B.C. Premier David Eby during an election campaign stop in Burnaby, B.C., on Sept. 25.RXL/The Canadian Press
B.C. Premier David Eby’s election promise to slap developers with a tax on unsold condos has been met with outrage from developers who’ve already paid hefty fees to build and who are paying substantial carrying costs on units they can’t sell.
Housing experts say the proposal will make it hard for the development community to trust the Premier again, if he is re-elected on Oct. 24. And policy analysts and experts outside that community are also divided, with many perplexed and even opposed to the tax, which would kick in by the second year of vacancy at 2 per cent of the assessed value, then go up by 1 per cent each year it remains unsold. The Premier said his new tax would target 5,000 vacant unsold condo units in Metro Vancouver.
At a news conference, the Premier told reporters he’d also increase the speculation and vacancy tax to 2 per cent for domestic homeowners and 5 per cent for foreign owners.
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Simon Fraser University finance professor Andrey Pavlov said he was shocked by the move, which could drop prices in the short term, but have severe unintended consequences, he said.
“No one wants to hold because they want to sell – that’s how they make their money, and then they deploy the money for the next project. To add to those carrying costs, sure, that will incentivize developers to sell even faster.
“And some of them may say, ‘Fine, whatever, I’ll take the loss and move on.’ So, some condos might be sold at a lower price than other ones. But the problem is, this is a very short-term effect. And once you look past that horizon, the issue, of course, is that no one will ever want to build.”
Mr. Eby said his new tax would target 5,000 vacant unsold condo units in Metro Vancouver.DARRYL DYCK/The Canadian Press
If building in B.C. becomes more expensive and riskier, developers will be forced to build expensive homes, Prof. Pavlov said.
“That investment needs to have some rate of return. And when you make it riskier, you must increase the rate of return.
“And that makes most projects uneconomical, so they never start. And the ones that do start, they need to offer a huge rate of return, which means basically luxury buildings. And that’s not the type of housing we need. So, we’re doing exactly the opposite.”
Commercial broker Mark Goodman said the tax will add to the overall cost of building and make financing more difficult.
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“They’re punishing the people who build homes,” he said. “This is a penalty for completing projects at completely the wrong time in the cycle. Lenders will treat it as extra risk. More presales will be required. There’s a higher cost of capital. More projects get shelved, and so what happens is the shortage gets deeper.
“These developers are already on the brink. Many of them are leaving the industry, leaving the province,” Mr. Goodman said. “That’s coercion. It’s not a housing plan. He’s threatening a war on developers.”
Economist and policy expert Mike Moffatt, founding director of Ottawa-based Missing Middle Initiative, called the tax plan “bad policy” that could have the temporary effect of reducing prices but creating more harm than good.
“It may end up helping motivate a few sales, but for the most part, I wouldn’t expect it to accomplish a whole lot,” said Mr. Moffatt. “There can be many reasons why a developer might not be able to sell. If there’s a construction loan on the property then selling it and taking a loss might not be feasible.”
He said that the tax could even incentivize developers to stall on completing the project to avoid the tax.
“If you have a building that’s not completely sold, maybe you wait a little bit, try and sell more units before obtaining an occupancy permit,” Mr. Moffatt said.
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“We have enough market tension and market instability. So, adding a tax on top of that doesn’t help,” he said. “I get that it probably is politically popular. But I think overall, it’s not a good way to fix the housing market.”
But the Premier’s idea does have its share of supporters. Robert Renger, planning consultant and former senior development planner for the city of Burnaby, said it could incentivize developers to sell “and meet the market where it is right now.”
“If they have to start paying a tax in addition to their other costs, it’ll incentivize them to agree to lower their prices to what people are willing to pay, instead of just sitting on these many thousands of units,” he said, echoing the Premier’s justification.
“They don’t want to spook the market, so they want to maintain the prices. In some cases, I’ve been told their financing doesn’t allow them to lower the prices, although that can be worked out. You’ve got an oligopoly, really, that has an interest in not lowering prices.”
He believes that developers “are hopeful that foreign buyers will come back into the market, that the ban on that will end,” he added, referring to the federal government’s ban on foreign buyers, which expires in January.
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“That would create more demand and push prices up. Then they also do self-interested promotions like, ‘why not allow interest on mortgage payments for new units be tax deductible?’ which is another way of getting prices up, by allowing people to have bigger mortgages subsidized by tax breaks. So, they prefer any kind of sort of help, rather than being constrained or forced to take lower prices.”
Beau Jarvis, president of Wesgroup Properties, said some people have said they could just rent out the units, but that isn’t feasible when developers are facing so many costs.
“We have to pay 5 per cent GST to the federal government if we rent them. Perhaps our provincial government could lobby the federal government on this front rather than proposing yet another punitive tax on housing?” he said in an e-mail.
“Imagine taxing an automobile manufacturer, a heat-pump manufacturer or virtually any other business simply because it had finished inventory that had not yet sold,” he added.
The result would not be increased production, he said.