House Flippers

When house prices were rising, it was an easier business for hours flippers.

The market has softened, and house flipping is beginning to look risky.

Note: The flaw with the chart below is that most flippers will "live in the property" for at least 1 year before selling so they can claim it as their principal residence and avoid capital gains tax on the sale. The regulators don’t count flips that occur within 18 months.

Dark Money

Dark money is the proceeds of crime or money that are transferred to Canada illegally. Dark money includes funds earned legitimately that are transferred illegally from countries with capital controls (e.g., China) and legitimate earnings moved from nations subject to international sanctions (e.g., Iran, Russia, and North Korea).

To hide the illegal nature of the funds, it is laundered in the real estate market. Sometimes, the property's true owner is hidden by using a Straw Buyer, and other times the property is owned by a shell company.

Sometimes a real estate agent or lawyer will accept the illegal cash to help the nefarious individuals hide their true origins. In 2015, a British Columbia realtor was caught with hundreds of thousands of dollars in her closet at home.

It is hoped that the new British Columbia land registry will stop money laundering, but some economists challenge this assumption. Kevin Comeau from Transparency international says the new system does not require the “proactive” verification of the identity of the true beneficial owner of a property. In other words, the ultimate owner, whose name is not listed on the land title, does not need to be verified - it’s an honour system. As a result, the system offers little value to law enforcement agencies and others who search the registry.

We see no evidence of a diminished role for dark money in British Columbia real estate.

Overall Non-core Demand

On balance, given the foreign buyer restrictions and volatility in the rental market, we assess that capital inflows toward residential real estate for non-core uses will soften in 2023. This adds some downward pressure on B.C. home prices.

3. Government Policy

Empty Homes Tax (Vancouver)

The City of Vancouver raised its Empty Homes tax from 1.25% to 3%, and now the City has approved another increase to 5% scheduled for 2023. From the government’s perspective, ownership of a vacation property in a major Canadian city is a luxury that only the wealthy can afford. The tax is intended to be a fee on luxury real estate that is charged to people who are most capable of paying it.

Vancouver has a supply shortage of homes, so ownership of luxury homes that sit empty is a misuse of a valuable resource.

Foreign Buyer Restrictions

The Federal Government, using its housing agency, has announced a ban on home purchases by non-Canadians effective January 1, 2023. There are some exceptions for those with temporary work permits, refugee claimants, and international students.

The two-year ban was implemented to allow the government to study whether it reduces the property market's levels of speculation and commoditization.

Overall Government Influence

Overall, the government unwound many programs supporting home values through the pandemic and subsequently implemented restrictions on foreign investment. Compared to a year ago, there is significantly less support from the government to maintain home values.