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:
- How will this new tax affect your current investments, sales and near-future decisions?
- What action can you take to benefit from this information?
Feel free to leave a comment or question below.