Vancouver’s plummeting home sales and surging activity in Toronto aren’t strongly related to the fallout from BC’s new foreign-buyer tax, says one economist.
“The foreign buyer tax had very little impact on Vancouver home sales, which have been on a downward trend since February,” writes Paul Ashworth, chief North American economist for Capital Economics.
“That supports our claim that, rather than foreign buyers, it is irresponsible lending and rising domestic debt that has been driving Canada’s housing bubble,” he continues.
Starting August 2nd, non-resident homebuyers purchasing residential properties in Metro Vancouver have had to pay a 15-per-cent tax, a policy measure from the provincial government to cool the searing market.
But even a day before the tax took effect, Ashworth cited insured mortgages with soaring debt-to-income ratios in Toronto and Vancouver as an indication that local debt, spurred by low mortgage rates, was a major driver of these housing markets, rather than foreign buyers.
He pointed to the Bank of Canada’s June edition of its Financial System Review, which suggested about a third of all insured mortgages issued in Vancouver last year had loan-to-income ratios above 450 per cent.
In Toronto, these high loan-to-income insured mortgages accounted for 40 per cent of all mortgages.
“What has really changed in the past 12 months is not a big increase in foreign buyers, but a further decline in interest rates, which has allowed lenders to relax lending standards even further,” wrote Ashworth at the time.
In the more recent note, Ashworth specifically addresses media reports he says have tied the 23-per-cent year-over-year drop in Vancouver residential sales activity last month to the tax.
“Most of those media reports failed to mention that Vancouver home sales were down by an even bigger 27 per cent year-over-year in July,” he says.
As for Toronto, where home sales soared 23.5 per cent year-over-year in August, Ashworth balks at the idea that the elevated level of activity has much to do with foreign buyers turning east.
“A few commentators tried to link the surge in August specifically with the introduction of the foreign buyer tax in Vancouver, claiming that foreigners were now switching their focus to the GTA,” he writes.
Ashworth notes home sales in Toronto have been rapidly increasing since late-2012, according to Capital Economics’ seasonally adjusted figures, far predating the tax.