Vancouver has attracted a flurry of out-of-town homebuyers, but little is known about their impact on real estate prices.
UBC Sauder School of Business professor Jack Favilukis and New York University business professor Stijn Van Nieuwerburgh are researching the effect of out-of-town buyers on home prices in Vancouver.
In this Q&A, Favilukis discusses the model they developed to measure this and whether policies like a foreign buyers tax are effective at addressing housing affordability.
Tell us about your model. How did you develop it and what does it reveal about the impact of out-of-town buyers on home prices?
We used census and national household survey data from Statistics Canada to create a model of Vancouver filled with realistic households who either live in the city or live in the suburbs and commute to work. These households include people who grow older, have careers, experience economic shocks, accumulate wealth and save for retirement, and who either rent or own housing.
To assess the impact of out-of-town buyers, we looked at absentee landlords or similar types of households who do not work locally and whose main impact on the economy is through their purchases of real estate.
In Vancouver, we found a moderate increase of five to 10 per cent in both prices and rents when we assume that 10 per cent of the available housing stock is purchased by out-of-town buyers. Unfortunately, there isn’t much data on the actual number of out-of-town buyers, so 10 per cent is just a rough estimate.
We expected that the impact of out-of-town buyers would benefit some and hurt others, and indeed this is what we found. However, we were surprised to find that in almost every calibration of the model, the average effect was negative.
How do out-of-town buyers negatively affect Vancouver households?
Imagine that all households in Vancouver are approximately the same and each owns their home. If out-of-towners, all of a sudden, show up and wish to buy 10 per cent of Vancouver real estate, this will drive up prices, and result in a capital gain for the locals. The locals may not be able to buy as much housing as they would like to, but they have all this extra cash to make themselves happy.
Now, of course, not all households in Vancouver are the same, but the home ownership rate is around 65 per cent so we expected the benefit to outweigh the cost. We were wrong. While indeed, older households who own their home do benefit handsomely after out-of-towners show up, this benefit is not enough to offset the cost to others. Poorer households, younger households and renters, despite being a minority, are more negatively affected because it is much more expensive for them to pay for housing going forward.
Even some homeowners are hurt from the price appreciation caused by out-of-town buyers. Think of a 30-year-old, middle class, childless couple who owns a two-bedroom condo but is planning on having children and upgrading to a four-bedroom house with a yard in five years. The four-bedroom house appreciated by much more than their two-bedroom condo, so the capital gain on their condo doesn’t help them realize their plan.
The B.C. Liberal government implemented a foreign buyers tax last year. Based on your research, is this type of tax effective at addressing housing affordability?
Based on our model, anything that discourages out-of-town purchases will result in greater economic prosperity for locals, so at a very basic level, the foreign buyers tax is better than doing nothing.
However, some policies are better than others and I think the foreign buyers tax is one of the least attractive options. One reason is that, while it discourages future buyers, anyone who has already bought, and who is already taking housing away from the local market, suffers no consequences. Some of my UBC colleagues have proposed a much more sensible approach, calling on the provincial government to address housing affordability in the Lower Mainland with a tax targeting property owners without ties to the local economy.
A second takeaway is that distributions matter. Even without a foreign buyers tax, some people (older, wealthier, and homeowners) will reap large benefits while others (poorer, younger, and renters) bear large costs. If there is a way to share the benefits and burdens, then a foreign buyers tax may not be necessary. For example, the city could make it easier to build more housing, therefore dampening the effect from foreign buyers. The city could also build more infrastructure, making it easier to build in, and commute from, further outlying areas.