Soaring property prices in some of the world’s most popular residential markets have led some cities to take steps to discourage foreign investors.
Vancouver is the latest “gateway city” to introduce a tax on foreign property buyers, with the British Columbian government announcing that a 15 percent tax applies from August 2016. It follows the introduction of a 15 percent tax by the Hong Kong and Singaporean governments in 2012 and 2013, respectively.
The taxes are in response to the perception that foreign investors drive up residential property prices, making housing too expensive for the local population.
Attracting overseas interest
Adam Challis, EMEA Head of Residential Research at JLL, says globalization has resulted in individuals and organisations investing money internationally – and real estate investment has become part of that, whether it’s from institutions or individuals looking for pension income or a second home.
Much of the investment has come from China, where a $50,000 limit on how much residents can invest outside the country hasn’t countered the surge in the number of individual Chinese who are diversifying into property investments around the world, Challis says.
In British Columbia, foreign nationals invested more than $1 billion into property in the province between 10 June and 14 July, of which more than 86 percent went into the Lower Mainland – the region surrounding and including Vancouver.
The British Columbian government says that although investment from outside Canada is only one factor driving price increases, it represents “an additional source of pressure on a market struggling to build enough new homes to keep up”. It hopes the new tax will make home ownership more affordable and accessible for middle-class families.
Falling property prices
It’s too early to tell whether Vancouver’s new tax will have the desired effect. In Singapore, where the 20 percent tax was one in a long line of cooling measures, house prices posted their 11th consecutive quarter of declines in the second quarter of 2016, according to the Urban Redevelopment Authority. The residential property price index stood at 140 index points in the second quarter, 9.4 percent below the all-time high of 154.6 reached in the third quarter of 2013 – the year in which the foreign homebuyer tax was introduced.
David Green-Morgan, Global Capital Markets Research Director at JLL, suggests 80-90 percent of the index fall is down to cooling measures with the remainder driven by slower economic growth, particularly in China where many of the overseas buyers were from.
“The cooling measures have been very effective; they’ve almost brought the market to a standstill,” he says.
The fall in property prices in Singapore is also likely to be a result of lower market sentiment. Green-Morgan says over the last 12 to 18 months people have expected the cooling measures to reduce property prices and are therefore delaying buying properties, making it somewhat of a self-fulfilling prophecy.
“This isn’t unique to Singapore – it’s a global phenomenon. If people expect property to be cheaper in a month’s time, why buy now?” he says.
Long-term investment proposition
The introduction of foreign property taxes could make these cities less attractive to buyers who are looking for a short-term gain because, as Challis points out, the extra fees will eat into their overall performance. For those seeking a long-term investment it shouldn’t make too much difference – and there could even be a shift in the investor base from those seeking a short-term punt to those who are in it for the long-run.
“The tax is annoying but as long as the long-term story around rental demand looks good, it can be absorbed over a holding period of more than 10 years,” Challis explains.
An unintended consequence of higher stamp duties is they could drive investors to lower average value properties. This would undermine the aim of the tax, which is to increase the amount of affordable property available for the local population. Challis says a more effective solution would be to channel investment into supporting the development of new-build properties.
In either case, the new taxes are expected to result in investors turning to markets without such restrictive measures. Green-Morgan says this has probably already happened in Singapore, with demand shifting to cities like Tokyo, New York, Vancouver and London.
“Flows will shift to the optimal location for investors,” Challis adds. “If costs are punitive in Vancouver, investors will look at Toronto. Or they will turn to another asset class altogether. The cooling measures will end up pushing capital somewhere else.
“The decision that legislators need to make is whether this capital can be used to solve local shortage of new housing, or if it is better to let it disappear.”