Will the flipping tax have its desired effect? BCREA says not likely

New analysis is looking at whether B.C.’s real estate flipping tax will actually make a difference, and according to the findings, it may not be enough.

The BC Real Estate Association (BCREA) says “flipping activity, by any definition,” makes up “an insignificant share” of all the sales in the province. Citing the Bank of Canada, it says just 2.5 per cent of home sales in Canada were of a property bought within 12 months.

More specifically in Vancouver and Victoria, the BCREA says that number is closer to three per cent. Overall in B.C., the government has said about seven per cent of homes sold between 2020 and 2022 were resold within two years, though the BCREA says other estimates put that figure closer to 10 per cent.”

“We know that flipping activity can be harmful when markets become overheated, and rapid price appreciation attracts market participants who are purely short-term speculators. It is important to differentiate sellers who are merely trying to profit from short-term market conditions from those who invest their time, labour, and capital to improve the housing stock or provide additional rental units,” the BCREA explains in its latest Market Intelligence report.

The BCREA points out that it’s still unclear how many of the “seven per cent” of homes identified as being sold within two years between 2020 and 2022 would be subjected to the flipping tax, with exemptions in place as part of the rules.

“If you are buying a home and selling it after a year, there’s a very good chance you’re going to qualify for one of the many, many exemptions there are to the tax,” Brendon Ogmundson, chief economist for the BCREA, said.

“It’s a very small demand impact, which is why we kind of emphasize, given the two-year horizon that they define a flip, there’s a real chance now that if you have someone that was looking to sell but doing so might trigger a flipping tax or they don’t want to go through the hassle of going to the government and explaining why they’re selling their home … they’re just going to delay a listing to avoid the tax. So there’s a real chance that listings actually fall because of the tax, and that could make markets a bit tighter and actually increase prices.”

Outlined in B.C. Budget 2024, legislation for the home-flipping tax is set to be introduced this spring. If passed, the new rules will take effect as of Jan. 1, 2025.

The BC NDP has explained that homes sold within a year of it being bought will face a tax rate of 20 per cent of the profit, declining to zero per cent “between 366 and 730 days.”

“To those who want to make a quick buck by flipping homes, things are about to get more difficult,” Finance Minister Katrine Conroy said during her budget delivery.

The BCREA estimates that the tax would lower sales by 1.7 per cent in B.C., but have little impact on bringing prices down.

“It’s a real issue and people kind of figure it out very quickly within reading the details of the tax … and that’s what our modelling shows. And it doesn’t take very much — maybe a five or 10 per cent decline in new listings activity for the supply effects of this policy to totally overwhelm the very small demand effects and you end up with prices actually rising with this tax, compared to without,” Ogmundson explained.

“In our models, we implement a tax that affects sort of the return expectations of investors and that slows their overall demand. Ultimately, it’s a very small amount — like 1.7 per cent — that doesn’t have enough of an impact in the sort of scale of the housing market to really affect prices very much. We’re talking about a very small sliver of demand, so no surprise, the price impact is very small.”

The BCREA notes that “flipping is controversial in Canada,” pointing out arguments from critics who say the act “contributes to home price inflation.”

It adds “the extent to which flippers indeed cause home price appreciation remains theoretically and empirically ambiguous,” noting it remains unclear whether people who flip homes “cause price appreciation” or whether these people are attracted to markets “where price appreciation is highest due to other factors like supply constraints and high population growth.”

“The issue is we’re in a market that has a lot of demand. We have very high population growth. And even if we didn’t have that really high population growth we have right now, we have a lot of people, especially in the city, in their typical household formation years,” Ogmundson said.

“People between the ages of 25 and 40 tend to really like to find their own homes, and we have a lot of those people because the millennial generation is the largest cohort in B.C. and they’re all kind of in that age group now. So we have a ton of demand from demographics — we just haven’t really build enough housing over the past 15 years to really meet that demand.”

In its budget, the B.C. government said the tax, under its Homes for People plan, is aimed at discouraging speculators from driving up prices in the real estate market. Exemptions to be excluded from the tax include circumstances like life events such as divorce, death, illness, or work relocation.