4 Facts About the Foreign Buyers PTT Multifamily Landlords Should Know

The Foreign Buyers PTT could have a huge impact on the multifamily rental housing market in Vancouver.

Last month, provincial legislation introduced a foreign buyers PTT (Property Transfer Tax) in an attempt to slow overseas investment in Vancouver real estate. Foreign purchasers, particularly from China, have been blamed for fuelling rampant price growth in the Vancouver region.

Multifamily rental apartment buildings and mixed use rental buildings are included in the tax. As a result, this new tax could affect you – multifamily investors and landlords.

Here are 4 Facts About the Foreign Buyers PTT Multifamily Landlords Should Know:

1. Foreign Buyer’s PTT is Really Expensive!!

The new PTT adds an additional 15% to an asset sale purchase price for foreign buyers. That is a staggering price increase over market value on a resale apartment building.

Current PTT is charged at a rate of 1 per cent on the first $200,000; 2 per cent on the portion between $200,000 and $2,000,000; and 3 per cent on any amount over $2,000,000. The new foreign buyers portion would be added on top of current PTT.

Here’s an example:

A non-Canadian buyer of a $2.5 million apartment building would have to pay

1% on the first $200,000 = $2,000
2% on the portion between $200,000 and $2,000,000 = $36,000
3% on the portion between $2,000,000 and $2,500,000 = $15,000
15% foreign buyer PTT = $375,000

Total PTT: $428,000

Think about it. Would you pay $2,928,000 for a building that should cost $2,553,000?

And, how did these “foreign investors” became wealthy in the first place? It probably wasn’t by over-paying for investment deals.

2. Foreign Buyers’ PTT Covers a Huge Area

The Foreign Buyers PTT covers a massive area and most of the apartment buildings in British Columbia.

The tax applies to residential property buyers in Metro Vancouver communities including Anmore, Belcarra, Bowen Island, Burnaby, Coquitlam, Delta, Langley City and Township, Lion’s Bay, Maple Ridge, New Westminster, North Vancouver City and District, Pitt Meadows, Port Coquitlam, Port Moody, Richmond, Surrey, Vancouver, West Vancouver, and White Rock.

Residential property includes detached units, duplexes, multi-family units, apartment buildings, condominiums, mixed-use (residential portion only), manufactured homes, nursing homes, rest homes, bare, undeveloped land and farms.

Of the roughly 6,500 apartment buildings in BC ($1M+), just over 4,000 buildings are affected by this new tax, 3,650 apartment buildings in Metro Vancouver and 354 apartment buildings in Fraser Valley.

A total of 61.5% of the apartment building in British Columbia are affected by this tax.


3. Foreign Buyers Purchased a Lot of Apartment Buildings in 2016

Foreign purchasers invested a lot of money in Vancouver apartment buildings over the past few years. Since the source of capital is difficult to track, nobody has released an exact number of buildings or dollars invested in real estate by non-Canadians. Estimates in the media have ranged from 5% to 30% of the market being “foreign.”

At Multifamily Real Estate Services, we estimate that 18% of buildings sold in Metro Vancouver and Fraser Valley between Jan-Aug, 2016 were purchased by Chinese buyers from outside Canada.

While this is a non-scientific estimate, we used a similar method to a MacDonald Realty study in 2015 and Provincial NDP study from early 2016.

We looked at the names of multifamily purchasers in Metro Vancouver and Fraser Valley. At least 18% are individuals with ethnic Chinese names. Ownership of these properties is often held in a numbered company with an accountant or lawyer’s office the only mailing address. Excluded are all Chinese-Canadians who already own buildings in British Columbia or who we have personally spoken with.

On a personal note, I don’t like this method of analysis and use it only for lack of alternatives. While it’s one of the only ways to determine ownership, using people’s names seems prejudicial. As a method for tracking ownership, it lacks accuracy since we can’t tell who are new-Canadians and who are foreign nationals.

And, for the record, I fully support foreign investment in multifamily apartment buildings and developments. I also believe that all Canadians, regardless of ethnicity, deserve equal rights and opportunities to own property, free from prejudice or fear of recrimination.

Bottom line: 18% is a large number….gargantuan….mammoth!! If even half of those buyers look outside Vancouver, we’re all going to feel it.

4. New PTT Legislation Allows for Municipal Vacancy Taxes

Part of the new law allows municipalities, particularly City of Vancouver, to pass vacancy taxes. Cities can now

▪ enact a vacancy tax bylaw covering unoccupied residential properties; and
▪ impose an annual vacancy tax as part of the property tax payable by the registered property owner.

City of Vancouver staff are examining how they’ll move forward with the empty homes tax, according to Sara Couper, City of Vancouver Communications Manager. They plan to update council this fall.

This update will likely include details such as the tax rate, exemptions, methods to determine taxable properties, records of taxable properties, penalties, a process to hear and determine complaints, and the types of affordable housing initiatives that can be funded by tax revenue. The city will be conducting a public consultation this fall.

If passed, a vacancy tax may contribute to an increase in properties for rent.

Adding it All Up

In conclusion, the new Foreign Buyers PTT could have substantial impact on the Vancouver market.

By the numbers:

  • 15% over fair market value is what a foreign investor would have to pay

  • 60% of all existing apartment buildings in British Columbia are affected by this tax

  • 18% percent of properties sold Jan-Aug 2016 went to Chinese investors

  • 50-50 chance we end up with vacancy tax in Vancouver


And finally, two bonus questions for the owners and investors reading this:

  1. How will this new tax affect your current investments, sales and near-future decisions?
  2. What action can you take to benefit from this information?


Feel free to leave a comment or question below.

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Housing Shortage? What Housing Shortage

High housing costs in Toronto and Vancouver are being blamed on Chinese purchasers grabbing too much of an already-limited supply, on green belts outside the cities that bar needed housing and on opponents to high rises within cities, who further limit housing.

These factors do contribute to high housing costs, but most of the blame lies elsewhere. City homes aren’t expensive because we’ve run out of land to develop within cities, as is often claimed. City homes are expensive because politicians prevent available land from being intelligently developed or redeveloped.

Contrary to conventional wisdom, many of the most attractive cities in the world are low-rise, high-density cities. Within cities many of the most attractive neighbourhoods are also characterized by low-rise buildings in high densities.

Paris, for example, has a very high population density – by some measures several times that of Toronto or Vancouver – and very few high-rise buildings, most of which are concentrated in its outlying areas. An aerial view of Paris shows the rarity of high rises across most of its expanse. Like many of the world’s beautiful cities, Paris was built before the era of elevators and structural steel, yet very compactly – this compactness reduced travelling times, increased efficiency, and created the verve that is characteristic of great cities.

In London, where high rises have been proliferating only over the last two decades, development has also been marked by high population density: The traditional London-residential style is three to four stories. Other European cities – Barcelona, Naples, Athens – have likewise accommodated a great many people in a style many in Canada would envy.

Without constructing any more high-rises or giving up their greenbelts, Toronto and Vancouver could easily double their population within their existing city limits. Their residents wouldn’t even need to emulate European architecture. As an example, Toronto’s Annex district, one of the city’s leafiest and toniest, is also one of its densest – more than twice the density of Toronto as a whole, ten times the density of the Greater Toronto Area. If Annex-level densities were to come to, say, Toronto’s large low-density Scarborough district, which is now neither as leafy nor as tony as the Annex, Toronto’s population of 2.6 million would increase by 40 per cent, an increase of over 1 million people.

Toronto and Vancouver could easily double their population within their existing city limits. To accomplish that kind of transformation, not just in Scarborough but throughout Toronto, Vancouver or any other city, would require no subsidies, housing programs or other intervention by governments – to the contrary, it would require only that governments get out of the way, and let the city’s residents exercise the property rights they had a century ago.

Freed of numerous zoning restrictions, arcane planning rules, red tape and other drivers of frustration and cost, the existing housing stock would adapt, expand through additions when children came along, be subdivided when couples became empty nesters. Property owners with large lots would often build a second house as granny quarters – multiple buildings on lots were commonplace in the era before planners took over and homogenized development. Over time, the face of the city would change, bit by bit as each home owner did what came naturally, the effect generally being an increase in the quality and the quantity of the city’s built form, enlivening once-dreary neighbourhoods and increasing the number of people the same land could comfortably, even luxuriously, accommodate.

The tax system also acts to discourage density. A dense neighbourhood of narrow lots requires a fraction of the sidewalks, water pipes, electricity lines, and other city infrastructure required by suburban-style neighbourhoods of wide lots, yet because cities don’t bill property owners on the basis of the cost of providing services, dense development loses this natural economic advantage. Instead, cities finance themselves primarily through property taxes, which also act to discourage density another way – the city punishes homeowners through higher taxes every time they expand their property.

By restoring property rights and taxing residents on the basis of the services consumed, rather than the property amassed, politicians would put to bed the lament of high housing costs. Toronto and Vancouver don’t need to suffer high housing costs. They suffer no shortage of land, they suffer a shortage of common sense and freedom.


About the Author:
Lawrence Solomon is executive director of Urban Renaissance Institute, a former Vice Chair of the City of Toronto Planning Board, and the author of Toronto Sprawls (University of Toronto Press). Original article appeared HERE. Reprinted with permission.

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7 Things to Remember About the Vancouver Real Estate Boom

The Vancouver real estate boom is no secret. Prices have exceeding 20 per cent year-over-year growth. Given already high prices the acceleration in prices prompts the obvious question: What happens next?

In this article, we look to past periods of accelerating prices for answers. While many like to think this market is unique, there have been 7 times in history that Vancouver has experienced similar growth. In fact, the title of this post, “7 Things to Remember” are actually 7 Times to Remember when real estate prices performed similar to 2016.

This analysis is not a crystal-ball forecast, but rather an examination of what happens to Vancouver real estate boom prices after periods of rapid acceleration.

Vancouver Real Estate Boom HistoryAnalysis:

Periods of Vancouver real estate boom, defined as 20 per cent or higher year-over-year growth, are far from unusual in Vancouver. In fact, since 1981, there have been 46 months in which prices rose by more than 20 per cent on a year-over-year basis and 38 of those months occurred prior to 2010.

To provide a benchmark for the aftermath of a period of rapid price acceleration, we estimated a statistical model that does a good job explaining this data. In particular, it demonstrates that price growth basically returns to the average.

After an acceleration of home prices, the percentage change in growth tends to trend back to its long-run average growth rate. These findings are further confirmed by a the historical average of price growth following periods of 20% y/y price increases.

While these summary measures provide us with a general idea of how prices typically evolve following a period of acceleration, it is also informative to examine each period of price acceleration individually.

Excluding the highly anomalous 1981 market, there were 7 Times to Remember of price acceleration in the REBGV area over the past 35 years:

1988 and 1989:

Growth in home prices breached 20 per cent or more on a year-over-year basis six times in 1988 and re-accelerated into 1989, peaking at 45 per cent year-over-year in February 1989. From 1989 to early 1990, price growth averaged 30 per cent before eventually turning negative in October 1990, following a sharp increase in interest rates and the onset of a severe Canadian recession.


Home price growth tipped over 20 per cent for just one month in 1993 before trending to single digit growth within 12 months.


After a steady rise throughout 1994, home prices rose 23 per cent in February of 1995 but sharply corrected within six months, turning negative through the late 1990s as the lingering effects of the leaky condo crisis and significant net losses of interprovincial migrants dampened housing demand.


After a long period of relative calm in the Metro Vancouver housing market, prices accelerated through the early 2000s, eventually reaching growth of 20 per cent or higher in seven of 12 months of 2006. Strong price growth continued until the onset of the Global Financial Crisis in 2008 and ensuing recession which sent prices lower for several months in 2008 and early 2009.


The recovery from the financial crisis and subsequent recession saw prices rise as interest rates fell to historical lows and home sales surged from pent-up demand and rising affordability. By the end of 2009, home prices were back to their pre-recession level.


Strong growth in home prices was restricted to detached homes as a result of their relative scarcity. The federal government, through the Canada Mortgage and Housing Corporation, tightened mortgage insurance regulations. These tightening measures included requiring all insured borrowers to qualify at the five-year fixed rate and also a reduction of amortization periods on insured mortgages to 30 years in 2011, and eventually to 25 years in 2012. These changes had a strong impact on demand, and price growth turned negative in late 2011.


The year started with home prices posting 30 per cent year-over-year increases, which moderated to 16.5 per cent by May.

Vancouver Real Estate Boom TrendMost periods of price acceleration were followed by a moderation of price growth within 12 months. In two of the historical periods, price growth turned negative in the 12 months following a rapid acceleration. However, these periods coincided with an idiosyncratic or external shock, such as the leaky condo crisis of the mid to late 1990s, recessions or a tightening of monetary or macroprudential policy.

Using history as a guide to what comes next for the Vancouver housing market, one would expect that without a major economic shock or significant change in housing policy, that conventional market dynamics of supply and demand will take hold and growth in home prices will likely trend lower over the next 12 months.


The last question about the Vancouver real estate boom is one that only you can answer: How will you benefit?

(Parts of this article are copywrite BCREA. Reprinted with permission.)
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Where are BC Housing Sales Going Next?

The British Columbia Real Estate Association (BCREA) released its 2016 Third Quarter BC Housing Sales Forecast Update today.

Multiple Listing Service® (MLS®) residential sales in the province are forecast to climb 10.4 per cent to a record 113,000 units this year, eclipsing the previous record of 106,310 units in 2005. Housing demand is expected to moderate next year, with home sales declining nearly 8 per cent to 104,400 units. However, housing demand is expected to remain well above the ten-year average of 85,000 unit sales.

“The introduction of a 15 per cent tax on foreign national home buyers in Metro Vancouver is expected to accelerate a moderating trend in the market that began earlier in the year,” said Cameron Muir, BCREA Chief Economist. “However, other regions of the province are performing above expectations and at the provincial level, largely offsetting Metro Vancouver’s deceleration.”

The average MLS® residential price in the province is forecast to increase 11 per cent to $706,900 this year and a further 5.2 per cent to $743,700 in 2017.

“While the cyclical nature of housing markets can exact a harsh toll on affordability in the short term, there is some relief for beleaguered home buyers on the horizon, added Muir. Housing starts in the province are expected to reach near record levels this year, and the highest amount since 1993. In Metro Vancouver, a record number of homes are now under construction. “A moderation in housing demand combined with a rising number of both new and resale homes on the market is expected to create more balance and less upward pressure on home prices.”

Read the full BC Housing Sales Forecast HERE

(Source: BCREA Economics, Cameron Muir & Brendan Ogmundson)

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BC Building Permits 3rd Consecutive Month over $1.1 Billion

BC building permits activity increased 2.2 per cent from April to May and posted a third consecutive month of over $1.1 billion in permits. On a year-over-year basis, the dollar value of building permits in the province was 20.3 per cent higher than May 2015, led by a 22.6 per cent increase in non-residential permits. Residential activity was slightly lower on a monthly basis in May, but was up 19.5 per cent year-over-year, indicating that new home construction should remain strong in subsequent months.

The total value of Canadian building permits declined 1.9 per cent on a monthly basis in May as lower construction intentions in Ontario and Quebec offset strong gains in other provinces, including the BC non-residential sector.

BC building permits were mixed in BC’s four census metropolitan areas (CMA). Permits in the Abbotsford-Mission CMA jumped close to 40 per cent on a monthly basis but were 4.9 per cent lower year-over-year. In the Kelowna CMA, permits fell almost 7 per cent from April but were 27 per cent higher year-over-year. In the Vancouver CMA, permits increased 9 per cent on a monthly basis and were up 23 per cent year-over-year. In the Victoria CMA, permit activity was down 23 per cent on a monthly basis but was up 26.6 per cent compared to May 2015.

Source: BCREA Economics; Authors Cameron Muir, Brendan Ogmundson.

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Commercial Real Estate Indicators Push Higher

The BCREA Commercial Leading Indicator (CLI) pushed higher in the first quarter of 2016, reflecting a growing economy’s effect on the commercial real estate sector. The CLI index posted a 1.1 point increase to 120.8, eclipsing the previous index high of 120.1 set in the first quarter of 2015.

After flattening out for several quarters, the trend in the CLI is now reflecting the building momentum in the BC economy. The CLI trend, which smooths often noisy economic data, is pointing to a modest uptick in growth in investment, leasing and other commercial real estate activity over the next two to four quarters.

Most of the improvement in the CLI over the past three months can be traced to the economic activity component of the index. BC has led all provinces in economic growth for two years running and is currently tracking at over 3 per cent growth in 2016. Consumer spending continues to be the main driver with retail sales posting 7 per cent growth through the rst quarter of the year. Meanwhile, the wholesale trade and manufacturing sector have also recorded solid gains, pushing the CLI’s economic activity component higher by 1.2 index points.

Employment in the province is also growing strong. Total employment in BC has risen at a 2.9 per cent rate so far in 2016, the fastest pace of job growth since 2007. However, employment generated in key commercial real estate sectors remains mixed. The CLI measure of office employment increased for the first time since mid-2014, rising by 6,600 jobs. Manufacturing employment, which had posted consistent gains for several consecutive quarters, dipped in the first quarter by 2,900 jobs. Overall, the employment component of the CLI rose by 0.3 points.

Jittery nancial markets in the rst quarter contributed to a fourth consecutive decline in the CLI’s nancial component. The benchmark index for Canadian Real Estate Investment Trusts (REITs) followed a 3 per cent decline in the fourth quarter with a further 6 per cent decline in the rst three months of the year. That decline, combined with slightly wider credit spreads, led to a 0.4 point dip in the CLIs financial component.


Commercial-Real-Estate-Leading-Indicator-ComponentsQ1 Highlights

• The BC economy grew 3 per cent in 2015 and is on track to post 3.3 per cent growth in 2016. BC retail sales are up 7 per cent year-over-year in the first quarter and manufacturing sales have eeked out modest growth in spite of slowing demand in both the United States and China.
• Canadian REITs prices remained under pressure in the first quarter of the year, though this is mainly reflective of weakness in Canada’s energy sector. The average benchmark index for Canadian REITs was down 6 per cent in the rst quarter but had regained most of that decline by the end of March. A slight tightening of credit and modest upward pressure on credit spreads also contributed to an overall decline in the CLI financial component.
• Employment gains remain mixed in key commercial real estate sectors. The CLI measure of o ce employment increased by 6,600 jobs in the first quarter. In contrast, manufacturing employment dipped by 2,900 jobs after displaying significant momentum over the past year.

Variation in the Commercial Leading Indicator can be broken out into three distinct components:
» The economic activity component of the CLI follows the overall trend in the BC economy and reflects changes in economic variables shown to lead commercial real estate activity.
» The employment component reflects changes in the commercial real estate environment due to changes in the overall business cycle.
» The financial component acts as an early warning indicator from financial markets that could signal turning points in the commercial real estate market.

About the CLI

The BCREA Commercial Leading Indicator was designed to forecast changes in broad commercial real estate activity. Our research shows that the variables that compose the CLI reliably forecast BC commercial real estate activity at a lag of two to four quarters. The index is revised each quarter due to revisions in the underlying data.

Source BCREA Economics, Cameron Muir, Chief Economist

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BC Home Sales Continue to Smash Record Books

The British Columbia Real Estate Association (BCREA) reports that a record 12,969 BC homes sales were recorded by the Multiple Listing Service® (MLS®) in April, up 30.3 per cent from the same month last year. BC home sales last month beat March’s record of 12,560 units. Total sales dollar volume was $9.64 billion in April, up 52.7 per cent compared to the previous year. The average MLS® residential price in the province was up 17.2 per cent year-over-year, to $743,640.

“Housing demand is exceptionally strong across the southern regions of the province,” said Cameron Muir, BCREA Chief Economist. “Consumers appear to be particularly active in the Vancouver Island, the Fraser Valley and the Thompson/Okanagan regions.“

“Strong employment growth is helping underpin consumer confidence,” added Muir. The BC economy employed more than 78,000 additional workers during the first four months of the year, an increase of 3.5 per cent compared to the same period last year.

The year-to-date, BC home sales dollar volume increased 64.3 per cent to $31.2 billion, when compared with the same period in 2015. Residential unit sales climbed by 36.2 per cent to 28,028 units, while the average MLS® residential price was up 20.6 per cent to $761,860.

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Building Permits, $1 Billion Per Month

Canadian Building Permits – May 5, 2016

Building permits total $1 billion per month.  British Columbia is clearly in the midst of building boom as permits remain at elevated levels for a fifth consecutive month.  Construction cranes line the horizon and development sites abound in nearly every area of Metro Vancouver and Fraser Valley.

The total value of Canadian building permits declined 7 per cent on a monthly basis in March following a 15 per cent increase in February. The drop in permits was the result of lower permit activity in the commercial sector in Alberta, Ontario and BC.

In BC, total permit activity declined 5 per cent from February to March but remained above $1 billion for the fifth consecutive month. On a year-over-year basis, the dollar value of building permits in the province was 10 per cent lower than March 2015. Non-residential permits accounted for all of the decline, falling 33 per cent on a monthly basis and 37 per cent year-over-year. Residential permits rose 8 per cent on a monthly basis and were up 2.6 per cent year-over-year.

Construction intentions were mixed in BC’s four census metropolitan areas (CMA). Permits in the Abbotsford-Mission CMA were up 31.5 cent on a monthly basis and 11 per cent higher year-over-year. In the Kelowna CMA, permits fell 16 per cent from February and were 34 per cent lower year-over-year. In the Vancouver CMA, permits increased 6 per cent on a monthly basis and were down 12 per cent year-over-year. In the Victoria CMA, permit activity was down 29 per cent on a monthly basis but was up 41 per cent compared to March 2015.

(Source: BCREA Economics)

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Provincial Unemployment Best in Canada

Provincial Unemployment Lowest in Canada – May 6, 2016

For the first time since 1976, BC provincial unemployment rate is lowest of any province in Canada.

Employment in Canada was essentially unchanged in April following a surge of job growth in March. Total employment fell by 2,100 jobs and the national unemployment rate held steady at 7.1 per cent.  Total hours worked, which is closely associated with economic growth, increased by 0.9 per cent over the past 12 months.

Employment in BC continued to expand, rising by 13,000 jobs in April which helped drive the provincial unemployment rate down 0.5 points to 5.8 per cent. April marks the first time since 1976 that BC has had the lowest unemployment rate in the country. On a year-over-year basis, employment was 4.1 per cent higher compared to last April and year-to-date employment is up 3.3 per cent in 2016.

US Non-farm payrolls increased by 160,000 jobs in April and the US unemployment rate edged remained steady at 5 per cent. Over the past three months, the US economy added an average of 200,000 jobs per month in spite of weak economic growth in the first quarter.

Source: BCREA Economics

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BC Home Sales Up 70.1% in 2016

Vancouver, BC – April 15, 2016. The British Columbia Real Estate Association (BCREA) reports that a record 12,560 BC home sales were recorded by the Multiple Listing Service® (MLS®) in March, up 38 per cent from March of last year. Home sales last month eclipsed the previous record of 11,683 unit sales in May of 2007. Total sales dollar volume was $9.69 billion in March, up 66.9 per cent compared to the previous year. The average MLS® residential price in the province was up 20.2 per cent year-over-year, to $771,620.

“Housing demand has never been stronger in the province,” said Cameron Muir, BCREA Chief Economist. “Most large population centres of the province are now experiencing record levels of housing demand.“

“Strong employment growth, rising wages and a marked increase in net inter-provincial migration is fueling consumer confidence,” added Muir.

Supply imbalances are becoming increasingly common as new residential listings are not keeping pace with consumer demand. As a result, the inventory of homes for sale is at decade-long lows in many regions.

The year-to-date, BC home sales dollar volume increased 70.1 per cent to $21.59 billion, when compared with the same period in 2015. Residential unit sales climbed by 39.2 per cent to 28,028 units, while the average MLS® residential price was up 22.2 per cent to $770,408.

(Source: BCREA Economics)

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3 Serious Property Tax Changes That Affect Your Next Purchase

The BC Government’s 2016/2017 budget contained several measures related to housing, including the most significant changes ever made to the Property Transfer Tax (PTT). The changes didn’t quite meet BC Real Estate Association’s expectations, but there’s some good news for real estate consumers—at least in the short term.  Here are the 3 Serious Property Tax Changes That Affect Your Next Purchase:

  • Third tier over $2 million – Effective February 17, 2016, the PTT rate increased to 3% (from 2%) on the portion of a property’s fair market value above $2 million. Rates of 1% on the first $200,000 of a property’s fair market value and 2% on the fair market value between $200,000 and $2 million continue to apply. More information: https://www2.gov.bc.ca/gov/content/taxes/property-taxes/property-transfer-tax.
  • Data on citizenship – Effective in spring 2016, disclosure of citizenship will be required, on registration of a taxable transaction. This will apply to individuals and to corporations. The amendments will also require the disclosure of the names, addresses and citizenship information of settlors and beneficiaries of bare trusts.

(Source: BCREA Communications)

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Interest Rates Unchanged Amid Economic Growth Projections

Bank of Canada Interest Rate Announcement – April 13, 2016

The Bank of Canada announced this morning that it is maintaining its overnight rate at 0.5 per cent. In the press release accompanying the decision, the Bank noted that although first quarter GDP growth appears unexpectedly strong, it believes that strength is temporary and will likely reverse in the second quarter. However, fiscal measures announced in the March federal budget are anticipated to have a notable positive impact on growth.

The Bank is now forecasting that the economy will grow 1.7 per cent this year, 2.3 per cent next year and 2 per cent in 2018. That upgrade to growth means the output gap will close sooner than expected, likely in the second half of 2017.  That suggests a return to the Bank’s 2 per cent target for inflation along the same time-line.

Overall, the Bank judges risk in the economy as roughly balanced. Interestingly, the Bank did not highlight the housing sector as a risk despite frenzied activity in both Vancouver and Toronto.

A significantly upgraded economic forecast will very likely close the door on further discussion of an impending rate cut, though downside risks in the global economy remain.  Indeed, as the economy accelerates and the output gap closes, we expect the Bank to move to a tightening bias. However an increase in interest rates is still some time away.

If economic growth and job creation continue to surprise to the upside, it is possible that the Bank will begin raising rates in mid to late 2017 and we could potentially see a modest rise in mortgage rates toward the end of this year in anticipation of tighter monetary policy.

(Source: BCREA Economists Cameron Muir and Brendan Ogmundson)