Is B.C.’s reliance on real estate a threat to our economy? A look at the Netherlands in the 1960s shows why there might be cause for concern
After years of debate about price escalation and declining affordability in the Vancouver housing market, the province and the city have, at last, stepped in with measures to address the crisis. The province’s targeted 15 per cent property transfer tax premium (in effect since August 2) is designed to pull in the reins on foreign buyers who don’t live in Metro Vancouver. Meanwhile, Vancouver’s proposed vacancy bylaw (to be presented to council in November) would serve to increase an owner’s incentive to occupy the properties they purchase—or at least make those properties rentable for people who do.
Both taxes aim to cure a version of Dutch disease that had taken hold in Vancouver. That term was coined by The Economist in 1977 to describe the then-struggling Dutch economy. The Groningen natural gas field discovery in the late ’50s had resulted in soaring foreign investment, driving the value of the guilder higher but also making it tough for the Dutch manufacturing sector to compete internationally. Over the course of seven years, unemployment rose sharply, from 1.1 per cent to 5.1 per cent; as The Economist soberly observed at the time, there was a sharp discrepancy between “external health and internal ailments.”
That might ring a bell for many Vancouver market watchers: real estate has become our export boom while price escalation has been our currency explosion. Unaffordability is our internal ailment—the cost of which is clear to see as the city empties itself of millennials, young families and artists, and generally becomes less attractive economically to a range of skilled and talented people.
But if cooling the market is the motive for these new taxes, and by extension some contribution to affordability, what has been less discussed is another aspect of Vancouver Dutch disease: the potentially crippling dependence that B.C.’s economy now has on real estate. As a percentage of provincial GDP, construction and real estate services rose from 21 per cent in 2000 to over 26 per cent by 2014; nearest rival Alberta saw an increase from 16 per cent to 21 per cent over the same period. In the U.S., recent numbers indicate that residential fixed investment and housing services collectively represent less than 15 per cent of national GDP.
Our dependence is quite obvious if you examine B.C.’s budgetary books. Contributing over a billion dollars annually to provincial coffers, the existing property transfer tax is the only thing keeping us from running a deficit, according to Josh Gordon at SFU’s School of Public Policy. While based on only five weeks’ worth of government data (in which $1 billion in foreign sales were recorded), Gordon points out that the 15 per cent premium would indicate another $1.5 billion going to the government for the year. It’s a profitable (and mostly popular) tax that won’t be going anywhere soon.
Meanwhile, B.C.’s economic dependence on real estate deepens—which poses considerable risks. There’s the risk of a downturn having catastrophic effects on the provincial books. And then there’s the risk to hundreds of thousands of individuals. Canada has been in what Gordon refers to as an uninterrupted “leveraging cycle” since 2000, when our population’s debt-to-disposable-income ratio was a mere 110 per cent. The U.S. had a similar ratio then, and the countries tracked each other closely until 2007. At that point, the ratio plummeted in the U.S. when its real estate market crashed and continued to soar in Canada when ours didn’t. By 2014, Gordon’s latest data shows U.S. debt-to-disposable-income ratios back at 2000 levels while Canada’s had approached 170 per cent.
So could a well-intentioned transfer and vacancy tax be the pin that bursts the long-inflated bubble? Well, it could. But while Gordon is hesitant to predict the future, neither is he convinced that disaster is at hand. “My sense is it’s not going to cause an enormous crash.”
Tom Davidoff of UBC’s Sauder School of Business agrees. “Doom and gloom is not my central forecast,” he says. “If I were asked where things were going, well, first I’d say, I don’t know. Then second… maybe a 10 to 15 per cent price decline.” In other words, the August data out from the Real Estate Board showing average detached home prices off 0.3 per cent year-over-year will not be the final story.
As for the tax’s implied goal of improving affordability, it’s hard to see a 15 per cent price adjustment bringing back our emigrated artists, encouraging young families to set down roots or making new hires from other jurisdictions any easier. Still, Gordon points out that we really had no choice but to act. “Long-term, our price escalation is now almost vertical. To get that closer to a flat line, or even slightly declining, would be a good thing.”
These taxes may not cure Vancouver’s version of Dutch Disease, but they may halt its forward progress—buying time while other treatments, even cures, are discovered.
How much does B.C. depend on real estate?
According to a budget update released in September, the province will see more tax revenue from home sales in 2016-17 than from mining, energy, forestry, Crown land tenures and natural gas combined. The Ministry of Finance is projecting property transfer taxes alone will bring in $2.2 billion this year–almost double the $1.2 billion predicted in the spring budget.Property transfer tax