A market of extremes: near record sales in August combined with lowest supply in…
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What we are going to discuss
We are going to discuss the process of buying and owning residential properties in Vancouver and British Columbia, for Canadian citizens who are end users and for investors who are non-residents of Canada. We’ll also talk about the process to rent out properties before moving in or to keep them as investments, along with taxation.
What we are not going to discuss:
- We are not going into minute detail on tax, renting, and purchasing as we’re talking about an entire province with a lot of variation and many, varied types of properties. Instead, we are going to give an overview of the process of buying, holding, and taxation of real estate in BC.
- For more detailed questions, myself and all of the panelists have plenty of time after the webinar to answer all of your detailed questions at length. Furthermore, if you have any questions that we cannot answer because it is outside of our area of expertise, we will find those who can answer those questions after the webinar.
- We are not going to discuss purchases by non-Canadian citizens, due to BC’s 20% Foreign Buyers’ Tax.
I will start with a discussion of current market conditions across British Columbia with a particular focus on the Vancouver area, but at vancouvernewcondos.com you’ll find a network of 10 realtors who cover Greater Vancouver, the Fraser Valley, southern Vancouver Island, the Okanagan Valley, and Northern BC. I will also discuss the effect of COVID-19 on the market here in BC.
Please do keep in mind that British Columbia is a province of over 5 million people and almost a million square kilometres, so we will be discussing generalities in this webinar. We are keen to answer all questions, so if you are not able to have your questions answered here, feel free to reach out to any of us after, at any time.
Next, Adam Scalena, a Vancouver Realtor, will discuss the process of purchasing a property in BC as a non-resident (by visiting or doing so remotely) and how we can make it a simple and easy process for buyers who are not located in BC.
Then, Klaus Rode will discuss the process of renting a property once you have purchased it. This will include a discussion of how Klaus finds and qualifies potential tenants, how rent collection is now automated, and how he helps with taxes on rent. We will also touch on what happens if there are issues with a tenancy.
Finally, Ruby Chouhan, will discuss non-resident property purchase and ownership taxation, and taxation issues around purchasing and owning properties as a non-resident Canadian citizen in BC.
Once we have heard from our panelists, we will have 20 minutes for your questions. If we cannot answer a question you may have, rest assured we have a network of real estate, mortgage, rental, and tax professionals across BC who can answer any questions after this webinar.
Mike Stewart – Founder, Vancouver New Condos
Market Conditions and Overview
What was happening in BC real estate before COVID-19?
Strong, stable economy with low unemployment – BC has had, and continues to have, a growing population. The BC economy was growing by just over 2% prior to the COVID-19 crisis, which is good for a mature, advanced industrialized economy. Unemployment in the province in 2019 was quite low at 4.9%, and was trending down.
In terms of real estate sales volumes, using Vancouver data, we saw a surge in late 2019 from a bit of a lull in early 2019 and 2018. 2019 was a bit of an anomaly as the spring was slower than the fall and winter, which saw significantly increased sales volumes and upward pressure on prices.
This happened because of:
Constrained supply. Particularly in the Vancouver area, many municipal and city governments do not see increasing the supply of new homes as a solution to high housing prices. The development of new homes is a highly politicized process with NIMBYs and progressive politicians who don’t want to see more density successfully opposing new housing developments across the region. This has resulted in not enough new homes being built not only in Vancouver but in other BC cities, as well.
Ever-increasing demand. BC’s population continues to grow, but lifestyle changes have dramatically increased housing demand. As more people forgo marriage and having families, there is demand for a higher number of smaller studio or one-bedroom condo units for individuals or couples to live in, as opposed to larger properties to accommodate families with children. The demand for different types of housing is increasing faster than population growth.
The elephant in the room is COVID-19: How is it affecting the real estate market in BC?
What happened in BC real estate during COVID-19?
Sales volumes dropped around 45% in the spring, starting from March. Lockdown was a major contributor to the fall in transactions.
Real estate prices were stable during COVID-19. Although unemployment surged, it didn’t have a big impact on BC real estate prices. With the exception of the odd panicked sale, real estate prices remained stable.
Bounceback. The bounceback in sales volume began in April/May and by July 2020, the Real Estate Board of Greater Vancouver (REBGV) sales volumes were 22.3% higher than July 2019 sales volumes.
Sales volumes continued to rise. Sales volume for properties listed by the REBGV for August 2020, the most recent data we have, are up 36% over 2019. This is a continuation of the rising real estate market we saw across BC that started in mid-2019 after a soft 2018.
Why were prices stable and continue to be so? Why have volumes bounced back?
Central Bank and Central Government injections of huge liquidity – The Bank of Canada issued rate cuts that have pushed 5-year fixed rate mortgages below 2%. This is very common across the country now, but not historically.
Quantitative easing has allowed the Bank of Canada to commit to keep rates low over the medium term, and massive federal spending for income support across the economy have worked to avert a deflationary spiral in Canada. This has pushed up the value of real estate assets and the stock market: if people holding these assets feel wealthy, they will continue to spend.
Unemployment is up to around 11.5% because of COVID, but the job losses tend to be among lower-income earners and renters rather than mid or high-income earners and prospective property buyers. Furthermore, unemployment peaked in BC during spring at around 13%, and it’s currently falling.
All of this has been very effective in keeping the real estate market strong.
What is happening now in BC Real Estate?
Making up for lost time. Sales continue to rise across BC as people who wanted to buy or sell in the spring couldn’t do so. COVID-19 didn’t destroy demand; it deferred demand.
Sales volumes in Victoria in August 2020 are up 29.1% for condos and 45% for single family houses compared to August 2020, and prices are roughly stable. The Fraser Valley had the second busiest month of property sales in the past 20 years in August 2020, and prices are stable to slightly rising. Greater Vancouver sales volumes were 19.9% above the 10-year August sales average. For August 2020, the Vancouver sales ratio (the ratio of sales to active listings for each month) was, depending on property type, 21.6% to 30.7%. Generally, analysts say downward pressure on home prices occurs when the ratio dips below 12% for a sustained period, while home prices often experience upward pressure when it surpasses 20% over several months.
For certain property types, there is upward pressure on prices. You hear doom and gloom from the media and other sources, but take these predictions with a grain of salt as their crystal ball really is as good as mine or yours. For instance, the CMHC predicted in May 2020 that sale prices would fall 18% across Canada this year, but it isn’t happening. You can also look at the sale prices from 1977 to August 2020 to compare.
Houses slightly favoured over condos, due to COVID. Sales ratios are higher for single family homes compared to condos. This could be due to COVID-related factors of not wanting to be in high density housing or the need for more space to work from home.
While Greater Vancouver has a lot of potential for capital appreciation, you won’t see a lot of gross revenue (maybe 5%). Southern Vancouver Island is similar. The reason is likely because many high-net worth people move to these areas, not for economic reasons but for lifestyle reasons. In the Fraser Valley, which is close to Vancouver, you’ll see relatively high rental revenue and more capital appreciation than in Greater Vancouver. For example, a colleague of mine sold their clients a Fraser Valley property for $283,000 with a gross cap rate of 6.7%. The Okanagan offers relatively high rental revenue but with less capital appreciation. Northern BC is similar with revenue, as people move for the short-term to work. But, it does have large capital appreciation potential from large-scale natural resource and infrastructure projects. We work with a client in Fort St. John who has furnished rental options with shockingly high cap rates.
Buying a presale is a very straightforward process and there are lots of opportunities in BC. You’ll get a lot of documentation with floor plans and information on finishes and other things, and doing a transaction remotely is very simple with DocuSign.
Some benefits of presales include:
Low hassle and easy to purchase from overseas. Presales offer non-resident buyers a relatively simple and easy opportunity to invest in the Vancouver market, with typically a 20-30% deposit payable (wire transfers are mostly used for non-residents) over 18-24 months and the balance payable upon completion of the project.
Detailed digital renderings, floor plans, and documentation of the projects and their features and finishings. This allows for a hassle-free experience and expectation of a perfect, brand new property upon completion of the building with a full government-regulated 2-5-10 third-party warranty.
No need for a mortgage right away. You have flexibility for your intended return to Canada to get better financing or for other personal and/or financial needs and requirements.
Available incentives, although typically prices for presales are not negotiable. These incentives vary by project and can be quite generous depending on the developer’s requirements.
Some options for customization, especially for more expensive, higher-end presale options.
Less labour required, as existing properties are somewhat more labour intensive for a prospective non-resident buyer. Existing properties are typically less expensive than comparable presales but are not as uniformly perfect and hassle-free.
More flexibility in terms of price and completion dates as you negotiate with individual needs and requirements.
Rental revenue and/or the opportunity to take advantage of the ultra-low sub-2% rates currently available in BC.
- Early access to presales of every size and configuration for both end users and investors across Greater Vancouver, the Fraser Valley, southern Vancouver Island, the Okanagan, and Northern BC.
- Great email lists for presales for all of the above regions that we can add you to.
What is happening going forward in BC real estate?
The governing NDP has called an election for October 24, 2020 and based on current polling is expected to win. What that means for the real estate market in BC remains to be seen. John Horgan has positioned himself as somewhat of a pro-business Premier during the current minority government, but one could assume that will continue given Horgan’s success in assuaging the electorate’s past concerns about the NDP’s record on the economy. Immigration is expected to resume.
Beware of future predictions!
A perfect example of what to be wary of in terms of a future prediction for the Vancouver and BC real estate market was the Canada Mortgage & Housing Corporation’s prediction that prices in Vancouver would fall by 18% in 2020.
The CMHC was a venerable and credible institution that most Canadians, until quite recently too what it said quite seriously.
Fortunately for homeowners and current investors the CMHC was wrong. (Though unfortunate for the owners of the CMHC – all Canadians – who have to contend with a serious decline in CMHC credibility with its irresponsible and consistently inaccurate predictions)
Real estate prices in BC and in the Vancouver area are stable and are actually rising for certain types of properties (lower density options further from the core and closer to recreation and lifestyle options – think Nanaimo, Bowen Island, Squamish and single family houses).
Beware of future predictions on the BC real estate market!
Adam Scalena, Scalena Real Estate
Purchasing process and areas that are popular with investors
Adam and I have both lived overseas and we have many clients throughout the UK, Europe, Asia, and North & South America. We are familiar with the needs of people buying properties from overseas and have a whole suite of research tools and resources to help Canadians who want to buy properties in BC.
How can we buy a property in BC from the UK or Western Europe?
Tools for Buyers
- Private Client Services: we helped with beta testing and research for this tool and have used it with clients for almost a decade. You can set search parameters by geographic area (even down to address or neighbourhood), property type, and price. You’ll get realtor-level information like sold prices and days on market. We can also communicate with you directly from its own portal. It’s a great tool, especially to start out while abroad and monitor the market. It typically also avoids the lag you see on Realtor.ca so you can see listings before the general market.
- Presale email lists and real estate statistics: if you join our presale email lists, you’ll get sales ratios and benchmark price index stats to broadly monitor the market or submarkets, so you can see if we’re in a buyers’ or sellers’ market. There are lists for all cities in Greater Vancouver, the Fraser Valley, Victoria, Nanaimo, the Okanagan, and Squamish. Sign up at VancouverNewCondos.com or MikeStewart.ca.
- VancouverNewCondos.com: this site tracks new construction condos across BC and offers early access and incentives for projects, often before the general market.
- VancouverRealEstatePodcast.com: I’ve co-hosted this podcast on the Greater Vancouver area for 5 years, which has over 200 hours of content. We talk to economists, urban planners, developers, politicians, and industry experts, and we were featured in the top 10 business podcasts on Apple Podcasts Canada.
What’s the process to buy a property here from, say, London?
We would start with a phone consultation to discuss areas you’re interested in and Greater Vancouver areas that would fit your lifestyle, as well as your goals. If you can’t come in person for property tours, we can arrange for tours via Zoom or FaceTime, which we’re now doing more often. Our presale or pre-construction resources, such as floor plans and models, are online. It’s really easy to buy off-plan because of developers’ amazing resources. We can walk you through the paperwork and provide a location overview. Recently, we’ve been FaceTiming clients from the future building site to give a better sense of the surrounding area.
There is also the option to fly into Vancouver, once COVID restrictions are over, so we can hit the ground running in person and make really efficient use of your time. We can get you set up with the tools above so that you can do your research and prepare far in advance of your visit to buy, or get up to speed on the market and options to buy, from the UK or other points overseas.
Should you want to come to visit BC, we can introduce you to colleagues who specialise in the areas above to help with a purchase. If you would like to purchase remotely, we can also introduce you to area specialists who can help with a remote purchase.
Klaus Rode – Associate Broker, Century 21 In Town Realty Vancouver / Salesperson/Property Manager, Century 21 Percy Fulton Toronto
Your Rental Resource – specializes in rentals and property management
What is happening with the rental market across BC?
While rents are down in a few markets across BC, cap rates are between 3% and 5% in most markets. Places like Kelowna or Prince George may have lower rents, but purchase prices are also less. Cap rates tend to be higher further away from larger centres, like Vancouver, and in smaller towns.
In Vancouver, the average one-bedroom rent is $2,000, and purchase price will depend largely on the neighborhood in which you are purchasing, which affects your cap rate.
What has been the impact of COVID-19 on rentals across BC?
The impact has been less than we anticipated at the beginning of COVID. Initially, we didn’t know what to expect, and everyone was in a bit of a holding pattern. After the first month, the initial hit was on furnished rentals, some of which were used as Airbnb-type rentals. The demand just was not there any longer, and the number of furnished suites available saw a sharp increase in most markets. Slowly, as corporate transfers started up again, we saw a slow recovery in the furnished long-term rental market but with slightly more competitive pricing. On the unfurnished rentals side there was a slight rent reduction on the larger suites, as demand went down. On one bedroom suites, everything was stable and demand was good, as couples downsizing from a two-bedroom suite were driving a bit of the demand in order to save some money.
We now seem to be stable in Vancouver with one-bedroom rentals going between $1,900 and $2,100. Two-bedroom suites are a bit more varied in price, based on location, view, and amenities. We are seeing ranges from $2,400 to $3,200 a month. This seems like a large spread; however, you have to keep in mind that two-bedroom suites in Vancouver also have a big size range, and that is reflected in the pricing. In other areas like Kelowna, demand is still high for rentals. This can be in part attributed to professionals being able to work from home and relocating into smaller communities that offer a quieter lifestyle, still with some of the “big city” services they are used to. In the Lower Mainland, we are seeing more demand for the outlying areas for rentals, as some people prefer to live in smaller buildings.
If a non-resident is to buy a property here in BC and wants to rent it out, what are the next steps when working with you?
If you need help with property management or just want to double check what the estimated renal rate would be on a property, you can call or text me at 604-760-5856 or email firstname.lastname@example.org. I can review the agreement with you by email, phone, or Zoom call. If the property is vacant, my team will need to schedule professional pictures and a virtual tour for marketing.
How do you screen tenants?
With COVID, we have streamlined our process. If the suite is vacant, we have professional pictures and a 360-degree virtual tour done, and use this for advertising and the initial showing. If a tenant is interested, we send out the link from our partner site, liv.rent, and ask the tenant to apply for pre-approval. We do this partly to make sure that the tenant is qualified and interested in the rental, and also to cut down on the number of in-person viewings. We will only confirm an in-person viewing once we have an application, in order to minimize contact. Once this is done, and the tenant wants to proceed with a lease, we sign the paperwork virtually with DocuSign, and then set them up on our payment platform, RentMoola. This gives tenants a variety of ways to pay their rent.
What system do you use to collect and disburse rents?
Rent collection is done online through our partnership with RentMoola, and owner payouts and statements are tracked in our accounting software, Yardi. This enables us to set up the landlord in an owner portal, and they have access to monthly owner statements. Payouts are done by the 17th of the month and directly transferred into the owners’ bank accounts.
The whole rental management process is taken care of for our clients, from screening to dealing with issues to finding new tenants, so you don’t have to do anything.
Do non-resident property owners need a bank account here in Canada for their rental income?
Owners will need an account in Canada. First, we need to deposit funds into a Canadian bank account and second, the owners will likely find it more convenient to set up monthly payments on strata fees or yearly tax bills through a Canadian account.
As a segue to hear from Trowbridge’s Ruby Chouhan, our tax specialist, do you help with BC and Canadian tax on rental income?
We do monthly submissions to the CRA for non-resident tax on rental income. This is typically 25% of gross income. At the end of the tax year, we provide owners with the NR4 form so they can file their Canadian tax return with the CRA. Owners are also responsible for filing declarations for the Vancouver Empty Homes Tax and the BC Speculation and Vacancy Tax. Ruby can discuss tax implications in more detail.
Ruby Chouhan – Associate, Private Client Non-Resident Real Estate Services, Business Development, Trowbridge
Tax issues with purchasing and owning a property in BC as a non-resident
Do non-residents who own property and collect rent in British Columbia need a bank account? Does this have an impact on their non-resident status from a tax perspective?
Bank accounts are seen as a secondary tie to Canada; most property owners will have Canadian bank accounts to receive payments/pay bills and it’s not a problem at all. In general, residency status/ties are based on a number of other factors like economic ties, family ties, etc. If you have concerns about your residency status, it’s best to call and talk to us about your specific situation.
What taxes are payable on the purchase of a property in British Columbia as a non-resident of Canada or someone from abroad, even if they’re a Canadian Citizen?
In certain parts of BC (e.g. Fraser Valley, Metro Vancouver) there is an “additional property transfer tax for foreign individuals and entities” at 20% of fair market value. This tax is based more on immigration status, rather than tax residency status. Essentially, if you are a Canadian Citizen or Permanent Resident, you are exempt from this tax. It’s important to work with a good real estate lawyer, as they register the tax at final closing. The tax is payable on your proportionate share of ownership of the property.
Otherwise, there are refunds available in situations where you become a Permanent Resident or Canadian Citizen within one year of the property registration, and you must have lived in the property for a certain period of time (over one year as your principal residence).
Can you tell us about Vancouver’s Empty Homes Tax?
The Vancouver Empty Homes Tax is issued by the province rather than on an income tax level. It’s for properties deemed empty, which get taxed 1% of the property value. It doesn’t apply to principal residences or properties rented for more than 6 months of the year. If you have a long-term lease in place, you don’t have to worry about this tax. Each year, you must prepare a declaration of the status of the home to the BC government.
Can you tell us about the British Columbia Speculation and Vacancy Tax?
There is a Speculation and Vacancy Tax in BC designed to turn empty homes into housing and ensure foreign owners and those with primarily foreign income contribute fairly to BC’s tax system.
For 2019 and subsequent years, the tax rate is 2% for foreign owners and satellite families. A satellite family is considered one that is untaxed on worldwide income in Canada, i.e. a non-resident for tax purposes. If there is an arm’s length tenant in place for at least 6 months, you are exempt from this tax. There are other specific exemptions, also for non-arm’s length tenants.
The Vancouver Empty Homes Tax and BC Speculation and Vacancy Tax are two individual taxes that each require a declaration to be made.
How does it work for non-residents paying taxes on rental revenue of a property here in BC?
As a non-resident of Canada collecting rental income from Canadian property, the CRA requires that “non-resident withholding taxes” be paid on your monthly rental income. The CRA provides two options that are broken down into the three steps.
The first option, which is the CRA’s default requirement, is to withhold 25% of the gross rent on a monthly basis. Once the year is over, you are issued an NR4 slip indicating the amount of tax withheld, and you then have two years to file your Section 216 return and be refunded any overpayment of tax that was withheld.
The second option uses the NR6 form, which allows you to pay reduced tax withholdings based on 25% of your estimated net income. Most people prefer this method because 25% of your monthly rental income can greatly affect your cash flow. You must have a third party, such as Trowbridge, registered with the CRA as a tax withholding agent. Then, once the NR6 form is approved and you make a tax payment, for the rest of the year you don’t have to worry: we prepare an NR4 slip. The CRA has a strict tax filing deadline of June 30th of the following year, and not meeting it results in a hefty penalty of 25% of the gross rental income.
What kind of rental expenses are deductible?
Almost everything related to your rental property is deductible. For example, repairs and maintenance, property taxes, leasing fees, accounting fees, mortgage interest (which is usually the largest expense), and property management fees. The only rental expense, depending on the number of properties you have, is travel and vehicle expenses.
Let’s talk about selling a property in BC as a non-resident. Can you tell us about the 25% non-resident withholding tax on the sale of a property in Canada?
- Certificate of Compliance applications must be submitted to the Canada Revenue Agency (CRA) within 10 days of final closing.
- Failing to submit the applications in a timely fashion may result in penalties of up to $2,500 per non-resident taxpayer.
- The processing timeframe is normally 12-16 weeks.
- Your real estate lawyer is required to hold, in trust, 25% of the gross sales proceeds until such time that final certificates are issued by the CRA. 50% of gross proceeds may be withheld due to the property being a rental.
- The CRA will request a payment of 25% of your net capital gain; this amount will be paid from the funds held by your lawyer. Upon receipt of payment, the CRA will issue the final certificates.
- The following year, you’re required to submit a Non-Resident Canadian Tax Return to report the sale and selling-related expenses.
- The tax paid to the CRA while processing your Certificate of Compliance applications will be reported as a “tax installment” and you will be refunded any overpayment of tax once the tax filing is assessed by the CRA.