Homes First

Healthy Housing, Kelowna and the Speculation Tax

Analyzing and addressing the BC housing crisis

The Real Estate Services Manager for the City of Kelowna recently submitted a report on the provincial taxes (speculation, foreign buyer and property transfer), and city council will be discussing it this evening. In light of these new provincial measures to address the housing crisis, I thought it might be interesting – especially after seeing some of the extreme lengths people will go just to rent in Kelowna – to put this tax talk in a wider framework to help us understand what’s at stake in this debate.

To get to the heart of analyzing and addressing the BC housing crisis, a good place to turn to is the Union of BC Municipalities’ report, “A Home for Everyone”. In this report that our mayor has endorsed, they work from the starting point that things are indeed way out of control, and all of our housing issues – from homelessness and poverty to missing rental stock, to the external pressures driving prices way out of our reach – are connected and need an overall strategy. Moreover, they realize that managing the fallout from an unhealthy housing situation is way more expensive (and less humane) overall than attempts to further prevent it, and that we will need all three levels of government to fix it. As per the report:

Governments, be they federal, provincial or local, have failed to fully gauge the magnitude of this issue as it has built. It is now at a scale where all orders of government are going to need to creatively use the full array of tools available to them.

Tools, which they state ought to be deployed to the end of “a demand management strategy that stabilizes house prices so that British Columbians can once again realistically be able to own a home without incurring crippling debt.”

It could be argued that the intent of the province’s recent foreign buyers, speculation, and transfer taxes are exactly that. But wait, haven’t we heard a lot of fear-inducing pronouncements on how the spec tax will send the economy tanking with developers running scared; or, outright dishonest politicking from opposition MLAs like Ben Stewart claiming that this is a “tax on the personal wealth and inheritances of British Columbians disguised as a way to promote affordable housing. In the corridors of the BC legislature, they quietly snicker because their deception is working” (emphasis mine).

Upon reading this UBCM report, I was most impressed by the positive moves that it showed could be made when governments view developers as long-term partners in the fight against the crisis rather than short-term gainers. So in its spirit of positive growth, let’s ask some questions about how we can move forward.

1) Some people think this is a tax on British Columbians – can the provincial government please clarify this?

From the outset, Finance Minister Carole James had said that those who occupy their home, rent out their home, or pay income taxes in BC will be exempt from the speculation tax (via The Vancouver Sun), however, it has become unclear in later documentation if this is the case, and perhaps BCers with second homes will be affected as well.

The City of Kelowna, echoing recent news reports, has said in this latest report on the tax that it appears that the provincial government is now considering ensuring that British Columbians that pay income tax in BC, are not subject to the speculation tax.

Perhaps it’s not surprising then, that many local homeowners believe they are victims of “yet another NDP tax”. So NDP, if you’re trying to gain cred as a party for all British Columbians, and move away from the right painting you as socialist tax-happy buzz kills, and towards getting folks on board with your pragmatic approach, then clarify, clarify, clarify, because otherwise Ben Stewart will do it for you.

2) What is the role of local government like Kelowna’s, and how can they help create affordable housing, and by extension an active and strong local economy?

Well, the UBCM report brings up some interesting points. First off is the municipal government’s role within the three orders of government (the others have the largest control with powers of the purse, immigration, employment, mortgage, etc), and its power to incentivize and plan different types of development and land use.

For example, while we see city councils accepting, if not courting, large development projects so they can charge them for infrastructure costs (known as DCC or development cost charges), we think, hey that’s cool, that’s money for the city to use for the common good like amenities, even parks or other nice things. But do we ever think wait, maybe that money only goes to supporting the impacts of the new project and its inhabitants: roads, electricity, etc to service it. And what if these new inhabitants are barely ever there, and these supports don’t exactly serve real locals’ needs, like say a 2km road to nowhere along the lake? Is that a net gain for the common good?

A rendering of the Blackmun Bay mega project proposed for West Kelowna waterfront. It is not tied into the fabric of the city, but would garner DCCs to defray infrastructure costs for the utilities that its part-time inhabitants would use.

Now what if, instead of putting up with whatever short-term profit-focussed project – however inappropriate for locals’ needs – just so we can make that DCC bank, we determine from the outset, what the common good is? And, if that common good is driving down the spiralling costs of homelessness, making houses affordable, the city more vibrant and attracting skilled workers (that vaunted tech sector and “creative class”), can we make developers build for that with purpose-built rental housing as the primary project goal? Yes! That’s what the UBCM suggests we can do by actually waiving the development costs to prompt developers to build these purpose-built rental projects. It’s not, like, an afterthought.

Could creating homes for locals’ needs like this, bring big gains to our economy not only from the trades and developers, but from the new inhabitants bringing their diverse skills and businesses here? In 2016, Kelowna was found by a Bank of Montreal report to be “the second worst place to find a job in Canada“. Our mayor said at the time that this might be a result of a downturn in the Alberta oil economy, thus providing further proof why we need to diversify the economic streams as we transition to a more sustainable local economy, and away from one at the mercy of an external, single resource (and one of the least future-proof resources at that). Clearly moves towards affordable and accessible housing and attracting year-round residents are a step in the right direction.

3) Also, aren’t we one of the least taxed housing markets?

We all know that BC’s low property tax make it an inviting place to invest. boasts Kelowna as #23 on the Top Cities with Lowest Property Taxes in Canada. But do my frequent, heavily sales taxed $25 bottle of wine purchases actually mean I’m making it even easier for non-residents to invest in the property market here? Well, according to UBC Sauder School of Business’ real estate economist, Tom Davidoff, that may be the case. Recently interviewed by the CBC, he explains:

We have a tax system today that says, “come here to buy property, but we’re really going to hit you with the taxes in income and sales taxes, if you live and work here.” And what does that do? It just encourages people to buy property as second homes, because it’s tax smart to buy a second home but not so smart to live and work in the province.

Interestingly, he was also one of the authors of a proposed 1.5% surcharge on Lower Mainland homes whose owners don’t pay income tax in the province (called the B.C. Housing Affordability Fund).

4) If the UBCM report and Healthy Housing Strategy that Kelowna City Council is behind, fully acknowledges the magnitude of the housing crisis, understands the problem of secondary short-term rentals, and sees that all levels of government have a role to play in stabilizing the market, then why is council against this speculation tax?

I don’t really know why, except that perhaps they are more comfortable with the non-resident investment activity occurring now, than the activity they could have if they shift gears towards a more diversified investment stream. In any case, based on the report before council tonight this is what is being debated now:

(Page 9) of the report, Speculation Tax – #2 Impact on buyers from outside of BC

The report indicates that the speculation tax will have no significant effect on adding housing stock and decreasing prices. They state that of the documented 18.2% of out-of-province buyers of homes in Kelowna, approximately a quarter of them will not be willing to rent their houses out long-term or live in them. So these non-resident owners are a small bunch and not enough to affect the market were the tax to do its job and deter them. The clear question here is where did they get this number of roughly a quarter from – along with the corollary three quarters that will either move in immediately or rent out long-term? My condo is majority out-of-province-owned and it’s a ghost town outside of the summer.

Evidence based projections are a good thing, but they cannot be based on the soft data cited above which reads “While it is expected that the majority of these purchasers would either eventually move to BC or rent their units long-term” and that somehow “1in3 to 1in4 purchasers [would be] removed from the market as they would not be willing to rent their unit or do not intend to reside in Kelowna” (emphasis mine).

According to a 2015 article in the Alberta Venture magazine that listed North American locations to consider for a second summer home, for Kelowna “affordability is definitely not a reason buyers would be looking here, but there is a prestige to having a home in Kelowna”. That doesn’t really sound like a plan for a landlord or a retiree.

(Page 9) of the report, Speculation Tax – #3 Impact on residential vacancy in Kelowna

One of the key intentions of the speculation tax (and of the UCBM report) is to encourage homeowners to add their vacant properties to the local rental housing stock. However, the report argues that this tax won’t contribute to that.

The city report selects the Canadian Census statistic that 6% of Kelowna properties are unoccupied (rather than using the Canadian Census stat that 25% of downtown Kelowna is vacant) and furthermore, it applies another soft number crunching formula to it: “a significant portion are owned by BC residents who will likely not be affected by the speculation tax… Estimating a 50% BC-ownership rate”. That’s it. There is no hard evidence basis for that estimation in this report.

I’m pretty sure council will come away strongly opposed to the speculation tax, no matter how much their intentions line up with the UCBM report they endorse. And I think most locals here will rally behind Mayor Basran’s call for an anti-flipping tax instead, because it’s popular and smart. And he may well win the semantic argument that it’s not so much a “speculation” tax, as an empty house tax (which can be argued is also in line with the UBCM goal of “a demand management strategy that stabilizes house prices so that British Columbians can once again realistically be able to own a home without incurring crippling debt.”)

I only hope our city can look past its reliance on developers seeking short-term profit. Incentivizing developers to create a “good mix” of housing here is a good start. Now we need to build a more diversified year-round economy, and attract full time residents – these millennials and GenX Lower Mainlanders full of education and dreams of raising families that they can’t do there anymore.

The real estate industry trade press keeps singing the praises of this demographic shift: the spill over from Vancouver, or what Randall Shier, president of Mission Group Homes, and former Vancouverite, describes as Kelowna “benefitting from Vancouver’s predicament, and growing in population by roughly 300 people a month…[at rates] significantly higher than the 8-per-cent growth for that age group in Canada”. But, are we really doing enough to attract them? Tumbleweeds through downtown, October to May ain’t gonna cut it.

Read the Union of BC Municipalities’ Report, A Home for Everyone: A Housing Strategy for British Columbians if you are curious to see how the results of tonight’s speculation tax discussions track with the report’s goals.

Further Reading: