London compared to Vancouver

If London wants to reduce the number of foreign buyers it can learn from the effects of Vancouver’s tax.

Derek Le is a realtor (estate agent) at Dave Jenkins Group in Vancouver

London and Vancouver, Canada are two of the world’s most talked about real estate markets. In 2016, both have reached new heights in sales and sale prices. Swiss Bank UBS has named London the second most overpriced city in the world, only trailing behind Vancouver. Both these cities are known to have heavy levels of foreign buyers, but how big of a role has foreign investment played in positioning these cities in the world’s largest housing bubbles? What have these cities done to protect their residents from sky rocketing property prices?

Of the two cities, London was the first to take steps in reducing foreign investment. As of April 6, 2015, foreigners purchasing residential properties in the UK are required to pay up to 28% in capital gains tax. With London’s residents already paying between 18 and 28% in capital gains tax (depending on their income) on any non-primary residential property purchases, its government was hoping to create better opportunities for domestic buyers against foreign investors.

This comes after the UK government had already implemented the 3% stamp duty surcharge on the purchase of any secondary properties. While both taxes have struggled to slow down foreign property investment, Vancouver has seen a reduction in overseas investors and a slowdown in price increases.

Prior to August of 2016, Vancouver had little legislation to discourage foreign property investment. This was an enormous factor leading to the city’s record-breaking property prices. In May of this year, the Greater Vancouver Real Estate Board reported that Vancouver’s residential property sales were up 17.6% over May of 2015, 35.3% above the month’s 10-year sales average. On July 25 of 2016, Vancouver’s provincial government announced that they would be implementing a 15% tax on properties purchased by foreigners in the Metro Vancouver area commencing August 2. This meant that all foreigners in the midst of transactions in Metro Vancouver were required to rush completion before the August 2 deadline.

The short time period between the announcement of Vancouver’s foreign buyer tax and its commencement date caused mayhem in the city. Realtors, real estate brokerages, buyers, and sellers scrambled to piece together deals before the new tax. The poor introduction of the tax was disorganized and left many in difficult situations. Deals fell apart when foreigners could no longer afford properties with a 15% mark up and many locals were left on the hook as the sales of their properties fell through. Though its introduction was chaotic, the new tax did make an impact on Vancouver’s real estate market.

From June 10 to June 29 Vancouver’s provincial government recorded that foreign investors made up 5% of the city’s real estate market. Foreign investment transactions peaked from July 15 to August 1, where they made up 19% of all transactions. Much of this increase was caused by foreign buyers rushing to complete sales before the new tax. Since the introduction of the new foreign buyer tax, it has been reported that Vancouver’s total number of residential property sales is down 26% from August of 2015.

Earlier this year, bidding wars were common on all Vancouver listings. My team and I could list a home for sale, do one open house, and have multiple offers bidding up the price tens and even hundreds of thousands of Canadian dollars. A single property could receive over 10 offers after just one day of showings with a large number of the offers coming from overseas buyers. Prior to Vancouver’s new foreign buyer tax, it was almost strange if one of our listings didn’t sell within one week. Since the tax has taken affect, we have seen a significant decline in foreign buyers. With less foreign buyers, there have been fewer bidding wars and the number of transactions has decreased as foreigners look elsewhere to spend their money.

It is still early to tell how effective Vancouver’s foreign buyer tax will be in the long-term. However, it is now evident that overseas buyers are transitioning away from Vancouver, to the south in Seattle, USA, and to the east in Toronto, Canada to invest in properties.

Vancouver’s tax, specifically for foreign buyers, has been successful thus far in reducing foreign investment. If London wants to reduce the number of foreign buyers it can learn from the effects of Vancouver’s tax.