When a week ago we reported that in a long-overdue decision, the British Columbia government finally cracked down on Vancouver's unprecedented "Chinese hot money" driven housing bubble by implementing a 15% property tax (which we had advocated for one month earlier), we said that "with today's tax, Vancouver's real estate nightmare in which local housing had become the "new normal" anonymous Swiss bank account, and also made real estate virtually unaffordable to local, hard working Canadians, is finally set to end."
However, not even we were confident that a 15% tax would be "prove to be a sufficient deterrent to future Chinese buyers." Now thanks to the Financial Post we now know that not only was the tax sufficient, but it has led to the prompt, much anticipated, and generally welcome bursting of the Vancouver housing bubble.
As FP writes, on Thursday and Friday of last week, realtors and lawyers were desperate to get in under the tax hike deadline, and filed a record-setting 15,000 property transfer applications on the last two business days before B.C.’s punishing new 15-per-cent tax on foreign property buyers went into effect. As a result, more than 9,200 transactions were filed on Friday, breaking the 2007-2008 record of more than 8,400 in a single day, according to the B.C. Land Title and Survey Authority. It also reported over 5,800 transactions on Thursday, representing nearly as many deals registered at month’s end in April.
The demand was so heavy that it crashed the land titles office’s electronic filing service on both days, the authority said.
That was last week. What about now that the tax is in place? As a new dawn breaks in Metro Vancouver’s real estate market, realty companies and real estate boards are reporting the first anecdotes of deals falling through as foreign buyers forfeited deposits on binding deals rather than pay the new tax. Worse, if only for the unprecedented local housing bubble, and certainly better for potential local homeowners who were locked out from the massively overpriced market, they report evidence of local buyers withdrawing offers in expectation that the market will soften.
Elton Ash, executive vice-president of Re/Max Western Region, said it is too early to accurately quantify how many deals fell apart, but he’s heard from realtors in some of the company’s 30 Metro Vancouver offices of cases where foreign buyers who couldn’t rearrange previously negotiated closing dates have already walked away.
“Our expectation is that there will be a percentage of transactions collapse due to the buyer basically defaulting on the contract,” Ash said.
He said that while it may take up to two or three months to gauge the full effect of the new tax, the outcome appears clear: the bubble has popped.
Next up: a court bottleneck which may cripple the home purchasing process for months, if not years. Jonathan Cooper, vice-president of operations at MacDonald Realty, expects many cases to go to court because deposits are held in trust by realtors and usually can’t be released without a court order. “I think the next chapters in this story are going to be written by lawyers,” Cooper said. “There are going to be cases for sellers trying to get the deposit out of trust and maybe suing the buyer for specific performance trying to get them to complete, and/or for damages if they are not able to find a buyer at a similar price point.”
Good luck collecting from the Chinese oligarch buyers.... or even finding them.
But the most dramatic impact will be on future transactions. With the soaring uncertainty about the future rate of home appreciation, and the availability of "greater Chinese fools", buyers will be far more pessimistic and cautious about paying the asking price, or engaging in the kinds of ridiculous auctions profiled here before, such as that of a house valued at $16 Million, selling for $68 Million "In 7200 Seconds."
Quoted by FP, Dan Morrison, chairman of the Real Estate Board of Greater Vancouver, said he’s heard of instances of Canadian buyers and sellers who backed out because of the uncertainty in the market. Philipp said one of his offices reported four cancelled deals as a result of the tax, while another reported five failed transactions on Friday alone, with one directly tied to the tax.
“There’s a domino effect here. One deal collapses, there’s so many other deals impacted by that,” Philipp said.
“I’m getting people coming to our open houses saying, ‘this means the prices are going to come way down,’” said Re/Max realtor Dave Vallee.
* * *
Last week we concluded by saying that "the good news is that if the transaction tax succeeds, Vancouver housing is about to become far more affordable. The bad news is that if it leads to a selling scramble, the worst case outcome - one predicted by the OECD at the start of June, namely a "disorderly housing market correction" - may have just been triggered leading to a dramatic collapse in Vancouver home prices."
It now appears that the worst case scenario may have been unleashed:
Cooper said the tax, rather than stabilizing the market, appears to be harming it. “When the government intervenes in the market this way and imposes costs that are retroactive … that almost by definition introduces an element of instability in the market.”
Perhaps, it will be ironic if as a result of the government intervention, what was until recently the world's biggest housing bubble, quickly morphs into the world's most violent housing market collapse.
On the other hand, considering the latest data just released from the Real Estate Board of Vancouver, according to which home prices rose 32.6% in July from a year ago, with the average selling price of a single-family detached home in the Greater Vancouver Area rising 38.0% to C$1,578,300, even as the actual number of sales collapsed by 18.9% y/y in July, we have a feeling the local population will be far more excited by the option of finally being able to buy a house at an affordable price, than the consequences of having to nurse what will shortly be a burst housing bubble for the ages.