Tax Speculations

February 28, 2019February 28, 2019 ~ Nathan Lauster ~ Leave a comment

co-authored by Jens von Bergmann & cross-posted at MountainMath

BC has introduced the Speculation and Vacancy Tax and instructions for filling out the declarations are in the mail. The tax targets homes in major urban centres that are left empty, or that are owned by “foreign and domestic speculators” that “don’t pay [income] taxes” in BC. The tax rate is 0.5% of the assessed value in 2018. From 2019 onward rates increase to 2% for foreigners (not permanent residents nor Canadian citizens) as well as citizens or permanent residents that are deemed members of “satellite families.” A “satellite family” is defined as a family – combining spousal incomes – where less than 50% of total worldwide income is declared (and taxed) in Canada.The portion targeting empty homes follows along similar lines as the City of Vancouver Empty Homes tax, with similar exemptions. Homes are generally exempt from the tax when owner-occupied or rented out for at least half of the year. Importantly, foreign and satellite family owners face additional burdens in renting out homes. Tenants must either be arm’s length, meaning they have no special relationship with the landlord, or, if non-arm’s length, they must be permanent residents or Canadian citizens with Canadian income at last three times the annual fair market value of the rent for the entire residential property.

The tax has been reported to affect about 32,000 homes, about 20,000 of which will be British Columbians with the remaining 12,000 foreigners or residents of other provinces, and generate around $200M in revenue. Unfortunately the province has not shared a more detailed breakdown of how many homes are in each of the category the tax targets, the empty homes, the foreign owners, or the satellite families.

Like everyone, we’re curious how it’s all going to work! Here we want to try and put out some preliminary guesses as to how many a) empty homes and b) foreign owners might get taxed. We also want to think a bit more about satellite families and imagine how possible consumption audits might work. This enables us to make some educated guesses about c) the population at risk of being audited. Surely some of those audited will either have to pay the speculation tax or end up referred for income tax avoidance. Others will have ready explanations for why their property holdings fail to match their reported incomes, likely explaining their lifestyles as products of income volatility or legal gifts (falling beyond combined spousal income). Finally, we want to address the possibility of better rental income reporting as a result of the Speculation and Vacancy Tax. Might there be even more d) revenue gained from better reporting rental income relative to direct Speculation and Vacancy tax revenue? Let’s find out!

TLDR:

We’re guessing from various sources detailed below that the BC Speculation and Vacancy Tax will identify about 8,800 properties as vacant and subject to the tax (i.e. not exempt). An overlapping 46,000 properties owned by “foreign” owners may be subject to the tax if they don’t secure qualifying tenants for their properties. Another overlapping 45,000 households may be at risk of being identified (or audited) as satellite families, mostly living in pricey single-family detached (or suited) dwellings. Around a third of these households will be headed by Canadian-born residents, and investor class immigrants will likely end up overrepresented within immigrant households at risk of being ID’d as satellite families. Metro Vancouver will be most affected by the tax. The collection of income and property value data together with the registration of tenants in rented properties will potentially bring in more revenue indirectly, by increasing compliance with reporting of rental income and reducing tax avoidance/evasion more broadly, than by direct payment of the Speculation and Vacancy Tax.

Empty homes

How many empty homes will the tax effect? Empty homes are hard to estimate. The City of Vancouver commissioned a study based on BC Hydro data to estimate the number of empty homes in the city in a similar manner to how the tax applies, coming up with 10,800 to 13,500 empty homes in the city. In the first year, 2,538 properties were subject to the tax (roughly half declared themselves so with the rest failing an audit or failing to file or appeal). Another 5,385 were declared exempt (some of the exempt properties were not in the universe of the Ecotagious study). It is unclear how much of the difference is due to previously empty homes getting occupied or evasion. It is difficult to use this to estimate the total number of empty homes affected by the speculation tax, but one very rough estimate would be to take the number homes unoccupied on census day and scale the numbers down by a factor 8.6, roughly the ratio of the 21,820 homes unoccupied on census day in the City of Vancouver to 2,538 empty homes paying the empty homes tax.

Overall there were 75,870 dwelling units that were unoccupied on census day in the regions where the Speculation and Vacancy Tax applies. If we use the Ecotageous study for the City of Vancouver as a guide, we would expect 41,725 empty properties using the definitions from the Speculation Tax, and 8,825 properties that will pay the tax. This might be a low-ball, given that the province has more effective means in checking for evaders entering into “fake rental” agreements and that the tax rate is lower (for the first year, and for permanent residents and Canadian citizens that make up the bulk of the affected owners in the years after) than in the City of Vancouver, and that the tax can be offset against BC income taxes, potentially inducing fewer people to sell or rent out their property in response to the tax.

Foreign owners

How many foreign owners will the tax affect? Foreign owners are defined as those owning property without being a citizen or permanent resident in Canada. Keep in mind that foreign owners won’t face any speculation tax so long as they rent out their properties to an arm’s length tenant or so long as the deal seems plausible for a non-arm’s length tenant (right now 37.7% of all secondary market renters in the regions affected wouldn’t meet the specified plausibility requirements, but that’s mostly due to their income being too low and that doesn’t matter for arm’s length tenants). Only if the foreign owner themselves occupies the property, leaves it empty, or keeps family members (like children) housed upon the property will they face the tax.

Ever since instituting the Foreign Buyer Tax in 2016, BC has been tracking data on how many purchases are made by foreign buyers. But for a variety of reasons, this kind of transaction data is a poor reflection of the number of foreign owners at any given point in time. Statistics Canada has sought to better collect data on foreign property ownership through its CHSP program, but the definitions differ from tax policy definitions. For CHSP purposes, it’s the primary residence of owners that matters rather than citizenship or permanent residence status – in other words, do owners live at foreign addresses or Canadian addresses? Some people with overseas primary residences will have Canadian permanent residence or citizenship. Some people with primary residence in Canada will not have Canadian permanent residence or citizenship (this status, for example, covered both authors of this blog post when they first moved to Canada). While imperfect, the measure of primary residence probably isn’t a terrible proxy for who will face taxation.

Extrapolating from the CHSP data for the region covered by the Speculation and Vacancy Tax suggests that 46,110 “foreign” owned properties might face the tax, in addition to the relatively small number of foreign individuals likely registering their properties through corporate ownership. It’s important to remember that there may be a significant overlap between the empty properties we looked at above and the properties of non-resident owners likely to face the tax, so these are non-exclusive categories. But we don’t yet have any good data on the degree of overlap.

Of note, so far we can report that the impact from the Speculation and Vacancy Tax will vary widely by geography. Many municipalities have very few empty properties or foreign owners. Others, as near UBC (Metro Vancouver A) have a lot. Of course it’s worth noting that the housing around UBC is unusual for many reasons, including its student population (often boosting census unoccupied counts and highly transnational). Moreover, Electoral Area A weirdly extends into the mountains of the North Shore, where a small number of empty cabins complicate the picture, but there aren’t too many, so we don’t show that part on the map.

Satellite families

What about satellite families? Brace yourself for a much longer discussion, necessarily delving into the definition of satellite families, the methods BC may attempt to use to audit those they suspect of being satellite families, and the limits of the information we can gather about satellite families.

In common parlance, satellite families refer to families where income earners live and work in one place while children and spouses live in another. Within the family sociology literature, this includes a variety of spousal and spouse-like relationships grouped as Living-Apart-Together (LAT). It also includes adult children being supported by parents who live elsewhere, and minor children who might be living with other caregivers (like grandparents) while receiving parental support. Within the immigration literature, satellite families might also be understood to include a wide variety of ways families work around and across borders, often sending different family members to places where they’re likely to see the most economic opportunities, but involving remittances sent back across borders for the good of the family as a whole. The Philippines and Mexico are perhaps the places most studied where families send workers abroad who return remittances back home, usually with a long term goal of reuniting the family. But other countries, including China and even Canada, have similar traditions. Satellite families create transnational ties, constituted in part through the flow of resources across borders but between family members. Vancouver likely has a lot of satellite family members engaged on both sides of transnational income sharing, both as wage earners supporting those abroad, and family members supported by those abroad.

Vancouver also has a lot of wealthy residents, including both immigrants and non-immigrants. And if there’s one thing we know about wealthy residents, it’s that they often don’t pay their fair share of taxes. In the specific context of BC’s Speculation and Vacancy Tax, the debate over satellite families has often emphasized tax avoidance. Satellite families are frequently suspected of gaming tax systems for their own advantage by deriving their income from another country, leaving it untaxed by Canadian income tax. Income tax, of course, helps to fund many services (e.g. education, healthcare) enjoyed by Canadian permanent residents and citizens. Property tax also funds many services, though as many observers have noted, BC has very low property tax rates. So it’s possible to game tax systems – entirely legally – by one family member working in a location (outside of Canada) where income tax rates are lower than BC’s and paying income taxes there, while other family members buy property and enjoy many of the services of BC, where property taxes are often lower than elsewhere. This is the situation the Speculation and Vacancy Tax is meant to correct, though of course it also potentially creates problems for transnational families who aren’t attempting to game tax systems. It also has no impact on satellite families who rent rather than own. Aside from identifying satellite families, the joining of property data with income data also has the potential to identify tax evasion. As revealed by recent CRA audits, tax evasion among wealthy Vancouverites is probably pretty common.

How many satellite families are there? We really don’t know yet. There’s no good data on the issue, especially since families filling out census forms may, or may not, choose to list members regularly working overseas as resident in BC (and census residence is different from tax residence). That said, we have a better sense of who might be at risk for either listing themselves as satellite families or being audited under suspicion of tax avoidance or evasion. But we have to make some guesses about what might trigger audits.

First, let’s remind ourselves of what data is being collected. The declaration form for the Speculation and Vacancy Tax asks about worldwide income for property owners, including the combined worldwide incomes of spouses. This is attached to property tax data from the assessment rolls. So the tax authorities should have declared data on worldwide income, income taxed in Canada, and property values. Recall that owners with less than half of their worldwide income declared in Canada are considered satellite families. Some people will identify themselves as satellite families. But in other cases, they may provide false declarations regarding their worldwide income. This opens up a variety of auditing opportunities for BC and the CRA. How will they decide who to audit for compliance?

We already know the CRA has identified lifestyle audits as a lucrative means of tracking tax evasion. We also know they’ve got a rule in place regarding rents deemed legitimate for non-arm’s length tenants. We can build on this to explore cases likely to trigger audits if undeclared as satellite families. Keep in mind there may be many explanations for discrepancies between property value and income, including family income volatility; dramatic appreciation of housing purchased long ago; or living off savings, inheritance, or gifts. But other explanations will identify home owners as “satellite families.” Of note, still other explanations may be referred to the CRA or police authorities when they suggest tax avoidance, tax evasion and/or work in illegal economies. So how many people are at risk of being audited as satellite families?

Wait, just a few more methodological caveats! We will try to estimate the number of households at risk of being audited or labeled as satellite families using the recently released 2016 PUMF data. 2016 data is, of course, now somewhat dated, being collected prior to a number of policy changes of interest to what we’re exploring, including (but not limited to) the imposition of the Foreign Buyer’s Tax in 2016, the imposition of the Empty Homes Tax in the City of Vancouver, and the slow roll-out of the Speculation and Vacancy Tax itself. We also won’t be able to achieve a perfect match with the regions the speculation tax applies in, having to make due with using Census Metropolitan Areas. The largest discrepancy is that this drops the Nanaimo area region. PUMF data is based on a weighted subsample, so estimates based on PUMF data are never counts as when using the census, but ranges based on different weightings. In most cases, actual census counts will be contained in these ranges, so PUMF data adds a conceptual nuance we usually don’t see when using census data. At this point it is good to remind ourselves that what we are really interested in is not the census counts but the actual numbers on the ground that the census is trying to estimate, but as usual we will gloss over this last step and be satisfied with estimating census counts. Here we will use the primary household maintainer as a proxy for the owner, and we will ignore dual or multiple ownership scenarios where owners fall into different categories. The speculation tax puts heavy emphasis on spousal income, which is different from family income or household income. That makes it a bit difficult to use census data to compare, we would need another custom tabulation to extract the income of spouses only. For this post we will gloss over this issue and just use household income instead. While family income may be closer to spousal income, we simply felt that household income is a more appropriate measure in the context of the Speculation Tax. People that favour different preferences are welcome to grab the code and make the appropriate adjustments. A related issue is what counts as a “satellite family”, in particular it is not clear if it applies to individuals who are not married or living common law. While only married (including common-law) tax residents in BC would appear to be at risk of declaring themselves part of satellite families, single individuals could also be flagged for lifestyle audits to determine tax compliance, so we include both, but we separate them. Throughout we will exclude immigrants that came in 2015 or 2016, as their 2015 Canadian income may not correctly reflect their subsequent Canadian income. Moreover, we exclude households that have moved within the preceding year, as well as properties worth less than $150,000, as these are exempt from the tax. Generally we don’t report if a category contained fewer than 30 (unweighted) cases.

Home-value-to-income based triggers

Assessed home value to income ratios could serve as a trigger for consumption based audits. But what’s a good ratio to use? For a foreigner renting out their property to a non-arm’s length tenant, the tax requires the income of a tenant to be at least three times the (fair market value of the) rent in order for a foreign owner to be exempt from the tax. We take this as a hint we can use this as an implicit definition of a satellite family. A satellite family may be identified as a household with declared income taxed in Canada that is less than 50% of three times the imputed rent. Why? There’s the expectation encoded in the non-arm’s length definition that housing costs will take up no more than one third of income. And if more than 50% of the household’s combined spousal worldwide income is declared outside of Canada, one is considered a satellite family. To estimate imputed rent we use a gross cap rate of 3%. This test is effectively asking that owner households spend at most two-thirds of their total Canadian income on shelter cost based on imputed rent.

However, this will catch quite a few “house-rich but income-poor” people. Take for example a senior that bought their house a long time ago for a lot less money than it would take today. If their house is now worth, say, $2M, then the imputed rent comes out to be $5k a month, or $60k a year, requiring an total annual income of at least $90k to pass our test. Given the fairly large appreciation of property, especially in the years before the census, it seems reasonable to adjust the trigger by how long the property has been held. The province will have the exact time the property was purchased to fine-tune this, but using census data we can only check if the person lived in the same residence one and five years prior. As we are exempting people that moved within the year before the census (analogous to the Speculation Tax exempting properties in the year they transacted), this leaves us with the five year timeframe.

Given the explosive rise in property values in the year before the census, we discount the imputed rent by a factor of 0.8 if the household maintainer moved into the property between one and five years before the census, and by a factor of 0.5 if the maintainer moved in more than 5 years before – reflecting the roughly doubling of property values within the five years before the census. We call this the adjusted imputed rent test.

Of note: our data is top-coded for dwelling-values above $2M, which can lead to some mis-classification for some properties with very high dwelling values, but ultimately different ways of adjusting for this have little big impact on the high-level numbers. We added an additional filter excluding households with household income above $90k, which softens potential issues around top-coded dwelling values.

Combined spousal income determines satellite family status under the Speculation and Vacancy Tax, so we separate out our estimate of those failing our adjusted imputed rent test (and hence at risk of being audited) by marital status. This yields an almost identical number of single vs married or common law households failing the test, combining for around 45,000 in total. While only married (or common-law) people would seem to be at risk of being labeled satellite families given the focus on combined spousal incomes (“gifts” to children and other family members don’t count the same), it’s possible that auditors will still include single people in the pool of those at risk of being audited for tax evasion and failing to accurately report worldwide income. So we’ll keep both singles and marrieds in the analysis, but treat them separately.

Household Status

We also want to look at other statuses that might matter. Students and seniors come to mind as being particularly vulnerable to audit because of their lower incomes. In addition, seniors may be especially likely to have purchased their homes long in the past, meaning their homes may have done much more than double in value since they’ve lived in them. So let’s see what happens when we separate out these groups.

We see that in particular single seniors make up a good portion of households at risk of being audited, but the bulk is taken up by working age population that is not attending school. Household type gives a different way to understand the makeup. If satellite families mostly involve an overseas wage earner supporting a spouse and children, do we see a lot of these types of households?

As it turns out, there are relatively few people who report being married but living as a lone parent who fail our adjusted imputed rent to income test. There are only around 2,400 married or common law household maintainers that show up in lone parent households, making up a small proportion of those failing our test overall. But it’s possible that many respondents filling out census forms still report their spouses as belonging to the household, even if they spend a significant amount of time working overseas, so we shouldn’t count out other married and common-law categories, split between those with and without children, from being considered satellite families.

Dwellings

What kinds of dwellings are people who fail our test living in? First let’s talk about dwelling values. By our metric, the disjuncture between dwelling value and reported income triggers possible audits. Higher dwelling values have a mechanical effect on increasing the income needed to avoid an audit, so we’d expect households with higher dwelling values to be more likely to fail our test. Is this what we actually see?

As one would expect, relatively few lower dwelling value homes are impacted. But each half a million dollar value bracket between $500k and $2M seems fairly evenly filled by about 4,000 households, jumping to higher number for homes above $2M, especially those occupied by married or common law household maintainers. Those most at risk of being audited would appear to be those living in the most expensive homes.

What structural sorts of dwellings are the people who fail our adjusted imputed rent to income test living in? Condo apartments? Single detached homes? Both dwelling type and condominium status will be available to government auditors. Our data only has three dwelling types: single detached, apartment and other. In our focus on owner-occupied dwellings and taken together with the condominium variable, we’re mostly separating condominium apartments from single-detached houses, with the latter showing up either as a single-detached house or a non-condominium apartment (i.e., house with a secondary suite or “duplex”). But there will be some other types of non-condo apartments and other types of structure (e.g. rowhouses) showing up as both condos and non-condos.

Most of those at risk of being audited would appear to live in single-detached houses, with or without suites, with condominium apartments taking a distant second. It would appear that not too many other kinds of housing will be targeted, or at least we don’t see enough of them to provide reliable estimates of their frequency. But this analysis by itself is interesting in policy terms. As a reminder, some condominium apartments will be temporarily exempted from the tax if they have restrictions on rentals – an out not available to other dwelling types (and also not available for long!) Detached houses with secondary suites have another potential loophole. Regardless of their status, property owners might be able to avoid paying the Speculation and Vacancy Tax on their house as a whole so long as they rent out one of the suites on the property to an arm’s length tenant, pointing toward the categorical flexibility houses with suites repeatedly demonstrate in policy terms.

Immigration

In the context of satellite families we often think of immigrant households. These are the households expected to maintain transnational connections, though overseas income earning may diminish with time (and generation). Of course, non-immigrants can also find themselves earning incomes (or partnered to those earning incomes) outside of Canada. Moreover, we know Canadians of many stripes and backgrounds attempt to evade taxes, just as they also have “bad years” where their incomes may drop out of the normal. So let’s look into immigration by period, including non-immigrants in the mix. How does immigration relate to risk of being audited as a satellite family using our adjusted imputed rent test?

Higher numbers of non-immigrants (i.e. Canadian born) fail our test than any ten-year immigration arrival bracket. Non-immigrants especially dominate the set of single people with lower incomes than expected by housing values, but they also appear in great numbers for married people. This is a striking finding, but also reflects the greater overall size of the non-immigrant population. Looking at immigrants by period, we tend to see what we expect: recent immigrants fail the test more often than more established immigrants. Recent immigrants failing our test also tend to be dominated by married couples, unlike what we see for non-immigrants, but this gap diminishes over time as immigrant patterns come to look increasingly like Canadian born patterns.

Looking at the share of owners failing our test in each immigrant category, as opposed to their total numbers, helps clarify these patterns further.

Here we see that higher proportions of recent immigrant owners fail the adjusted imputed rent test than for non-immigrant owners or more established immigrant owners. Reading shares by period of arrival sideways, the evidence would suggest that more recent arrivals owning homes will likely move toward non-immigrant patterns for home owners the longer they remain in Canada. But culture and wealth of immigrants may vary with period, so there may be other explanations at play as well.

Where are those who fail our test coming from? Let’s take a look, using place of birth! Of note, sending countries vary from period to period, meaning the period analysis (above) influences the place of birth analysis (below) and vice-versa. Arrivals from China, in particular, tend to be more recent. We should remind ourselves that place of birth is not necessarily the same as the place people immigrated from. In particular in the case of China, sizable portions of immigrants arriving from Taiwan and Hong Kong were actually born in China.

Here Chinese born and Canadian born household maintainers contribute the most to owners failing our adjusted imputed rent test. But other sizable contributors to possible audits include those from Hong Kong, other East Asian countries, and the United Kingdom. The United Kingdom may seem unexpected as a group likely to face audits, but we have already seen some of the relevant cases documented in the news. Let’s look at share of owners failing our adjusted imputed rent test by place of birth.

Diving into the share of owners likely to trigger audits, we see in all cases that it’s a minority of owners at risk from each country. The uncertainty ranges are too large to sensibly rank the data by place of birth. We grouped immigrants from birth places with fewer than 30 (unweighted) combined cases into larger groups. Nevertheless there are sizable proportions of owners arriving from China, Hong Kong, and Other Eastern Asian countries at risk of being audited. This likely reflects Canadian immigration programs selecting for wealth, like investor class programs, popular in these countries. Comparing investor immigrants living in the speculation tax regions to all immigrants by place of birth, we notice how the investor program leans heavily toward Pacific Rim countries.

We know just over 22,000 property owners in Metro Vancouver were identified as investor class immigrants in 2018 CHSP data. We also know that the incomes of the investor class immigrants reported in Canada have tended to be lower than for other streams, as confirmed in the 2016 census data below.

Looking at the adjusted family income deciles, the bottom decile is very strongly represented, with incomes slowly rising the longer the immigrants have been here. While we don’t know how these roughly 62,000 investor immigrants group into households and household types and break up into renter and the 22k owner households, this does provide more circumstantial evidence that a fair number of investor class immigrants will get caught by the adjusted imputed rent audit trigger.

East Asian ownership patterns may also reflect price discrepancies that make Vancouver real estate seem especially cheap to immigrants arriving from across the Pacific Rim. Arrival with wealth, whether from the sale of a pricey residence overseas or other sources, enables movers to quickly purchase housing in Vancouver. Once arrived, they could become satellite families by returning income earners to countries of origin where they see stronger job prospects (and less discrimination), or they could simply be living off of their savings as they adjust to life in Canada as homemaking migrants (ungated version). In this, immigrants may constitute a special case of income volatility in the years after their arrival. And of course let’s not forget that where there is wealth, no matter the source, there are likely to be attempts at tax avoidance and evasion!

Regional Variation

Lastly we quickly check on how properties likely to be declared as satellite families or audited for lifestyle discrepancies are distributed over the CMAs that we consider. Not surprisingly, in terms of sheer numbers, the Speculation and Vacancy Tax is overwhelmingly going to target Metro Vancouver. Almost all of the properties failing our test are in Metro Vancouver. Which isn’t too surprising since it’s where all the people live.

But what about in terms of share? Metro Vancouver is also where the highest value homes are located and the area with the most transnational ties. So perhaps it’s not surprising that the share of households likely to declare as satellite families or be audited as such looks highest in Metro Vancouver. But by share it’s more clear that Victoria, Kelowna, and Abbotsford pull at least some weight.

Comparing to Shelter-cost-to-income triggers

Another measure that has been in the public discussion regarding satellite families is the shelter-cost-to-income ratio. Instead of (adjusted) imputed rent, we can take the actual shelter cost from census data. This won’t be directly available to the government for audit purposes, but the government could try to approximate this using the mortgage registered against the property from their land title database.

Replacing our adjusted imputed rent with shelter cost we now can ask that owners have enough income to cover three times their shelter cost. Folding in the Speculation Tax definition of spouses having to declare at least half their joint spousal income in Canada we arrive at a shelter-cost-to-income cutoff of 66.7%. That’s something that’s reasonably easy to check in Census data, just like we did for renters near the top.

The total numbers of owner households failing the shelter-cost-to-income test is very similar to those failing our adjusted imputed rent test, but the populations don’t fully overlap as the following graph demonstrates.

This shows that the tests are quite sensitive to the definitions, and using these kind of tests for audits will not be entirely straight-forward. Provincial auditors will likely be busy, and will require a robust data-driven audit system in order to be effective.

Rental Income Tax Reporting Compliance

Reading through the requirements one can’t help but think that the BC government will make use of detailed individual tax return data to enforce the regulation. They may be able to use rental income on tax returns to verify the that arm’s length tenancies were correctly declared. At the same time, this should prove a very effective measure to ensure rental income is properly declared by landlords, which in turn forces proper declaration of capital gains taxes in case of a sale of a secondary residence, both of which are suspected to have low compliance. To get a rough idea of the impact, we use census data to estimate the total rent being paid by tenants. The aggregate shelter cost of tenants not in purpose-built, social housing or basement suites in our regions is $3.09B. Here we exclude basement suites because they are affected differently by the speculation tax. Rent is generally a bit lower than shelter costs, because rent may not include utilities. Combined with this, as well as tax write-offs, we assume an effectively 15% of this total is due as tax on rental income. If we take the current compliance rate to be 50%, the compliance rate that was recently estimated for artisanal landlords in London, and assume that the speculation tax increases compliance to 100%, this would generate an additional $232M of tax revenue at the federal and provincial level, which is the same order of magnitude as the projected direct tax revenue from the Speculation Tax. On top of this, declaring rental income makes it harder to evade capital gains tax at the time of sale of as secondary property.

Conclusion

The BC Speculation and Vacancy Tax has been reported to affect about 32,000 homes, about 20,000 of which will be British Columbians with the remaining 12,000 foreigners or residents of other provinces, and generate around $200M in revenue. While we’re not certain where these figures come from, given our estimates above they actually seem pretty reasonable. We’re guessing about 8,800 properties will be considered vacant and non-exempt from the tax, overlapping with 46,000 properties owned by “foreign” owners and subject to the tax if left unattached to a decent rental contract. A sizable 45,000 households may be at risk of being identified (or audited) as satellite families, mostly living in pricey single-family detached (or suited) dwellings. As we note, around a third of these households will be headed by Canadian-born residents, but it’s likely many investor class immigrants will also be hit, and the vast majority affected will be in Metro Vancouver. Finally, the tax will probably generate a lot of revenue indirectly by increasing income tax compliance, quite possibly topping its direct revenue. We’ll be watching to see how it unfolds!

For those interested in more details on our methods, or people that would like to make different assumptions and continue to investigate along these lines, the code for the analysis is available on GitHub.

Ottawa Talks Housing

January 16, 2019 ~ Nathan Lauster ~ Leave a comment

Back in November of 2018, I visited Ottawa for the CMHC’s National Housing Conference and presented preliminary results from my working paper (co-authored with Jens von Bergmann and Douglas Harris) on Who lives in Condos? In my last blog post (also up at MountainMath), we detailed how condos were used for metro areas across Canada, as well as how we arrived at our estimates. Here I’m following up with video of our full panel at the conference, “Building an Affordable Future for Rental Housing,” as well as our full powerpoint, both made available via CMHC.

My talk runs from the 10.00 minute mark till about 19.15. Other panelists include Marika Albert, new policy director for the BC Non-Profit Housing Association; Catherine Leviten-Reid from Cape Breton University; and Jacob Cosman from Johns Hopkins. The panel was moderated by Zahra Ibrahim. It was a great panel, even though I had a nasty cold and I wish we’d had representation all across Canada.

In case my talking head doesn’t do it for you (with a wicked cold, no less), here are the slides I refer to during my talk (or tap image below).

Here’s the full program with links to all of the other great panels.

And for good measure, here’s a picture I took in Ottawa outside of the Arts Centre hosting the conference. Ottawa, you’re beautiful! Though you are also very, very cold in November.

ottawa

When journalists attack!

December 6, 2018December 6, 2018 ~ Nathan Lauster ~ Leave a comment

Public intellectuals beware! Not everyone agrees with you, and some will be nasty about it. So how does it work when muck-raking journalists attack?

First some context: an observation of mine on twitter led to a little dust-up concerning the discourse around “foreign money” in Vancouver. I quickly muted the conversation, but it summoned many trolls, including the ghost of Margaret Wente (which paradoxically made me feel all warm & fuzzy, like I’d done something right). South China Morning Post reporter Ian Young, one of the chief troll-masters, decided to put out the equivalent of a journalistic hit on me. I suspect this is a pattern with Ian, given his past attacks on other public figures he disagrees with (like UBC’s Tsur Somerville). So I’m posting my responses here for future reference. Hopefully this will serve three purposes: 1) it may help keep Ian honest in his muck-raking; 2) it may have broader lessons for other academics who dare raise their voices in the rough and tumble public sphere; and 3) some people might actually be interested in my answers to Ian’s questions.

How things unfolded: After an initial relatively professional inquiry about getting my input on general issues (foreign money, racism, real estate), Ian sent me the following questions, which focus less on my input and more on my conduct, including both my tweet (which brought all the trolls to the yard) and my participation as an expert witness in a court case challenging BC’s foreign-buyer tax. But it doesn’t stop there. Read on if you’re also interested in strata wind-ups, because there’s a part two to the journalistic hit-story where Ian dives even deeper to try and find dirt on me!

Ian’s initial questions [in bold]:

In your affidavit in the Jing Li case, you say the role of “foreign buyers” in the Vancouver real estate market has likely been exaggerated. How big a role do you think “foreign money” – specifically, Chinese money (brought by both immigrants and non-immigrants) – plays in the Vancouver real estate market?

“Foreign money” is a problematic and sloppy concept, especially as applied to the wealth immigrants bring with them. I think immigrants play a strong role in driving Vancouver real estate, and we attract a disproportionate share of wealthy immigrants. We can talk immigration policy, and while I’m generally pro-immigrant (and an immigrant myself), I’m on the record against “investor” immigration programs. But when people immigrate to Canada, I no longer think of their wealth as “foreign.”

It would appear from data I’ve seen and analyzed, as compiled by the CMHC and Statistics Canada, that the role of people investing in Vancouver real estate while living elsewhere is a real but relatively small part of the local market. The evidence suggests local investors are far more prominent.

As for the issues of tax avoidance and money laundering (that people sometimes pretend only apply to “foreign money”), I take it for granted that these are bad things that should be ended regardless of how big a role they play in real estate.

Can you elaborate on the role of racism in the debate over foreign money and Chinese money in the Vancouver affordability debate?

I believe a number of different logics or motivations have driven the debate over “foreign money,” which as I’ve mentioned, I consider a problematic and sloppy concept. Many people are drawn to the “foreign money” explanation as a ready answer to their understandable confusion over prices that keep them from obtaining housing they feel like their parents might’ve been able to afford or that they could still easily obtain in other parts of Canada. They’re looking for answers – especially answers that don’t make them feel like failures for not achieving their particular homeownership goals, which are often associated with middle-class success, becoming an adult, and being a good parent. In this sense, there’s a real moral and personal element to debates over housing. And people are right to look beyond their own circumstances for explanations into Vancouver’s affordability woes. It’s a very sociological instinct!

But blaming foreigners isn’t helpful and the distinction between foreigners and foreign money isn’t very clearly drawn, just as blaming Chinese people isn’t helpful and the distinction between Chinese people and Chinese money is fuzzy at best. Racism certainly plays a part in the popularity of “foreign money” discourse, and Vancouver has a long and troubled history there. But we’re also in a very broad-ranging and very real populist moment where a generalizable xenophobia has taken root around the world. It takes different forms in different places, but it troubles me wherever I see it. Then there are also dynamics that are quite specific to Vancouver and its waves of immigrants from Hong Kong and Mainland China (and to a lesser extent, from Taiwan). Many people from Hong Kong are understandably worried over the future of their home city, seeing both Hong Kong and now Vancouver as threatened by Mainland China. These worries are frequently expressed through anti-Mainlander prejudice. I don’t think the term “racism” captures all of these logics or motivations, but it’s part of a somewhat toxic brew that in Vancouver is often targeted at Mainland China and Mainland Chinese.

Can you explain the continuum of racism in BC and what role it plays in government policies and public opinion relating to real estate here?

As you suggest in your questions, the debate about “foreign money” and “foreign buyers” was also particularized by many people as a debate about “Chinese money” and “Chinese buyers.” People moved back and forth between identifying Canadian sovereignty (vs. foreign) as their primary concern and targeting a particular nationality (“Chinese”) as a concern. My understanding is that anti-Chinese sentiment takes many forms, including those driven by race-logics and racism (and particularly prominent in Vancouver’s past), and those driven by logics and motivations internal to the Chinese diaspora that aren’t racial in nature, but rather reflect tensions with the Mainland. Anti-Chinese sentiment has historically played a very strong role in government policies in Vancouver and BC more broadly. Both governments have acknowledged and apologized for this, but I believe it would be naïve to suggest anti-Chinese sentiment no longer plays a role in driving policy.

Regarding your “national socialism” tweet…were you offering a sincere observation, or being deliberately hyperbolic?

[See tweet here]

It was a sincere observation, but couched as a worry rather than an accusation. Indeed, I went out of my way to grant good motivations to those involved in the discussion. My worry involved an underlying transformation in logic. Socialist logics focus on privatized wealth & related inequality as a problem. National socialist logics veer far to the right by twisting concerns about inequality to focus on particular groups of people, demonizing them as enemies of the nation and identifying their wealth or perceived power alone as the problem. To return to our local discussion, it isn’t hard to find far-right, pro-fascist organizations cheering on discourse about “Chinese buyers” and “Chinese money” being to blame for Vancouver housing woes. To put this in very simple and personal terms: if you think “foreign money” is the problem and you focus on the money part, I’ll be with you. If you think “foreign money” is the problem and focus on the foreign part, I won’t. This relates to what I think of as quite important underlying shifts in logic that are very pertinent to the present moment in time.

Where do you want the policy debate over real estate affordability in Vancouver to go? What areas deserve more emphasis than addressing foreign money and foreign buyers in the market, as a means of improving affordability, and why?

The most important aspects of affordability in Vancouver often get the least amount of attention. Those people currently marginalized by the market distribution of housing, including the homeless and those living in core housing need, should receive the most attention. They are the ones for whom housing is a life and death matter. Temporary Modular Housing is a great move here, and that and related programs should be expanded. Next we should focus on renters. They’re the ones in dire need of more options (Vancouver’s vacancy rate being at 1%) and at most risk of falling into core housing need. There are lots of policy options here, and we should be creating way more social housing options, including a big expansion of non-equity cooperatives. We should also encourage and enable many more market options. Far behind these groups, we get to owners and those desiring to own. There are real benefits to having a very large and broad range of property owners rather than letting property ownership accrue only within a very small and select class. There are also real benefits to having lots of different kinds of housing stock that enable a broad range of options for people to pool their resources together and buy housing, while also encouraging more environmentally friendly lifestyles. I don’t think we need any more programs encouraging and promoting home ownership, which is too often where affordability debates take us, but I don’t think it should be discouraged either.

What were the circumstances that led you to provide your affadavit in the Jing Li case?

I was approached by the law firm representing Jing Li to act as an expert witness in the case. Representatives of the firm very clearly and repeatedly assured me that as an expert witness, my duty would be to the Court rather than the law firm or their client. This was an important part of my decision to accept the role of expert witness. Through my work as an expert witness, I carried out research to answer questions posed to me by the law firm (through my letter of engagement), with my obligation being to provide truthful and well-researched (“expert”) answers to the Court.

The story continues

These were Ian’s first questions, and I initially agreed to delay blogging my answers until around the time Ian’s article came out. But after his first round of questions, Ian sent me follow-up questions focused solely on my conduct and concerning my former strata association’s wind-up and sale. He’d tracked down the buyers of the strata and apparently identified them as the very personification of evil “Chinese money.” So he sent me targeted questions about this being an unidentified conflict of interest influencing all of my public commentary. “It turns out that disagreeable professor was being paid by ‘Chinese money’ all along! Now we’ve got him!”

It’s a bit of a scoop! But not in the way Ian thinks. As I’ll discuss below, the strata wind-up was a complicated process that I felt ambivalent about, and I knew very little about the ultimate buyer. I’ve been planning on blogging about the experience of being part of a strata wind-up from the inside, but I’ve delayed for a variety of practical reasons. Now my story is in danger of being scooped by someone else! So let me tell you a little bit about what went down before Ian does whatever he’s going to do with his take.

What about my strata wind-up and sale?

My partner and I were initially quite angry when news broke that our strata council was considering looking at winding up the strata and putting it on the market. We liked our townhouse just fine, and we hadn’t been there very long. Ours was a mixed strata, comprised of townhouses and a low-rise building. The main issue seemed to be that the low-rise building was worried about their expenses, which were treated separate from ours, and wanted to compare estimates for fixing the place with what they could get for selling the place. We initially took this to suggest that the low-rise hadn’t been keeping up their building the way they should, and it didn’t seem fair that we in the townhouses should have to sell to cover their expenses. But then the possibility for big money from a sale also started getting thrown around in a lot of conversations with neighbours. Some were very excited by the prospect. Others were noticeably distraught that they might have to leave. After much discussion and many meetings, the strata as a whole voted to market the place to see how much it could sell for. Working with Colliers, we ended up with an offer that entailed a lot of money (around twice our assessed values). We knew very little about who made the offer, but the realtors told us it was a new developer with interests both in Canada and China. Then we had a vote on whether or not to accept the offer and wind-up the strata. My partner and I were conflicted in our voting. A lot of money was on the table, but we really liked our place and sympathized with those who wanted to stay. In the end our vote didn’t matter. The vote to sell easily met the threshold required under the new strata wind-up regulations.

There were minor complications throughout – it’s a big and involved process to wind-up and sell a strata – and we still weren’t certain the deal would go through for several months after the vote. In fact, we kind of hoped the deal would fall apart (especially when the flowers came out in our little townhouse yard!) But eventually all the t’s got crossed and the i’s dotted. And now we’re renters! (We negotiated a period of time in which we could rent back our properties while looking for someplace new to live).

Overall, the strata wind-up and sale is something that happened to us, rather than something that we actively sought. We weren’t at all certain we wanted it to go through. I learned lots from it, but it did not otherwise affect my public commentary* and I did not know who the beneficial buyers were until Ian sent me their names, nor have I ever had contact with the beneficial buyers. As in most real estate transactions, their identities were never anything more than a curiosity throughout the process. I remain curious, as ever, about what they’ll do with the place once we’ve all left. Until then, speaking as a tenant, if Ian wants to dig up dirt on my new landlords, I’ve got no problem with that.

*- There is one exception regarding the strata wind-up and sale affecting my public commentary! My partner and I are dual-citizens, and as a result we’ll be paying capital gains taxes on the sale to the USA, where sales of principal residence are not exempt from taxation. We don’t mind this in principal, and we kind of feel like windfall gains should be taxed. But we really, really wish our taxes were going to Canada. So its possible my advocacy for taxing the profit on sales of principal residences in Canada has been strengthened by the strata wind-up. Take my money Canada! Please!

A modest proposal regarding community consultation in Vancouver

November 16, 2018 ~ Nathan Lauster ~ Leave a comment

All too often our elected officials ignore vital input from our communities simply because, as they note, “we’re not looking at doing a full-blown consultation process.”

We believe full-blown consultation is always necessary for everything. But how do we do it in a way that enables places to speak? How do we insure we’re only hearing from the right voices, people who are actually from the area? After all, shouts and demands are too often heard from ~~the wrong side of the wall~~ outside our neighbourhoods, diminishing the rightful voices of those within, ~~We’ve kept those people out for a reason!~~ diminishing all that we love about our neighbourhoods.

~~Castle~~ Community consultation should only involve those people who actually live within the ~~walls~~ community, and we mean ~~own property~~ really live there. Furthermore, only long-time residents should be consulted, by which we mean ~~dynastic~~ residents who can speak for their enduring ties of place. How long is required to get place in your blood? Seven or eight generations should suffice. That’s why we advocate requiring a blood test for all of those who participate in community consultation. Only those with a minimum of 10% place in their blood should get a voice.

By this we mean to signal that both newcomers and prospective newcomers should know their places and not endeavor to speak for our places. They cannot speak for community. Most of them are only here at all because homes have been turned into commodities, for sale to the highest bidder!

1906-Lots-for-Auction-Vancouver-Archives — Shameful commodification of Vancouver homes

Can you imagine? One cannot auction a home! Think of the speculators and profiteers! The only homes that are really homes are those that have been passed down between generations, or perhaps ~~provided to the servants~~ established as non-market ~~somewhere else without raising taxes~~ with appropriate community consultation. If it’s not yours by birth or royal fiat, then it’s not really yours at all.

For similar reasons we believe we’re also justified in limiting the language of consultation. If you and your lineage can’t be bothered to learn the local language here then you demonstrate insufficient ties to consult on the future of place.

All consultation in Vancouver should henceforth take place only in ~~English~~ one of the two official languages of Squamish or Halkomelem.

Sincerely,

A concerned citizen

[ed. note: the above is satire directed at a certain strain of community consultation and settler nativism. But providing much more meaningful consultation regarding development with local First Nations would be an extremely good thing, and I’d love to learn Squamish or Halkomelem!]

Urbanism Axis & IMBY Allies

October 22, 2018October 22, 2018 ~ Nathan Lauster ~ Leave a comment

Last post I talked about how Vancouver’s election provided possible insights into the relationship between Urbanism (or IMBY-ism) as a political axis running perpendicular to more traditional Left-Right axes. Now we have results!

But first: a clarification. Initially I drew from the Cambie Report‘s clever crowd-sourcing of placements for political parties and prominent independents in Vancouver along both a municipal urbanism axis and social and economic left-right axes (ultimately combined), as follows.

Election-2018-positions1

Positions were allocated (and defined) by the wisdom of crowds. Not surprisingly, I received some pushback for accepting this wisdom – not everyone agrees with crowds! And that’s fair. Many policy positions and histories, especially within my area of housing, were actually more nuanced. Here I’ll provide a – still very rough – breakdown of how I see the axes providing important information about different positions and histories, which may be of use both for interpreting Vancouver and thinking through IMBY coalitions more broadly.

Election-2018-positions5

Starting with the Urbanist Right in the upper-right quadrant, we have a relatively familiar market urbanism: anti-zoning and libertarian inspired. Pro-housing everywhere “the market” wants it. Market urbanists tend to extol the virtues of density and disruption. YIMBY everywhere.

Moving clockwise, below we have the Preservationist Right. To add a bit of nuance, this is a position that I’ve argued actually much better characterizes the North American tradition: Rigid zoning for exclusive single-family neighbourhoods and more flexible market allocation of housing within a constrained urban core. Right leaning municipal coalitions offer a grand bargain between middle-class detached homeowners’ relatively conservative desires to be left alone and developers’ interests in making money downtown. The mantra goes something like: “Strong protections for me and the market for thee.” Or NIMBY in the Great House Reserve, YIMBY in the Urban Core.

Continuing around the clock to the Preservationist Left, we move toward the left-leaning reaction against the North American tradition. Anti-poverty alliances frequently identify developers as villains. This makes sense insofar as many alliances have borne repeated witness to the displacement that can result from unleashing market development upon the marginalized neighbourhoods of the urban core. Anti-developer politics can seem like a progressive end in their own right and can sometimes also win over middle-class voters (think “All neighbourhoods matter”). For a farther left subset, the socialization of housing seems the best bet for protecting those marginalized by the market. Lots more social housing is in order – but often concentrated in and meant to preserve neighbourhoods viewed as under development pressure. The orientation runs from NIMBY everywhere to PHIMBY (Public Housing in My Back Yard).

Moving up to the Urbanist Left, we find alliances that often view urban growth as good, both in terms of promoting diversity and in terms of reducing environmental impacts. Many accept that disruption is part of living in a city. But it shouldn’t be imposed unequally and policies should work to avoid displacement. Those I’ve also termed Inclusive Urbanists set their sights on returning exclusionary neighbourhoods to the urban fabric by reforming single-family zoning. They look to introduce social housing and diverse rental options to every neighbourhood. The tendency is YIMBY, but reform-oriented, with an egalitarian emphasis directed at diversifying single-family exclusionary hoods and large helpings of PHIMBY.

Ok, now let’s get back to what happened in Vancouver, where we had parties occupying each of these quadrants. Who won? And what does it tell us about IMBY-coalitions?

Let’s start with mayor.

Election-2018-positions6

The mayoral race ended up a showdown between two strong Urbanist Left candidates (Kennedy Stewart and Shauna Sylvester) and the strongest of the Preservationist Right (Ken Sim from the NPA – historically the epitome of the grand bargain party: NIMBY for detached home-owners, YIMBY in the urban core). Stewart beat Sim by less than a thousand votes (half a percentage point) in a real squeaker of a race.

Broadly speaking, both the Urbanist Left and the Preservationist Right fielded strong candidates. But what happened to the Urbanist Right and the Preservationist Left? The Urbanist Right candidate was clearly Hector Bremner, and at 5.7% of the vote, his Yes Vancouver party failed to attract much support beyond its passionate young base of market YIMBYs. The Preservationist Left initially had a party-supported candidate in COPE’s Patrick Condon (who early on made clear he wouldn’t run if the Green Party’s Adriane Carr had decided to try for the mayorship). But Condon dropped out after experiencing a stroke. Late in the race he endorsed independent candidate Sean Cassidy, who failed to attract much other support. Even adding in support for the fringe candidacy of IDEA Vancouver’s Connie Fogal (widow of progressive hero Harry Rankin), the Preservationist Left failed to crack 2% in the mayoral race.

So can we collapse the field, calling YIMBYism a left-wing phenomenon and NIMBYism mostly driven by more conservative impulses? Not quite so fast… let’s turn to Council! Here I note the average % of total council votes accorded to candidates in each party, highlighting the parties that actually won council seats (no independents won seats, despite overall respectable showings). I also provide the range of averages for major parties in each quadrant.

Election-2018-positions7

While the mayor’s race seemed to reduce relatively neatly to a singularly important Urbanist Left – Preservationist Right axis, the council race sees a real and strong split between the Preservationist Left (COPE and the Greens) and the Urbanist Left (OneCity and Vision), with the Preservationist Centre-Left ultimately receiving the most support. Indeed, the new council will be made up of five members from the Preservationist Right (NPA), four members from the Preservationist Centre-Left (three Greens and one COPE), and one member from the Urbanist Left (OneCity).

So what does this all this tell us about IMBY coalitions?

First: it’s important to distinguish those BYs: the backyards of Single-Family House neighbourhoods are treated differently from the backyards of the Urban Core.

Second: Right-leaning coalitions tend to do well in cities only when they leave the back yards of Single-Family House neighbourhoods alone. So far there’s little evidence that a right-leaning YIMBY coalition can win, though this could change in the future, as single-family neighbourhoods continue to lose population.

Third: Most YIMBYs lean left by quite a large margin, and left-leaning YIMBY coalitions can win. A Lefty Urbanist won the mayoral race in 2018, despite the competition from an exceptionally strong contender in the same quadrant. Moreover, Vision Vancouver’s coalition held power for the last ten years until their organizational implosion in 2018, and still placed well ahead of most other parties even if they won no seats.

Fourth: There’s a real and consequential split between Lefty Urbanists and Lefty Preservationists. I think this is often about perspective. From the point of view of anti-poverty activists working in the urban core, developers almost always look like villains (non-profit developers MAY be exceptions). From the point of view of people feeling excluded from cities’ vast tracts of single-family neighbourhoods, developers look like potential allies. On the flip side, the path to political success often runs through middle-class homeowners, and it’s easier to get them on your side by promising it won’t inconvenience them much than by suggesting they might need to sacrifice some parking or sunlight on their gardens. Vancouver’s Green Party, in particular, has walked this line to great success.

Theoretically, this election should put to rest the notion that all or even most YIMBYs are mostly market-oriented. After all, if they were they would’ve come out in mass for Yes Vancouver. Instead YIMBYs seemed to support Urbanist Left candidates in numbers easily surpassing support for the Urbanist Right. But to be fair, this was also a really messy election, witnessing the organizational implosion of the reigning party (Vision) and a confusing profusion of new parties. This likely benefitted those older organizations that managed to avoid imploding (Greens, COPE, and above all the NPA, who recovered strong from a shaky start), above and beyond informed platform comparisons.

Final Question: Can those Urbanist Leftys who made it into office this year work with their Preservationist Left or Preservationist Right colleagues? I’m guessing efforts to Make Room in single-family neighbourhoods are going to slow down again after Vision’s successful last-minute drive to introduce duplexes (with suites!), opening up all nearly all lots to four potential dwelling units (2x owned, 2x rented) across the City. Given housing plans put forward by the NPA and Greens, maybe we’ll eventually get matching legalization of an additional main unit rental suite (1x owned, 2x rented, 1x laneway rented), legalizing what’s already happening on the ground in many places. It’s less clear what will happen in the urban core, where alliances may shift project by project (remember, NPA councillors look pretty market YIMBY outside of single-family zones).

Let’s animate that GIF:

Election-2018-outcome-anim

Addendum: (preliminary) vote tallies from the City of Vancouver obtained here! Looking forward to the voting location breakdown we got from the 2014 election.

Fact-checking Vancouver’s Swamp Drainers

July 23, 2018July 27, 2018 ~ Nathan Lauster ~ 3 Comments

[co-authored with Jens von Bergmann and cross-posted with MountainMath]

Swampy facts: the dark, broken, and ugly side of housing talk in Vancouver.

Down south of the border, a politician who shall remain nameless campaigned on “draining the swamp” of Washington D.C., trafficked in countless conspiracies, and lied his way into office. His lies painted a picture of a United States turned dark, corrupt and menacing. He promised to fix it, Making American Great Again, mostly by shutting down globalization and kicking out the immigrants.

In Canada, we like to think we’re immune to this kind of rhetoric. But a strain has made its way into discussions concerning Vancouver, where the intersection of real estate, politics, and globalization are increasingly portrayed as a swamp in need of draining. We don’t believe most of those portraying Vancouver as swamp-like are intentionally lying (and in real life they surely favour the preservation of environmentally sensitive wetlands). Nevertheless many commenters are muddying the discourse with poorly sourced claims as a means of scoring political points and attacking various aspects of globalization.

It’s tricky to track down the spread of all the false claims out there. Fortunately a bunch of them were concentrated in a recent piece on “Dirty Money” in Macleans by Terry Glavin that views Vancouver as “a case study in the dark, broken and ugly side of globalization.” Recognizing that getting facts and interpretations right is often difficult for even the most well-intentioned, let’s work toward correcting a few misperceptions, line by line:

“At least 20,000 Vancouver homes are empty, and nobody’s really sure who owns them.”

Variations of similar statements permeate the media, with various degrees of factual accuracy. The most common misrepresentation is to refer to the 25k homes not “occupied by usual residents” as “empty”, which the above quote avoids by using an appropriately lower number.

The main issue with the above quote is that it’s portraying those “at least 20,000” homes as problematic vacancies, neglecting that that count includes moving vacancies around census day, empty suites (about 4000 of them), and units in buildings that completed around census time and did not have the time to fill in yet.

Accounting for these types of vacancies, we arrive at the ballpark of the Ecotagious Study based on BC Hydro data that found between 10,800 (for year-long vacancies) to around 13,500 (for four-month vacancies) and now the 8,481 empty homes through the Empty Homes Tax declarations, although some of those empty homes found via the EHT are outside of the universe Ecotagious reported on.

When quoting these numbers, the key question is what are the numbers supposed to be used for. If it’s to highlight “problematic” vacancies, then the Ecotagious numbers probably get us the best estimate for that point in time. Since then the number has likely dropped due to Empty Homes Tax pressure, we will have to wait until the repeat of the Ecotagious study to get confirmation on by how much.

And the reason we don’t know who owns them is not for some nefarious reason but simply because the methods we have for estimating empty homes (other than the ones caught by the Empty Homes Tax) do not allow for the identification of units.

“Another 25,000 residences are occupied by homeowners whose declared taxable household incomes are mysteriously lower than the amount they’re shelling out in property taxes, utilities and mortgage payments.”

That’s plain false, we have looked at this before. The 2016 census counted only 8,940 owner households with higher shelter costs than income. An additional 14,510 renter households paid more than their income in rent and utilities, making for a total of 23,450 households in the City of Vancouver that had higher shelter cost than income, most of which were renter households.

The wording of the sentence, followed by the next talking about tax avoidance in British Columbia real estate, seemingly suggests that the majority of these 23,450 households were cheating in some way. Let’s take a closer look at these households with shelter cost higher than income.

One of us (Jens) is partially responsible for bringing this stat into circulation and failing to provide more extensive context from the get-go.

Looking more closely, we see that the bulk of these households are non-census-family households, probably roommates in many cases. Students likely account for a lot of the data. Single parents are also common. While there are some indications of irregularities in the data worth investigating further, broadly suggesting all these households are tax cheats is irresponsible.

“Non-residents own roughly $45 billion worth of Metro Vancouver’s residential properties, and non-residents picked up one in five condominiums sold in Metro Vancouver over the past three years.”

The first part is fairly accurate, CHCP reports that $43 billion worth of residential properties in Metro Vancouver were owned by non-residents. Of course that’s less than 5% of the total value of $884.5 billion.

The second part is a prime example of making statements without understanding the data. We don’t have data on non-resident buyers, presumably referring to buyers with primary resident outside of Canada at the time of the sale.

Considering similar statements in an earlier article by the same author, our best guess is that the author was referring to non-resident owners of condos that were built between 2016 and late 2017. Owners of recently built condos could be taken as a proxy for buyers if one makes some assumptions on resales.

Except the ratio of condo units built between 2016 and late 2017 that were held by non-resident owners is one in 7.1 for Metro Vancouver, and for the City of Vancouver that the previous article was referring to the ratio is one in 6.5. (CANSIM 33-10-0003)

In summary it seems the original statement is the product of playing loose with definitions, Metro vs City mixup and aggressive rounding to pump up the numbers.

“But Transparency International reckons about half of Vancouver’s west-side residences are owned by mystery trusts or shell companies.”

Big if true, a claim so outrageous that it needs data to back it up. It seems that this is based on a transparency international report that the author also referred to in a February column, where the author characterized this as “Transparency International estimates that perhaps half of Vancouver’s high-end residences are now owned by shell companies or trusts”. Now this has morphed into “about half of Vancouver’s west-side residences”. It’s good to remember what the Transparency International study actually did, it looked at the 100 most expensive properties in Metro Vancouver and found that 46 of these were owned by companies or trusts (not all of which have opaque ownership).

Via StatCan’s CHSP (CANSIM 39-10-0003) we now know that 5.61% of Metro Vancouver’s residential properties are owned by companies or trusts (or “non-individuals”), roughly in line with most other Canadian metropolitan areas in BC and ON as the following graph shows. Needless to say, the 100 most expensive properties on Vancouver’s west side are likely quite distinct from the rest.

Even after adding the non-resident owners to the non-individual owners, Vancouver still looks a lot like most other metro areas. In fact, the only metro area that really stands out is London, ON. Otherwise it’s the non-metropolitan portions of BC and ON that have the highest representation of company and trust ownership structures.

“In Metro Vancouver, homeownership costs amount to 87.8 per cent of a typical household’s income”

It does not. Most people spend far less, as the following graph on share of income spent by owners on shelter costs demonstrates.

The author appears to be conflating running shelter costs of owner households with the RBC affordability metric which compares the cost of financing the typical home for sale in the region to the typical household income. The latter metric may (imperfectly) reflect some of the difficulty now facing those wishing to jump from renting to owning, but has little bearing on how much typical households currently spend in either category.

“Vancouver has also become a major global hub for organized crime networks based in China.”

Here the author immediately pivots to the opioid crisis and the suspicious transactions identified in the recent money laundering report concerning lax oversight of casinos, attempting to link these to broader affordability issues and to globalization. To be clear, both the opioid epidemic and money laundering are serious issues in their own right. The fentanyl crisis has killed way too many British Columbians. As a recent report by Sandy Garossino notes, the criminal organizations associated with money laundering through BC Casinos have also claimed multiple lives. We should be outraged by the crisis and the crime ring, but it’s wrong, as Garossino adds, that this, “mainly bugs us because we figure it’s driving up the cost of housing in Vancouver.” The opioid epidemic demands more sustained attention than it’s likely to receive as a prop for tarring globalization. That’s not at all what it’s about. It requires a comprehensive re-think of our health care systems, pain management strategies, and criminalization of drug use, and the biggest villain in the story so far appears to be a major American pharmaceutical company. As for money laundering, further reporting on its role within the real estate sector has been promised by the Attorney General, but so far it’s not clear that shady practices – while certainly present – have had much to do with driving up real estate prices. As multiple commenters have noted, even if all the $100 million so far reported to have been laundered in our casinos over 10 years was re-invested in real estate, it would represent at most tiny fraction of total real estate transactions. Property transfer tax data shows that Metro Vancouver averaged $5.2bn worth of residential real estate transactions each month in 2017, dropping to $4.4bn during the first 5 months of 2018. There are real reasons to be outraged over the opioid epidemic and money laundering. But the link between these issues and affordability remains tenuous, and insisting upon the link in the absence of further reporting diminishes the importance of the documented damage they’ve already generated without pointing toward any good solutions for affordability, the opioid crisis, or tackling money laundering.

“Freeland could have been describing Vancouver: ‘Median wages have been stagnating, jobs are becoming more precarious, pensions uncertain, housing, child care and education harder to afford.’”

This is plain false. To its credit, back in February the NDP government moved to make childcare much more affordable for British Columbians. Why ignore this progress? Moreover, Vancouver has seen strong jobs and income growth. To gauge wage growth, we look at full-time employment income for couple families, lone parent families and unattached individuals and compare the trajectories to Metro Toronto.

We see that Vancouver CMA has overtaken Toronto for non-family individual income and lone-parent median income, and almost closed the cap on couple family income.

This shows how Vancouver’s labour force participation rate has increased with respect to Toronto while the unemployment rate decreased. Lastly we can look at the regional job vacancy rate for the respective economic regions to see how Vancouver’s job market is much stronger than the labour force is able to fill.

Afterword

In our hyper-polarized environment it is probably not enough to simply point out factual errors without further comment. So we take this opportunity to state that we strongly support stricter oversight and enforcement of money-laundering, as well as implementing measures to increase transparency in property ownership. We are also gravely concerned about Vancouver’s affordability problems. We’ve supported a number of housing policies recently put forward by local governments, including the empty homes tax, the school tax, and the boost to social housing investments, all aimed at fixing regulation and providing more housing to those most in need. It’s important to separate out what governments are doing right from where they might be failing. This is where swamp imagery fails us, blending everything together and dragging it all into the mud.

We think fixing our affordability problems is going to involve making tough choices and policy tradeoffs, and we should approach them with a clear sense of what’s at stake rather than mixed up facts, vague swamp-ish imagery and the sense it can all be blamed on the dark, corrupting forces of globalization. We’ve all seen where that last route can take us.

As usual (for Jens), the underlying R Notebook for this post that includes all the code for the graphs and numbers in this post is available on GitHub. Feel free to download it to reproduce the analysis or adapt it for your own purposes. Hopefully this kind of transparent and reproducible analysis can help establish a shared base of facts. And reduce the amount of guessing needed to make sense of people’s numbers and statements.

Update (July 27, 2018)

Several people have pointed out via Twitter and comments that inflation-adjusted income growth might be a better metric to use. And that’s a good point. In the context of housing we often have nominal housing prices in mind, so nominal income can be a good metric in this context. But inflation-adjusted incomes add another important perspective.

Here we used Canada-wide inflation estimates, Vancouver’s income growth looks even stronger when normalizing by CMA-specific CPI. (Digging into the reasons for this would probably make another interesting blog post.) The two graphs show the inflation-adjusted incomes, as well as change in adjusted incomes indexed to 2000. We can clearly see the growth in all categories, both in absolute terms, as well as in relative terms compared to Toronto. Despite this, the notion of “stagnant incomes” in Vancouver is quite pervasive in news stories.

If the Problem is Speculation, then Why Focus on Foreigners?

January 11, 2018January 11, 2018 ~ Nathan Lauster ~ 1 Comment

Ok, I’ll admit it. I’m an immigrant to Canada. And from the US, which has recently seen a surge in anti-immigrant and anti-foreigner rhetoric and mobilization. We saw the same, of course, in the UK leading up to Brexit, and there are outbreaks in many other places around the world as well. Anti-foreigner rhetoric is having its populist moment. And I don’t like it.

So I’m especially sensitive to anti-foreigner rhetoric. Combine that with my research interests in housing and immigration and my love for my adopted city of Vancouver, and well, you can probably see where this is going: I think we should stop our destructive focus on blaming “foreigners” for our housing problems.

This doesn’t mean we should stop paying attention to the impact of immigration policy and global flows of capital (and there are many good reasons to oppose wealth-based immigration policies like the investor program still operating out of Quebec!)* But it does mean we should stop using “foreigners” as our go-to explanation for sky-high housing prices.

Why? First, it’s dangerous. It should be patently obvious at this point that anti-foreigner rhetoric is the handmaiden to fascism. If I need to explain why that’s bad news, go visit some other blog. Second, it’s sloppy. The concept of “foreignness” is not well-defined in rhetoric, readily lends itself to racism, xenophobia and related “other”-blaming, and remains inconsistent with rhetoric when applied to policy. Let’s take Andrew Weaver’s recent foray into advocacy for a ban on foreign ownership as an example. He defends the ban this way: “We are delighted for people to come and work and live and own property in B.C. but it’s not okay for people to park capital here with no intention of living here.” I’m on-board with carefully tracking flows of capital, but does “foreignness” now apply to folks from Alberta and Ontario? And how do we square “foreignness” with the complexity of immigration? (I worked here on a visa for three years prior to becoming a permanent resident and then citizen, fully intending to live here all the while). Analyst Andy Yan offers a different, but related take for his focus on foreign-buying data: ““It comes down to a question of fairness. As people struggle with keeping their existing home or even having a home in Metro Vancouver, is it fair to treat them in the same way as someone who has a secondary or tertiary home here?” This is an entirely legitimate question, but it has little to do with foreignness, and everything to do with speculation and investment. To put the matter differently, if we’re trying to counter the possible negative effects of speculation and counteract wealth inequality, then I’m in, but if all we’re doing is coming up with policy responses to favor Canadian speculators over foreign speculators, then count me out.

And just what is the balance between “foreign” speculation and Canadian speculation? This is a tricky question to answer, in no small part because we DON’T track global capital very well. Like, at all… I’m all on-board at doing better with this – let a thousand Panama Papers blossom and the CRA take notice! But for now, instead of tracking capital, we track bodies and assign them to residence and rights of citizenship in complicated fashion. We have legislation in BC distinguishing “Foreigners” on the basis of PR and Citizenship status, regardless of their actual place of residence (our “foreign-buyer tax“). And now we have Andrew Weaver extolling the virtues of New Zealand’s proposed “foreign-buyer ban“, which is a little more complicated, but linked to assigned residency (e.g., temporary residents on visas can buy a home, but have to sell it when they leave). The latter issue of residency is what was kinda-sorta measured by Statistics Canada in its recent release of data on non-resident (“foreign”) property ownership (CHSP). This is the data Andy Yan’s been playing around with. But to date most write-ups of this data that I’ve seen, including that from Statistics Canada, have simply focused on the comparison between non-resident (outside Canada) and resident (in Canada) property owners. When we use this as a proxy for talking about speculation, the implicit assumption seems to be that everyone outside of Canada is a speculator/investor/vacation home owner, and everyone living in Canada owns only the property they live in. We lose sight of domestic speculation and investment. How do we fix this?

One answer is we combine this information with Statistics Canada’s Survey of Financial Security (SFS). This handy little survey differentiates between principal residence and other real estate for participants, including those in metropolitan Vancouver and Toronto. Here I’m going to combine these datasets together in a very simple and replicable fashion to divide up the value of residential real estate into principal residence, other Canadian residence, and cross-border (Non-Canadian) residence. Effectively I’m just taking the total value of resident real estate holdings from CHSP and subtracting the Principal Residence real estate holdings value estimated from SFS to get the Other Canadian Residence category. This enables us to compare domestic speculators/investors/vacation home owners with foreign speculators/investors/vacation home owners. So what does total property value look like broken down into Principal Residence, Other Canadian Residence (a.k.a. “domestic investors”), and Non-Canadian Residence (a.k.a. “foreign investors”)?

Something like this:

Res-RE-Holdings-Residency

Principal resident owners are separated out in purple, leaving only the properties held by investors / speculators / vacation home owners and the like in green. These are further distinguished between owners residing someplace else in Canada and owners residing someplace else across the border. In Toronto, these two groups are closely matched, though domestic investors look just a little more prominent than international investors and both are dwarfed by principal resident owners. In Vancouver, overall investment in the real estate market by non-owner occupiers is much, much larger, and domestic investors account for the lion’s share of the investment. Many of these investors, no doubt, live in Vancouver (where the SFS data estimate around 1 in 5 families own a second property besides their principal residence). Others live in Toronto, Calgary, and elsewhere across the country. But with respect to Vancouver’s place in Canada the following seems clear: If speculation is the problem, then its largely home-grown.

There are some decent arguments out there for favoring the buyers in purple over the buyers in green. We’ve got lots of policy options for reducing the value of BC properties as investment vehicles – many having to do with tax policy. There are even better arguments, I think, for focusing on providing lots of affordable rental and non-market housing options for people so that ownership isn’t the only decent game in town. But what arguments do we see for favoring the folks in dark green over the folks in light green? If the important thing is to prop up the middle class in their entry into home ownership, why pit middle-class home ownership against foreigners instead of against the far broader class of investors and speculators as a whole? It’s for BC’s Green Party to answer that one, I guess…

*- I’m proud to have elicited the approval of at least one prominent academic I admire by ending my recent co-authored piece on Chinese-Canadian immigration with the line: “Investigations into the work of home-making suggest how Canada’s immigration policies contribute to rather than ameliorate global inequality, revealing an invitation that reads: give us your energetically leisured, your wealthy, your elites yearning to breathe freely.” Yes. We can do better, including taking in lots more refugees instead of fast-tracking “investor-class” immigrants!

NOTE: Inspired by the transparency of Jens von Bermann’s gitHub kits, but not knowing how to do that, please see my following spreadsheet if you’re interested in the data extracts I worked with and how I produced the above! Feel free to check my work and by all means let me know if I missed something!

ValueRE-SFS-CHSP-2016