Vancouver Condo Bubble Takes New Hit: Murky Condo Flippers Targeted in Pre-Sale Tax Hunt

The changes pose real threats to the highly speculative pre-sale condo market.

By Steve Saretsky, Vancouver, Canada, Vancity Condo Guide:

Starting September 17th, the BC Government will move forward with a new property transfer tax that will require people to report additional information, including their name, citizenship, and social insurance number, if they purchase through a corporation or trust. They will also mandate property developers to collect a database of pre-sale buyers and remit those to the BC Government. The efforts are aimed at curbing tax evasion and reigning in money laundering which are believed to have contributed to runaway house prices in the province.

The changes pose real threats to the highly speculative pre-sale condo market.

In recent years, pre-sale buyers have made out like bandits, securing pre-sale contracts with no proof of funds, financing, and in many cases no intention of closing upon completion — ultimately flipping the contract to another buyer for windfall profits, with most of the gains earned on the leverage of price inflation.

These profits are largely tax-free as flippers choose not to self-report capital gains to Canada Revenue Agency (CRA, equivalent of the IRS in the US). Because there is no title registration through BC land titles, the best CRA can do is take the developer to court in order to obtain the list of pre-sale buyers who have flipped their contract.

And that’s exactly what CRA has done — most recently targeting the developers behind Vancouver’s Trump Tower, the sprawling Wall Centre Central Park project near the Vancouver-Burnaby border, and Amacon’s Tempo project in Richmond.

With the job of CRA auditors set to get much easier come September 17th, it leaves us with the potential impacts on the pre-sale market.

The sudden chill in the Vancouver condo market has also leaked into the pre-sale space. According to MLA Advisory, which works closely with pre-sale condo developments, the absorption rate for new condo sales in Greater Vancouver and the Fraser Valley’s housing market has plunged from 94% in January to 49% in June.

“Overall, the market has experienced a downward trend for pre-sale absorptions, indicating a shift from the hyperactive levels experienced over the past two years to more normalized market conditions,” MLA said. “Historically, normalized pre-sale activity is viewed as projects experiencing 50% to 65% sales absorptions within the first 6 to 9 months and sell-out periods of 12 to 24 months depending on the size and complexity of the project.”

While the trend is certainly unwelcoming news for condo developers, the current absorption rate is nothing to panic about, not yet at least. What could trigger a cold sweat are current market trends continuing at a time when housing starts sit at record highs.

New developments are also competing with a slowing re-sale market which is witnessing prices cool and inventory surge 45% in June. This has triggered a growing chorus of bonuses to brokers and decorating allowances to prospective buyers.

To think it was just 12 months ago when buyers were camping out-front sales centers! The deteriorating sales data, however, came prior to the upcoming tax reporting changes implemented by the BC government, suggesting things may get even slower.

The move by the BC government to crack down on tax evasion by requiring developers to collect and report information on pre-sale condo assignments to ensure buyers are paying the appropriate taxes may, according to real estate consultant and architect Michael Geller, “take investors out of the market, especially those whose primary motivation was to flip the agreement before they closed.” The result may be that projects will be “put on the back burner because they can’t achieve their pre-sale targets demanded by the bank.” By Steve Saretsky, Vancity Condo Guide

The spending slowdown on housing in Canada was particularly unkind to the province of BC. Read…  Spending on Housing Dropped 12% in Canada in June 
 

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

 

  43 comments for “Vancouver Condo Bubble Takes New Hit: Murky Condo Flippers Targeted in Pre-Sale Tax Hunt

  1. George McDuffee
    Jul 30, 2018 at 3:50 pm

    Better late than never.

    It is hoped that the “Muppets” who purchased at the artificially inflated prices will not be too badly hurt. How badly are the banks / shadow banks (and the entire financial sector) going to be hurt by this? Any foreseeable tax payer bailouts?

    • Gershon
      Jul 30, 2018 at 10:25 pm

      It is hoped that the “Muppets” who purchased at the artificially inflated prices will not be too badly hurt.

      On the contrary, if won’t bother me if they end up living in a cardboard box. These “muppets” drove valuations to nosebleed levels that priced out the prudent and responsible, and drove up housing costs for everyone. Let them suffer the consequences of buying into a bubble – maybe their offspring will be forever inoculated against such financial greed and recklessness.

      • Frederick
        Jul 31, 2018 at 9:14 am

        BRAVO Gershon Well said Greed, no matter what they tell you, is NOT good

    • Aug 2, 2018 at 8:08 am

      Most of the speculators are already up millions of dollars or more from prior years so it won’t affect too many.

  2. J.M.Keynes
    Jul 30, 2018 at 4:07 pm

    – The BC government already had imposed a “Empty Home” tax and that ensured that the Real Estate market got an additional hit. And that real estate market was already tanking.

  3. Gian
    Jul 30, 2018 at 4:22 pm

    Kind of a conundrum for governments imposing such taxes on the sale of RE, deflate prices by gouging investors and driving down prices, which ultimately reduces the bottom line of the thieves in city hall. Exicse tax in WA is roughly 1.8% of the gross sales price, not net. In CA, it is about 3.3% of the adjusted gross. This, after paying property taxes in perpituity (as long as you own the property). Perhaps the Feds should force lenders to write NINJNA loans again if they want to make housing “affordable”.

    • Unamused
      Jul 30, 2018 at 6:12 pm

      ->Perhaps the Feds should force lenders to write NINJNA loans again if they want to make housing “affordable”.

      The Feds never forced lenders to write NINJA loans, and city hall is local government, not international predatory business.

      Lenders already tried NINJA loans. Those detonated, so it’s a bad idea for you promote them unless your goal is another global financial meltdown. What hasn’t been tried is banning speculation and manipulation of real estate markets. I don’t suppose you’d be in favor of that.

      Enforcement efforts against money laundering and tax evasion are a good thing, but obviously money launderers and tax evaders aren’t going to be at all enthusiastic about them.

  4. bret
    Jul 30, 2018 at 5:21 pm

    “The move by the BC government to crack down on tax evasion by requiring developers to collect and report information on pre-sale condo assignments to ensure buyers are paying the appropriate taxes may”

    It is shameful that this information wasn’t being collected already. What other market data is being kept from the public, either by hiding or not being collected?

    • Paulo
      Jul 30, 2018 at 11:02 pm

      It is shameful, but remember…the previous Govt was a right wing one and the largest contributor to the RW Libs was the Van RE Board. This is the same Govt that allowed the casinos to be money laundering factories. The situation is not unusual or unexpected.

      Good news article and better late than never, I suppose.

  5. xy man
    Jul 30, 2018 at 5:42 pm

    City Hall should not bother investors who invested in presales, otherwise, construction workers/realtors will be lining up for EI. Plus who is going to fund the 3 levels of governments? Costs of living is not cheap, let me tell you that.

    Also free citizenship if you buy 3 condos, since the locals are worthless in term of contributing to the local economies.

  6. Not Amused
    Jul 30, 2018 at 5:54 pm

    ->Murky Condo Flippers Targeted in Pre-Sale Tax Hunt

    I read it wrong. At first it looked like a new treatment for cancer.

    Sometimes speculative bubbles look like financial tumors, but maybe it’s just me.

  7. Bobber
    Jul 30, 2018 at 6:26 pm

    Canada let speculation and foreign purchases get out of control. The government has lost a lot of trust and credibility. Canadian society may not be so nice in the future. When the government picks favorites, don’t expect the populace to play fair either.

    • Shane
      Jul 30, 2018 at 8:46 pm

      Simple. Seize these properties.

      Any property over a limit is investigated. If it’s obviously foreign owned, and having a dual citizenship means foreign, it’s seized and any possible sizeable assets as well.

      EVERYTHING.

      They are turned out into the street and their home countries can deal with them.

      DO YOU HAVE ANY IDEA HOW ANGRY NORMAL REGULAR PEOPLE ARE?

      It would be a mercy for them because historically it’s far far worse.

      • Frederick
        Jul 31, 2018 at 9:16 am

        Shane YES I have a pretty good idea kid Hang em High

      • Nonplused
        Aug 5, 2018 at 5:57 pm

        The government can’t “seize” the properties unless they can prove some sort of crime like tax evasion, which is why they are moving to understand who’s flipping these pre-builds and see if they are reporting their gains. Nothing wrong with that I suppose, speculators who have been reporting their gains will be unaffected.

        It’s going to be a rough ride for the developers though, assuming they have large numbers of pre-build buyers who are going to be deterred from participating if they have to report their gains. Pre-build sales have long been a key component in obtaining the financing necessary to build a project, so driving the speculators out might not lower prices at all, and could result in less condos being built instead, if builders cannot arrange financing without this component.

        The problem is that the pool of buyers who intend to reside in and occupy the unit and can wait up to 3 years to move in is relatively limited. So the speculative community that is willing to buy a pre-built unit and flip it upon completion has long been a life blood to the condo developers. It’s a form of free financing based on the principle that a bird in the hand is worth 2 in the bush, i.e. a condo available for immediate possession and occupancy is worth more than one that is 3 years away, if it gets built at all. So this is why the speculators are so important to the developers and the profit from the flip is the reward the speculator gets for financing the construction.

        However, if the speculators aren’t reporting their gains, CRA does have reason to look into it. Capital gains are taxed at a lower rate in Canada than income is, but they are still taxed.

        But “seizing” properties would cause developers to disappear, and that isn’t going to help. The solution to high prices is more supply. You can’t have restricted supply and low prices. Doesn’t work. To really solve the problem of high housing costs in Canada, the restrictions on supply have to be addressed. Vancouver might not be a good example, although they can still build up, but for the most part Canada has lots of land but very restrictive building practices. New units are intentionally put on the market in a very controlled manner so that housing does not decline due to over-supply. Even the banks are in on it, certainly the municipalities too.

        The real problem with a housing bubble like they have had in Vancouver is that there really isn’t a way back down. It might seem like a good idea for housing to fall in price and be less expensive for the 2-5% of the participants that enter the market for the first time each year, but if that happens the other 95-98% of the current property owners are going to lose a lot of equity, and if they are highly mortgaged they might be wiped out. There is no easy way down from here.

    • Paulo
      Jul 30, 2018 at 11:15 pm

      It isn’t so simple. Each province has different rules/laws and each has a very different Govt….from extremely conservative to more social democrat in nature. Plus, some cities have large foreign populations (speculators) and many are more sedate/traditional. It’s like assuming that what works for LA parishes works in Seattle.

      Furthermore, there is a lot of resistance to over-reaching Feds and the rights of provinces is always being flexed when it suits a particular provincial govt. Then, their are the 1st nations who declare themselves….nations, when it might be a band of a few hundred people. It’s complicated.

      A comparison to the US might be the conflict between sates that have legalized pot and a fed Govt who declares it a sched 1 crime.

      Canada is truly a mosaic of cultures and far from being a melting pot with one set of rules to follow. Get this, Canada’s largest city had a right wing populist mayor who snorted coke and smoked crack. His equally fat brother is now the premier of Ontario. You can’t make this stuff up.

    • intosh
      Jul 31, 2018 at 2:01 am

      Governments desperately need more money. Taxes on ever increasing property values is an easy way for them to fill to coffers. And housing bubbles create jobs and make homeowners feel richer. Unlike other forms of taxation, governments can play that card for a very long time (and they have) before the protests from the “left-behind” become more serious and widespread.

    • Maximus Minimus
      Jul 31, 2018 at 11:20 am

      Your comment is an understatement/

    • Aug 2, 2018 at 8:12 am

      It wasn’t the foreigners, it was just the foreign Chinese as well as the local Chinese that created this entire mess. To make matters worse the daft locals started copying what the Chinese do.

  8. MCH
    Jul 30, 2018 at 7:14 pm

    I’m genuinely curious, along with the bad actors, there are bound to be some real homeowners who take a beating because of this drop in real estate prices. What happens to them? Or are they just considered acceptable casualties?

    • Bobber
      Jul 30, 2018 at 8:54 pm

      They benefitted from the undeserved rise in prices, so they should be able to stomach a falloff.

      • Mch
        Jul 30, 2018 at 9:39 pm

        Talking about the guys who bought higher, and then went underwater.

        • Bobber
          Jul 30, 2018 at 9:58 pm

          Anybody who bought at the top let greed get the best of them. There was always the alternative of renting.

          I’m sure they wouldn’t be sharing their gains if things went the other way.

          I have no sympathy for that scenario. Others may differ.

        • Frederick
          Jul 31, 2018 at 9:18 am

          Bobber I know at least two of us on this thread are right there with you

        • Ras Moyag
          Jul 31, 2018 at 2:08 pm

          And what about my Enron, and PetsdotCom stock. Should I expect a handout too? Please, what an investing nirvana if the government covered losses. Yippe bring it on!!

    • Gershon
      Jul 30, 2018 at 10:30 pm

      What happens to them? Or are they just considered acceptable casualties?

      I have zero sympathy. The responsible and prudent refused to pay such outrageous prices. The fools rushed in, many knowing full well they couldn’t reasonably afford the mortgages they were taking on, but having drank the Kool-Aid that “it’s different here!” and that prices would only go up. In the process they drove up housing costs for everyone. So yeah, they’re “victims” solely of their own poor judgement. If they get foreclosed on and take a huge financial hit that won’t bother me one bit. Let them be a cautionary tale.

    • Jul 30, 2018 at 11:34 pm

      As homeowner, you just keep making your mortgage payments. You’re stuck, and you know it. But unless you HAVE to sell, you don’t need to recognize a loss. Just keep plugging.

      • Aug 2, 2018 at 8:17 am

        Certainly not in Vancouver, the local salary in that province is only about $40,000 Canadian at best. The prudent thing to do is declare personal bankruptcy. If the Chinese stop buying the local real estate market has to plunge by at least 50 percent and even after a 50 percent plunge most locals still couldn’t afford the prices.

  9. TropicalSunset
    Jul 30, 2018 at 7:37 pm

    Good moves by the BC Gov’t but should have been very aggressive and earlier. It is ridiculous when foreign investors dominate and inflate a local SFR/condo market. And local people who live there, work there, raise their kids there and just want a home to live in, are affected negatively.

    • realist
      Jul 30, 2018 at 11:01 pm

      Your comments are highly germane, as are those of Bobber above. Sadly, the horse left the Vancouver Barn long ago, and is unlikely to return. The damage is far advanced, and largely irreparable. How long ago? – it was in 1988 that I fell into conversation with a mild-mannered real estate agent, a middle-aged women well known and respected in the industry, as she showed me one of her residential listings in Vancouver on a quiet Sunday. Her observation: “Our government has sold out our country to foreign interests and foreign money”. How very right she was.

  10. andy
    Jul 30, 2018 at 7:53 pm

    Wouldn’t northlings be happy people are willing to buy this far in whitewalkers land?

  11. Cashboy
    Jul 30, 2018 at 11:59 pm

    The major western cities like London, most of the property is owned by foreigners. A lot of “dirty” money is laundered through property transactions. The property boom in Spain started when the Euro was introduced and replaced European local currencies because it was a method of getting rid of the “black money” one had aquired.
    In most of Asia, a foreigner cannot own freehold land. I actually think this is correct because the prices don’t go crazy with foreign demand and remain in line with wages of locals.

  12. intosh
    Jul 31, 2018 at 1:45 am

    Now that another spotlight is about to be directed at Canadian Money-Laundering City I, the money laundering cockroaches that remained are packing bags for Canadian Money-Laundering City II, Toronto.

    • Prairies
      Jul 31, 2018 at 12:55 pm

      With the cooling markets I think Toronto is getting passed up for Montreal and Ottawa. Shady business practices try to avoid well lit areas and the lights are aimed at Vancouver and Toronto.

  13. SimplyPut7
    Jul 31, 2018 at 2:03 am

    This is great news!

    Now when will the rest of Canada do this?

  14. George
    Jul 31, 2018 at 3:38 am

    Vancouver real estate will always be a great investment. The prices may adjust 5-10% but will steadily climb in the long run. We will never see detached house prices below a million west of Coquitlam again. In a decade I doubt we’ll see houses under a million west of Langley.

    • Aug 2, 2018 at 8:36 am

      Stop and think… if the Chinese stop buying and actually sell real estate will capsize in the entire province of British Columbia. Wages are stagnant in Canada due to mass emigration to Canada of third worlders. The yuan is devaluing (they become poorer outside their native China) and their local stock market is presently in a bear market.

  15. yon
    Jul 31, 2018 at 4:53 am

    Finally! Big questions remain…..who was complacent during the past years, turning a blind eye to the money laundering? And, had any member of the city or parliament personally benefited?

  16. John
    Jul 31, 2018 at 11:56 am

    Sounds like it’s a Swamp up there. Naturally this starts with a cleaning up via taxation. It’s amazing, one Country, with 10 provinces all doing their own rules/tax thing? So now trickling down to city levels? Sounds more like a pension panic beaurocrats looking at Provincial Finance, which they somehow they figured out. Of course, they and their political sponsors will not pay. That is what their people are for. But, it’s them who need a grip.

  17. Shawn
    Jul 31, 2018 at 12:26 pm

    It seems the BC and Ontario government are the only two governments on the continent tackling the problem of rampant housing speculation and money laundering. I hope I’m wrong and there are more.

    • Prairies
      Aug 1, 2018 at 10:54 am

      They are the only 2 provinces that let it get out of hand. The rest of the provinces don’t have the world wide attraction, so the speculation is lower end. The question comes down to what happens over the next few years. Will cities like Montreal, Ottawa, Calgary, etc. welcome the money being blocked from the other 2 major metros. Or will they stop it before it gets that bad.

  18. Jul 31, 2018 at 11:53 pm

    I spent a day in Vancouver last week. Saw a McClarren, lots of Yachts, and the Chinese migration (estimates put it at over 50% of RE purchases)

  19. vap
    Aug 1, 2018 at 7:40 pm

    All the ones saying sell are afraid to sell their own homes.
    All talk no action, excuses will be bound.

Comments are closed.