Foreign buyers in Vancouver will be paying more for investment properties this month (beginning August 2). The Canadian provincial government of British Columbia has enacted a 15 percent real property transfer tax on foreigner-purchased properties in Metropolitan Vancouver, adding $300,000 to the cost of a two-million-dollar home. The tax is the response of Premier Christy Clark’s government to data indicating that foreign absentee buyers have been driving up home prices past the point of their affordability to native B.C. residents. Recent data showed that foreign buyers spent more than CN$1 billion on B.C. property in just five weeks, 86 percent of it in the Lower Mainland. “People who use housing solely as a means to make money rather than living and working in Vancouver should be taxed as such,” Vancouver Mayor Gregor Robertson is reported as saying.
As recently as last fall, the Clark government had steadfastly denied that foreign purchases were a significant driver of home price inflation in the region, instead attributing higher prices to limited supply, high domestic demand, development regulations, and low interest rates. Hence, officials including B.C. Finance Minister Mike de Jong had dismissed any notions that foreign buyers be targeted for disincentives, as was being advised at that time by Canada’s then Prime Minister Stephen Harper. Harper had reportedly said, “Some reports have suggested that speculative foreign nonresident buyers are a significant factor in driving homes out of the price range of average families, especially in Vancouver and Toronto. If speculators are driving up the cost of housing to unaffordable levels, that’s something the government can and should address … Other countries, like Australia, have put in place regulations that limit the ability of foreign buyers to purchase existing houses for investment purposes.”
Indeed, the restrictions enacted by Australia in 2010 appeared harsh. Those rules prohibit nonresident foreign investors from buying existing homes, and this constraint can only be lifted if they plan to redevelop or build new housing. Relief for temporary residents may be approved by the government before they purchase or build a home; but once approved, such residents can only purchase that one property for their personal residence while in the country. Once it is no longer their primary residence, they must sell it within three months. Yet despite the severity of the law, observers had reported no meaningful reduction in demand in recent years.
Closing Regulatory Loopholes
Canada’s investor immigration program was suspended in 2014, but not before allowing as many as 200,000 people to enter Vancouver. While the EB-5 program in the U.S. is similar, it requires investment in employment-generating enterprises, while the Canadian program only required the prospective immigrant to commit funds to the government’s use for five years. Although that avenue has now closed, there are claims that a similar program in Quebec, the QIIP, continues to be used by immigrants to Vancouver, despite a requirement that investors move to Quebec. Statistics that might indicate relocations of new immigrants from Quebec to Vancouver are not reported by BC Stats; yet at historical rates, these might include more than 5,000 – 6,000 new high net worth residents per year in Vancouver.
The money infused into the housing market by these new immigrants, in addition to the inflow contributed by investors remaining in China through friends, family members, and invested businesses in B.C., would perhaps be sufficient alone to drive up home prices in the Lower Mainland. However, key regulatory loopholes in the B.C. market have been exploited by B.C. real estate agents to exacerbate the problem, by allowing real estate “wholesaling” and contract reassignment, or “shadow flipping.”
“Wholesaling” as has been practiced in the Vancouver market involves individuals—often unlicensed—approaching homeowners and offering them a price on their property. These seller referrals are then passed on to real estate agents who already have pools of prospects ready to buy. While there is nothing inherently wrong with approaching a homeowner with an offer of sale, all persons involved in advising or brokering a real estate sale are required to be licensed; involving unlicensed persons is illegal. Furthermore, wholesaling presents issues related to agency that would prevent this approach from being used in Washington State without mandatory disclosures.
In shadow flipping, upon approval of a purchase-and-sale contract, a prospective “buyer” sells the assignment (i.e., the right to the contract) on to a second “buyer” for a greater amount, who might then sell it again before the sale is closed and all parties cash out, with the seller receiving a substantially lesser amount than the final price paid. Reportedly in many cases, the intermediary buyers included real estate agents and speculators. Real estate observers view shadow flipping as an exploitation of the seller who presumably might have received a much greater price for the property.
Before announcement of the property transfer tax on foreign buyers in July, Premier Clark acted in March to inhibit shadow flipping by requiring the seller’s signed consent to these reassignments, as well as mandating that all profits on sale be returned to the seller. Other ideas put forward, but not adopted, included a two percent tax on property bought by absentee investors, and additional property transfer taxes on shadow flippers. It remains to be seen whether the measures enacted, in combination with the new property transfer tax on foreigners, will have the intended effect of slowing the rampant speculation in the Vancouver real estate market.
Puget Sound Fundamentals
In contrast with these market conditions peculiar to Vancouver, the Seattle metropolitan area is a sustainably robust housing market largely driven by fundamentals, despite seeing increasing numbers of immigrants. While Puget Sound’s high-tech economy draws new residents from all over the country, foreign buyers here—mostly Chinese as in Vancouver—have been a dominant and increasing share of luxury homebuyers, especially on the affluent Eastside. Direct flights from Asia, Puget Sound’s renowned quality education, an internationally influenced culture, relative affordability compared with other West Coast gateway cities, and the ten-year, multi-entry visa program agreed between the U.S. and China all continue to entice visitors and new residents. Realogics Sotheby’s International Realty has undertaken several initiatives to welcome, inform, and nurture clients among these new arrivals, such as our RSIR WeChat and Juwai.com channels providing news and listing data in both Chinese and English.
In terms of community and economic development, unlike other Anglozone immigrant investor programs, the U.S. EB-5 program effectively promotes second home ownership and permanent immigration to the region through investments that are structured to increase employment and benefit the local economy, rather than fund federal government operations. Moreover, Washington real estate laws in combination with U.S. federal laws provide some of the world’s highest levels of transparency and protection to real estate buyers and sellers, with duties to clients defined by statute. Finally, our state and municipal governments currently do not impose any property tax or transfer tax expressly aimed at foreign buyers. No similar bills have been put forward by the Washington State Legislature, and policy makers have remained silent on any proposals to that end, as market conditions in Puget Sound and statewide do not seem likely to warrant such measures.
So for the foreseeable future, the only impact on Seattle and Bellevue real estate of the new tax in B.C. is to increase the comparative affordability to foreign buyers of our real estate in relation to similar properties in this neighboring market. Realogics Sotheby’s International Realty has been monitoring the activity of foreign buyers in our target markets, and we will continue to offer insights on any shift in demand that may result from changing conditions in Vancouver and other competing markets.
“It’s not entirely surprising to see such policy making given that Vancouver, BC has become one of the most expensive real estate markets in the world, in large part because of global demand,” said Dean Jones, President and CEO of Realogics Sotheby’s International Realty. “The irony is this could create even more interest in alternative markets like the Seattle/Bellevue metro area as foreign buyers, mostly Chinese, increasingly explore their options and stretch their dollars.”
 Dirk Meissner, “B.C. to bring in real estate tax on foreign buyers,” The Canadian Press, 25 July 2016.
 “Vancouver property tax for foreign buyers,” SkyNews.com, 11:05 am, Tuesday, 26 July 2016.
 Rob Shaw and Peter O’Neil, “Tories look to Australia for foreign buyer issue,” Vancouver Sun, 10 October 2015.
 Ian Young, “Here are immigration statistics Vancouver isn’t supposed to see. Why the secrecy?” South China Morning Post, 1 July 2015; updated 23 February 2016.
 According to Globe and Mail investigator Kathy Tomlinson, knowledgeable sellers have always been able to avoid the practice by requiring a no-assignment clause in the purchase-and-sale contract. “B.C. government moves to end shadow flipping,” The Globe and Mail, 18 March 2016; interview, “Questionable Real Estate Assignments,” The Lynda Steele Show, audio webcast 8 February 2016.
 David P. Ball, “Vancouver Shadow Flipping Shows ‘Naked Greed,’ Premier Says,” The Tyee, 18 March 2016.