ECONOMICSMarket IntelligenceMarch 2020Estimating the Impacts of the Speculation and Vacancy TaxSummary Findings: While all BC markets experienced sharp declines since 2018, the Speculation andVacancy tax (SVT) is estimated to have reduced home sales in taxable regions inBC by an additional 12.5 per cent compared to non-taxable regions. Growth in homeprices since 2018 is estimated to be 5 per cent lower in taxable regions in BCcompared with non-taxable regions due to the SVT.However, these impacts effectively disappear if Metro Vancouver markets areexcluded from the analysis, suggesting the impact of the SVT has been limited toMetro Vancouver.A recovery of home sales is underway around the province, and without addressingsignificant supply issues, any progress made toward improved affordability looks tobe short-lived.The SVT’s impact on the rental market also appears to be more material in MetroVancouver, where there was a record increase in rental supply, yet it is not possibleto disentangle this from impacts of the Empty Homes Tax and short-term rentalregulations that were implemented around the same time.IntroductionSince 2018, several housing policiesdesigned to dampen demand andhousehold indebtedness have beenimplemented by federal, provincial andmunicipal governments. These includethe federal government’s revisedGuideline B-20, generally referred to asthe mortgage stress test, the increase andexpansion of the province’s Foreign BuyerTax (FBT), and the new Speculation andVacancy Tax (SVT). This period alsocoincided with interest rates graduallyrising from very low levels.Given the concurrent implementation ofthese measures, it is difficult to isolateeach policy’s impact on the housing1In a previous study, BCREA Economics estimated thatB-20, along with rising interest rates and strainedaffordability, accounted for as much as 85 per cent of themarket.1 While this report focuses on theimpact of the SVT, the provincialgovernment also increased the FBT ratefrom 15 to 20 per cent and expanded thegeographic scope of the taxable regions.While foreign transactions have declined,that downtrend occurred well beforeBudget 2018 and was likely prompted byexternal factors such as tighter capitalcontrols by the Chinese government in2017 (Figure 1).Given there is considerable overlapbetween the SVT and FBT regions, ourestimated impacts could be viewed asdecline in 2018 home sales. BCREA Market Intelligence .pdf
BCREA Market IntelligenceMarch 2020markets hardest hit by the crisis,”4 andexemptions from paying the tax rangefrom vacation properties owned by BritishColumbians to situations related to deathand health. 5capturing the combined impacts of theprovince’s Budget 2018 policy measures.Figure 1: Non-Resident Purchase ofResidential PropertiesAs of September 2019, data from the BCMinistry of Finance shows that 9,350owners of residential properties in theprovince paid the SVT, which representsabout 0.5 per cent of total residentialproperties in the province. Of these, 78per cent were in Metro Vancouver where31 per cent were foreign owners, 19 percent were satellite families, and theremaining half were a mix of BC residentsand other Canadians (Figure 2).Revenue from the tax was 115 million forthe 2018-19 fiscal year, higher than whatthe province expected.6 The provinceintends to use the revenue to supportaffordable housing initiatives.The Speculation and Vacancy TaxThe SVT is part of the BC government’s30-Point Plan for housing announced inFebruary 2018.2 The impetus for the SVT,according to the provincial government, isto discourage housing speculation and toencourage people with vacant homes toconvert them to long-term rentals.Figure 2: Share of SVT Payors by Type ofOwner and RegionThe annual tax targets foreign anddomestic owners of residential propertiesin designated taxable regions of BC 3 whodo not pay provincial taxes, and satellitefamilies who declare less than 50 per centof their household income for Canadiantax purposes. In 2019, a 2 per cent taxrate was applied to the assessed value ofproperties owned by foreign owners andsatellite families, and 0.5 per cent forCanadian citizens or permanent residents(e.g., an owner who pays taxes in anotherprovince).Impacts on the Rental MarketAs stated earlier, one of the province’sintentions with the SVT is to encourageAccording to the provincial government,the “ tax only applies in urban housing24Homes for B.C. https://www.bcbudget.gov.bc.ca/2018/homesbc/2018 homes for bc.pdf3 With some exceptions, the tax generally applies tomunicipalities within the Capital Regional District (e.g.,Victoria, Saanich, Sooke, Sidney, etc.), Metro VancouverRegional District, Abbotsford-Mission, Chilliwack, Kelowna,Nanaimo and Lantzville.BC government news release 5 Full list of exemptions can be found ncy-tax6Speculation and Vacancy Tax Technical Briefing https://news.gov.bc.ca/files/SVT Consultation All.pdf2
BCREA Market IntelligenceMarch 2020the conversion of vacant homes into longterm rentals. Data from the CanadaMortgage and Housing Corporation 7shows that, between 2018 and 2019, arecord number of condominium rentalswas added in Metro Vancouver. Althoughwe cannot determine the exact number ofnewly completed units versus theconversion of vacant units to long-termrentals, we do know that the number ofunits added to the rental market in 2019exceeds the net additions to thecondominium universe (Figure 3). Thissuggests that at least some existing unitsin Metro Vancouver were converted tolong-term rentals.8Figure 4: Rental Vacancy Rates of theThree Largest Paying SVT RegionsNonetheless, the impact of the SVT onthe rental market in Metro Vancouver isparticularly difficult to disentangle fromthe impacts of the Empty Homes Tax(EHT) and short-term rental regulationsthat were implemented around the sametime.Despite the increase in supply, strongdemand in Metro Vancouver kept therental vacancy rate unchanged at 0.3 percent in 2019 (Figure 4). In recent years,population growth in the younger cohort(between 15 and 34 years old) who tendto be renters has surged. In 2018, thiscohort grew by 2.6 per cent, an increasenot seen since 1996 (Figure 5).Figure 5: Growth in Population by AgeCohort in Metro VancouverFigure 3: Change in the Number of Unitsin the Condominium Rental UniverseAccording to City of Vancouver data onthe EHT, 787 homes were declaredunoccupied in 2019. This was about a 15per cent decline compared to the previousyear and 30 per cent lower than in 2017when the number of declared vacant78CMHC, Rental Market Report - ta-tables/rental-marketreport-data-tablesCMHC reported that this is particularly true in the BurrardPeninsula area in downtown Vancouver, where 2,996 unitswere added to the rental market, while only 318 were newunits.3
BCREA Market IntelligenceMarch 2020properties stood at 1,131.9 However, thedecline in the number of homes declaredas vacant does not fully explain theincrease in the condominium rentaluniverse between 2018 and 2019 in MetroVancouver (Figure 3), suggesting thatother factors were at play.Estimating the Impact of the SVT onHome Sales and PricesAs a first step in analyzing the impact ofthe SVT on ownership markets, we lookedat the change in MLS sales and averageprices from 2017 to 2019 across 76 submarkets in BC, separating those submarkets into two groups – SVT regionswhere the SVT applies and non-SVTregions where it does not.The next largest SVT-paying region wasVictoria, which reported a decline in thevacancy rate between 2018 and 2019from 0.4 per cent to 0.3 per cent (Figure4). Reasons for the decline likely havemore to do with economic fundamentalsthan policy, given the change in thecondominium rental universe wasnegligible during this period (Figure 3).Census data shows that there has been aslow shift from home ownership towardthe rental market in Victoria, which likelyhas been exacerbated by an increasinglyunaffordable housing market in theregion. As well, Victoria continues toattract young workers who tend to berenters, placing further upward pressureon demand.While the trend in market performancebetween SVT and non-SVT regions wasbroadly similar, as Table 1 shows, salesand average price declines were larger inSVT regions. On average, sales in SVTregions declined 29 per cent while thosein non-taxable regions were down about20 per cent in the post-2018 Budgetperiod. Average prices increased 1.2 percent in SVT regions and were up 7.3 percent in non-SVT regions.We further confirm a distinction in marketperformance between SVT and non-SVTregions using a machine learningalgorithm called k-means clustering.10Specifically, we apply an unsupervisedlearning algorithm (e.g., the data is notpre-classified as SVT or non-SVT) to sortthe regions into clusters based on theirsimilarity in market performance.In contrast, the vacancy rate doubled inKelowna between 2018 and 2019 from0.6 per cent to 1.2 per cent (Figure 4).During this period, there was a surge innewly completed rentals and condos,adding much supply to the rental market.Also, unlike Metro Vancouver andVictoria, Kelowna has a higher share ofSVT properties owned by BC residentsand other Canadians who tend to ownrecreational and retirement properties(Figure 2). To be exempt from the SVT,such properties need to be rented for atleast six months in the calendar year.Table 1: Comparing SVT and Non-SVTMarkets (Post 2018 Budget)MLS Data% ChangeSalesAvg. PricesSVT-29.5%1.2%Non-SVT-20.3%7.3%Cluster Analysis% ChangeSalesAvg. Prices9Cluster 1(SVT)-31.5%0.1%Cluster 2(Non-SVT)-19.3%7.8%10Mortgage Broker News spxThis is an algorithm that groups data into clusters byminimizing within-group variation. In this analysis, it attemptsto find clusters of markets whose change in sales andaverage prices are as similar as possible.4
BCREA Market IntelligenceMarch 2020As shows in Table 1 and Figure 6, despitesome false positives, the algorithm does agood job of sorting the data into clustersthat very much resemble the actual SVTand non-SVT regions.11Overall, the data seems to show a cleardistinction between the marketperformance of SVT and non-SVTregions. However, we need to rememberthat the SVT was announced andimplemented during a period of materialchanges to housing and macroeconomicpolicy, including the B-20 mortgage stresstest and rising interest rates.Of note, the algorithm has a difficult timedifferentiating SVT and non-SVT marketsthat are geographically adjacent. Forexample, market performance is verysimilar in Nanaimo, an SVT region, andParksville, a non-SVT region. Thealgorithm sorts both markets into the nonSVT cluster. Similarly, the CentralOkanagan, an SVT region, and Penticton,a non-SVT region, were both sorted intothe SVT cluster.Therefore, to measure the impact of theSVT, we must try to control for the impactof confounding policies in our analysis.Figure 6: Cluster Analysis11Outlier markets such as Kitimat were excluded from thisanalysis.5
BCREA Market IntelligenceMarch 2020Figure 7: Sales Trends in SVT Regionsand Non-SVT RegionsDifference-in-Difference AnalysisSince the SVT applies in only somemarkets across BC and not in other(sometimes adjacent) markets, we try toidentify the causal impact of the SVTemploying a common method designedfor policy evaluation known as differencein-difference (DiD).DiD is a quantitative technique often usedto study causal relationships in settingswhere, as in the case of the SVT, theselection of treatment groups was notrandom and when other factors may haveimpacted outcomes when the policy wasput into effect (e.g., mortgage stress test,rising interest rates). While not perfect,this technique provides a solid benchmarkto the magnitude of market impactattributable to the SVT. 12Our DiD estimates show that sales in SVTregions underperformed those in non-SVTregions by approximately 12.5 per centsince 2018. That means that regionswhere the SVT is in place, sales were12.5 per cent lower than they would havebeen without the SVT.A key assumption for the validity of DiDestimation is that the treatment andcontrol groups, in this case the SVT andnon-SVT regions, have a parallel trendprior to the policy intervention.Similarly, our DiD regression for MLS average prices reveals that price growthin SVT regions was 5 per cent lower thanin non-SVT regions since the introductionof the tax (Figure 8).As shown in Figure 7, the pre-Budget2018 trend in non-SVT and SVT regionsales was very similar, as was thereaction to the B-20 stress test at thebeginning of 2018.Figure 8: Estimated Difference BetweenSVT and Non-SVT RegionsDiD assumes that, absent a policyintervention, the post-intervention trend inthe SVT and non-SVT regions would beidentical. While the trend in sales for bothgroups is very similar following theBudget 2018 announcement of the SVTand other tax measures, the magnitude ofsales decline in SVT regions wasnoticeably larger. Using DiD, we attemptto discern how much of the difference intrends was due to the implementation ofthe SVT.12See appendix for methodology and detailed results.6
BCREA Market IntelligenceMarch 2020between SVT and non-SVT markets onVancouver Island and in the Okanagan.We also estimated the DiD regressionsexcluding Metro Vancouver to gaugewhether our results held up for marketswhere the tax applies, but where therewere relatively few SVT payors.The combined effect of federal andprovincial measures may havesuccessfully arrested the rapidacceleration of home prices that occurredbefore 2018. However, a recovery ofhome sales is underway around theprovince, and without addressingsignificant supply issues, any progressmade toward improved affordability looksto be short-lived.Estimating the same regression but for adata sample that excludes MetroVancouver, we found that the impact ofthe SVT on home sales was close to zeroand not statistically significant. Theimpact of the SVT on home price growthwas an estimated negative 0.6 per cent.Moreover, while the SVT, the City ofVancouver’s Empty Homes Tax andshort-term rental regulations may haveencouraged more units to be added to therental stock, particularly in MetroVancouver, vacancy rates remainextremely low and as a result rental ratescontinue to rise.ConclusionsOur estimates show that tax measuresintroduced in Budget 2018 compoundedthe already significantly negative effectson home sales and average prices fromother policy measures, particularly the B20 stress test. While B-20 is still thedominant causal factor in the broadmarket slowdown that occurred in 2018and 2019, markets in which the SVT waslevied underperformed non-SVT regionsby a significant margin. However, theseresults seem to be confined to MetroVancouver markets with negligibledifference in market performancePerhaps the impact of the SVT will be feltlonger term, as tax revenues are allocatedto affordable housing and other projectsneeded to address the supply side ofprovincial housing. For now, it appearsthat the SVT, along with other recentlyenacted housing policies, provided anultimately temporary salve to the issue ofhousing affordability.7
BCREA Market IntelligenceMarch 2020Appendix: Methodology and ResultsTo estimate the impact of the SVT on sales and prices in SVT regions, we estimated thefollowing standard difference-in-difference regression for our outcome variables Yi (sales orprices in each market i) on Tax status Ti 0 for non-SVT markets, Ti 1 for SVT markets, atime dummy variable ti where t 0 for the time period before the SVT and t 1 for the periodafter the SVT, and an interaction term to capture the impact of the SVT:Yi α β1Ti β2ti δ(Ti ti) εiWhere,α constant termβ1 Treatment group specific effect (average permanent difference betweentreatment group (SVT markets) and control group (non-SVT markets)β2 Time trend common to SVT and non-SVT marketsδ Estimated impact of the SVTεi random, unobserved error termThe regressions were estimated in natural logs, so the coefficient of interest, δ, can beinterpreted as a percent change in sales or prices due to the SVT.The coefficient δ, which measures the impact of the SVT, reported below with t -statistics inbrackets. Note: the regressions are in natural logs, so the reported impact is calculated as𝑒 𝛿 1.Table 1: Estimated Impact on Sales and Prices – Whole SampleOutcome .052(-2.719)*Estimated Impact, 𝑒 𝛿 1%-12.5%-5.0%*Statistically significant at the 5% levelTable 2: Estimated Impact on Sales and Prices – Excluding Metro Vancouver MarketsOutcome .006(-10.758)**Statistically significant at the 5% level**Not statistically significant8Estimated Impact, 𝑒 𝛿 1%0.2%-0.6%
in Metro Vancouver were converted to long-term rentals.8 Despite the increase in supply, strong demand in Metro Vancouver kept the rental vacancy rate unchanged at 0.3 per cent in 2019 (Figure 4). In recent years, population growth in the younger cohort (between 15 and 34 years old) who tend to be renters has surged. In 2018, this
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