In its 2018 budget, the B.C. government unveiled its much-anticipated plan to improve housing affordability, declaring improving housing affordability to be one of two key priorities.
One measure announced by the government to achieve this affordability is the assessment of a new school tax. The tax will hit approximately 43,000 homeowners in 2019 and is estimated to generate $200 million in provincial revenue.
This new tax, aimed at residential properties assessed at over $3 million, will tax owners at the rate of 0.2 per cent for the property value between $3 and $4 million and at the rate of 0.4% for the value exceeding $4 million.
While this new tax presently engenders little sympathy from most, we need to take a closer look at its broad implications in the long term.
Recently, Andy Yan, director of Simon Fraser University’s city-planning program, was reported to have said that the tax represents a solution to the “profound concerns about free riders.”
Free riders are those lucky enough to have bought property prior to the recent explosion of housing prices, unlike struggling new buyers who apparently possess no such luck. Yan’s solution for seniors who have limited income is to defer their taxes. He considers equity erosion from taxation a new, modern and progressive tax system.
However, the implication that owners of more expensive homes are free riders that have somehow lucked out seriously negates the sacrifices experienced by previous generations.
They too struggled to save for a down payment and qualify for a mortgage – likely in an era of crippling double-digit interest rates. They didn’t win the lottery. They weren’t simply lucky. Their ownership of expensive housing is more a function of where they sit in their life cycle.
House prices tend to double every seven to 10 years, so once you manage to get into the real estate market and pay off your mortgage, you are left after many years with a valuable asset.
Now the government wants to eat away at their equity, just because it sees something new to tax.
Ironically, due to this very predictable rate of house price appreciation, over time all homes will be subject to this new tax intended for only expensive homes. These measures will simply make housing more expensive for the middle class, while causing the wealthy to flee.
Capital flight resulting from progressive asset taxation is a real phenomenon other countries have experienced. France, for instance, retreated from its wealth taxes following a profound net loss of tax revenue, employment and wealth in the 1990s.
In addition, residential properties captured by the school tax include single-family homes containing rental units, such as basement suites or homes divided into two or three suites. Landlords will recoup housing ownership cost increases by hiking rents, thereby worsening housing affordability for tenants.
There will be a cascading effect on both housing prices and rents, as increased housing costs are downloaded to both buyers and tenants.
As we are all acutely aware, there is a market imbalance fuelled in part by interprovincial migration and immigration, where housing demand seriously outstrips available housing supply. In this market environment, adding costs to higher-end homes will put pressure on all home prices, even those of entry-level homes.
What might not be apparent to homebuyers reviewing the government’s new tax measures is that they will truly cost everyone. They will make it even more challenging for first-time homebuyers to enter the market and for renters to make ends meet.
Equity taxes might sound appealing to voters and help a precarious government with its re-election plans, but in the end they will serve to worsen housing affordability. We need to take a closer look at this major shift in tax policy and understand how it will impact all of us. •
Samantha Gale is the CEO of Canadian Mortgage Brokers Association – British Columbia.
