Taxing the Flippers

Happy Monday Morning!

Inflationary pressures in Canada subsided, with headline inflation for the month of January coming in at 2.9% year-over-year, well below economists expectations of 3.3%.

The Bank of Canada’s two preferred core inflation measures both decelerated, averaging 3.35% from a downwardly revised 3.6% a month earlier, also slower than the 3.6% pace expected by economists. A welcoming relief for homeowners facing mortgage renewals this year, and politicians facing upcoming elections.

Source: Financial Post

“We’re optimistic that the Bank of Canada will start bringing down interest rates sometime this year — hopefully sooner rather than later. But that’s their decision to make,” Trudeau told reporters this past week in Vancouver.

BC’s premier David Eby also got in on the action, pinning blame on the Bank of Canada for “driving inflation up by driving up the cost of housing” through mortgage interest costs, which can be passed through as higher rents.

This is just the latest in a chorus of finger pointing on who’s responsible for the nations housing crisis. Remember just a few weeks ago Macklem noted "Housing affordability is a significant problem in Canada but not one that can be fixed by raising or lowering interest rates," instead pointing the blame on rampant population growth and a chronic under supply of new housing.

There are no shortage of scapegoats for this self-induced mess we’ve gotten ourselves into. In reality it’s a combination of ultra loose monetary policy, a build-up of excess leverage, a flood of foreign capital, rampant population growth, and several decades of underbuilding brought on through restrictive zoning and government bureaucracy.

According to a 2022 CMHC report, government charges on new development which include, taxes, warranty fees, municipal fees, development charges, density payments, and permit fees, adds up to $143 per square foot on a modest 1,000sqft condo in Vancouver, government charges would therefore amount to $143,000.

However, other estimates from Ryan ULC, a global tax services provider that recently acquired local B.C. commercial real estate appraisal firm Burgess, Cawley, Sullivan, calculates government fees and taxes at a whopping 29.25% or $327,565 for a new Vancouver condo priced at $1.1 million.

Source: Ryan ULC

Either way you slice it, housing here is taxed like cigarettes, and the hits keep coming. After all, it is an election year.

The BC Government has unveiled a home flipping tax. If a property is bought and resold within 2 years, there will be a 20% tax on profits. This is in additon to capital gains taxes and active business income that is already charged on house flippers.

This is ultimately a tax that appeases the BC NDP’s voter base, I mean really, who has sympathy for a house flipper?

However, lets unpack the second order effects. Under the current guidelines the home flipping tax will be retroactive. So while it doesn’t come into effect until January 01, 2025 it will hit purchasers who, for example, bought in March 2023 and then resold in February 2025.

What’s perhaps more peculiar is the impact this could have on pre-sale buyers. If you bought a pre sale 3 years ago and plan to sell it on completion next year it sounds highly likely you’ll be subject to the BC Governments flipping tax, since it appears that the clock will start ticking on completion day, not the day you signed a contract of purchase at the presentation centre.

Keep in mind that pre-sale buyers are required to fund new housing supply. The vast majority of developers can not obtain construction financing in BC without pre-selling at least 60% of the building. You need pre-sale buyers, investors, speculators, whatever you want to call them in order to get new housing supply off the ground. This is the model to fund new construction and it is not going to change whether we like it or not.

In other words, if you know the BC Government is going to clip 20% of the profits when you sell on completion, and the feds are going to take the other 50% what does that do to the pre-sale market?

If you remove the investor, you remove a good amount of new housing supply. End users will struggle to fill the void because most end users don’t want to wait 3.5 years to move in, they want move in 3 months from now.

I do wonder if Eby and co will find an exemption for pre-sale buyers. After all, they’ve drafted a lot of pro-supply policies in recent months which include mass rezoning of single family and transit oriented land.

For those keeping tabs at home, house flipping accounts for 4% of total transactions today, a small number when you consider probably half are a result of death, divorce, or job relocation, all of which would be exempt from the tax.

Make no mistake, I am not arguing for sympathy for home flippers, I am merely pointing out the illusions that another tax is going to create affordability. Our housing market is broken for all the reasons listed earlier, not because Joe six pack decided to buy a dilapidated house, and rehab it on the weekend.

Don’t miss the forest for the trees. And no, this message is not sponsored by HGTV.