B.C. real estate reform: What you need to know

Posted by Steve Harmer on Thursday, February 9th, 2017 at 10:50am.

Real Estate in British ColumbiaYou will have heard about the changes to British Columbia real estate laws

The British Columbia government is in the midst of a wide-ranging overhaul of how the housing market is regulated and taxed, amid growing concerns that foreign ownership, rampant speculation and unscrupulous real estate agents are fueling an affordability crisis.

On Aug. 2 2016, a 15-per-cent tax took effect for home purchases in the Metro Vancouver area involving foreigners. During the past several months, the province has also announced an end to self-regulation, largely in response to a series of Globe and Mail investigations into questionable practices within the industry. This has included a tax on vacant homes in the City of Vancouver.

These are in addition to what the federal government is doing, including closing a loophole that some foreign buyers have used to avoid paying capital-gains tax, as well as requiring lenders to stress-test mortgages

Here’s what you need to know about the recent changes to the B.C. real estate industry, and the controversies that preceded them:

Foreign buyers and vacant homes

The debate about the Vancouver region’s seemingly out-of-control housing market has focused in large part on the theory that wealthy foreign buyers have been driving up prices and then leaving homes and condos empty. Earlier this year, the B.C. government promised to begin tracking the nationality of buyers for all residential purchases in the province. The collection only began at the beginning of June, but as data showed that one in 10 sales in the Vancouver region went to foreign buyers, the province announced a 15 per cent tax on foreign buyers.

BC housing data

The tax, which took effect on Aug. 2, applies to buyers who aren’t Canadian citizens or permanent residents; foreign-registered corporations; and Canadian corporations controlled in whole or in part by foreign nationals or foreign corporations. The tax adds $300,000 to the purchase of a $2-million home. A Chinese citizen who has been living in Vancouver as a student filed a proposed class-action lawsuit, arguing the tax is discriminatory and may even violate a list of international treaties.

Foreign buyers in BCThere are already signs that the tax may be having an impact. The province released data from land title transactions covering about seven weeks before the tax took effect, as well a month after the tax was in place.

In the Vancouver region, foreigners – people who aren’t Canadian citizens of permanent residents – accounted for 13.2 per cent of transactions from June 10 to Aug. 1. Those transactions amounted to more than $2-billion. But the proportion of transactions plummeted after the tax was in place, with just 60 sales to foreigners from Aug. 2 to Aug. 31.

Similar drops were seen in individual cities. In Richmond, foreigners made up about 25 per cent of purchases in the weeks before the tax and just 1.9 per cent in August. In Victoria, where the tax does not apply, there was very little change, with foreigners accounting for just under four per cent of sales before and after the tax.

The final business day before the tax, July 29, saw foreigners flood the land title office with $851-million worth of transactions – accounting for more than half of all titles registered in the Vancouver region that day.

BC foreign property investment

The tax’s introduction prompted immediate speculation from within the industry that the new policy had tanked the market. August and September sales data has since released by the Real Estate Board of Greater Vancouver, with both showing the pace of sales had fallen significantly. In September, for example, there were 32.6 per cent fewer homes sold than in the same month in 2015.

However, sales volume had already been dropping steadily for months even before the new tax took effect.

Vancouver home sales

The government is also clearing the way for the City of Vancouver to impose a tax on vacant homes. Vancouver Mayor Gregor Robertson proposed such a tax and warned that the city would act alone if the province didn’t help, after a study commissioned by the city found about 10,800 empty homes in the city, mostly condos, as of 2014.

Vancouver Vacancy Rates

 

The tax is expected to take effect in 2017, though many of the details still must be worked out. While the city is still figuring out the tax rate, the current proposal would see a tax rate as high as two per cent and would rely on owners to declare whether homes are vacant. However, Mr. Robertson has suggested the rate may need to be even higher, with penalties more severe than the $10,000 currently allowed under provincial law. The provincial government has also said it will consider requests from other cities to implement similar taxes, though mayors in the greater Vancouver region have disagreed on the best way to target empty homes

The end of self-regulation

Real Estate Council of BCThe Real Estate Council of B.C. – a self-regulating body that is largely controlled by realtors – has had full control over licensing, regulation and discipline since 2005. The premier says the council had more than enough time to show it was capable of controlling the industry – and it failed.

The province has now appointed a dedicated superintendent of real estate, who will take over all regulation and rule-making duties from the council. Micheal Noseworthy, a former real estate lawyer and, most recently, a high-level bureaucrat in the Yukon government, is now in charge of regulating the province’s 22,000 real real estate agents. But the council isn’t being eliminated. Instead, it will be restructured to ensure the majority of members come from outside the real estate industry. Currently, just three of 17 members are from outside the real estate sector.

The province will also adopt the stricter rules recommended by the panel. Those include dramatically higher fines of $250,000 for agents, up from just $10,000 today, and $500,000 for brokerages. Real estate agents who engage in misconduct will have to return commissions to victims. And the government will also put an end to dual agency, also known as “double ending,” in which a single real estate agent represents both the buyer and the seller.

What was in the report?

After roughly four months of work, the panel released a 64-page report with 28 recommendations that would have reshaped how the real estate industry is regulated. Those recommendations will now be used as the province constructs a new system of government regulation. But the future envisioned by the report would have maintained the overall regime of self-regulation, with the Real Estate Council of B.C. continuing to be in charge of issuing licenses, setting the rules, and investigating complaints.Real Estate report

While the panel was highly critical of the council, noting the public perception was that the body has been “unable or unwilling to take strong action” to rein in the industry, it said it would be up to the government to decide whether it needed to be changed. The report also took aim at private local real estate boards and recommended they no longer be able to investigate complaints involving harm to members of the public. Instead, the panel said consumers should have a single regulator to turn to when they are abused by agents. The provincial government’s announcement on Wednesday did not specifically.address this issue.

Other recommendations from the panel included:

  • The council should create confidential reporting tools to encourage the public and whistle blowers from within the industry to come forward with complaints
  • Real estate agents should not be permitted to keep the proceeds from unscrupulous deals, which should instead be returned to victims
  • All offers on a listed property should be filed with the agent’s managing broker and retained to allow the real estate council to review them
  • Real estate agents should not be permitted to acquire an interest in their own listings
  • Managing brokers and agents will be explicitly required to report misconduct to the council
  • Consumers should be given more information about the obligations owed to them by their real estate agent
  • Real estate agents should be subject to a new code of ethics and professional conduct

Self regulation

Canada real estate explainedLike in other provinces, British Columbia’s real estate industry has been largely left to regulate itself through the Real Estate Council of B.C., which was given full control over real estate agents in 2005. A provincial government agency, the Financial Institutions Commission of B.C., or FICOM, has overseen the council, but it has been the council that largely set the rules, issued licenses, handled investigations and, when an agent was found to have broken the rules, determined punishment.

The current 17-member council is largely made up of real estate agents, brokers and strata managers, though there are also three government-appointed members there to represent the public.

The Globe and Mail reviewed a year’s worth of disciplinary decisions from the council and found most real estate agents who are found to have acted improperly received only written sanctions or small fines of a few thousand dollars, which are dwarfed by the commissions they stand to receive in a market where the average house fetches well over a million dollars.

The council shouldn’t be confused with the B.C. Real Estate Association or the province’s 11 local real estate boards, which also have their own rules governing conducts of realtors – a trademarked term only members can use. The boards have their own processes to enforce those rules, including fines and suspensions, but their real power comes from their ability to control access to the MLS service that the vast majority of homes are sold on. Unlike the real estate council, the board’s disciplinary decisions are kept secret.

It’s not quite clear what will happen to the boards’ ability to discipline their own members in light of the government overhaul of the system.

Elsewhere in the country, it’s a mix of self-regulation and government oversight. Here’s how the industry is regulated across Canada:

  • B.C.: The legislature passed law in July ending self-regulation
  • Alberta: Self-regulated, Real Estate Council of Alberta
  • Saskatchewan: Self-regulated, Saskatchewan Real Estate Commission
  • Manitoba: Government-regulated, Manitoba Securities Commission; the Manitoba Real Estate Association oversees education and testing
  • Ontario: Self-regulated, Real Estate Council of Ontario
  • Quebec: Self-regulated, Organisme du courtage immobilier du Québec (OACIQ)
  • New Brunswick: Described as “co-regulation,” the industry is jointly overseen by the Financial Consumer Services Commission (a government agency) and the New Brunswick Real Estate Association
  • Nova Scotia: Self-regulation, Nova Scotia Real Estate Commission
  • P.E.I.: Government-regulated, Department of Justice and Public Safety; the Prince Edward Island Real Estate Association oversees training and testing
  • Newfoundland and Labrador: Government-regulated, Financial Services Regulation Division; the Newfoundland and Labrador Association of Realtors oversees training
  • Northwest Territories: Government-regulated, Department of Municipal and Community Affairs
  • Yukon: Government-regulated, Department of Community Services
  • Nunavut: Government-regulated, consumer affairs branch of the Department of Community and Government Services

BC shadow flipping explained

 Shadow flipping

Skyrocketing prices in the Vancouver region, particularly in the City of Vancouver itself, have prompted unprecedented scrutiny of the real estate industry and the practices of some agents – all of which have fuelled calls, including from B.C.’s premier, for tougher regulation.

In February, The Globe and Mail published an investigation into a practice known has “shadow flipping.” Technically a form of contract assignment, shadow flipping involves a buyer turning around and flipping a property after signing a purchase contract but before the deal closes, in some cases multiple times. The middlemen, sometimes including real estate agents, split the markup, while the original seller doesn’t see any of that profit. Since the province’s property-transfer tax is paid when the sale is registered at the end of the process, only the final buyer pays the tax.

The council responded by appointing the independent advisory panel. B.C. Premier Christy Clark said if the council did not act, the government would step in.

But Ms. Clark did not wait for the panel’s report. In March 2016, the premier announced new rules to clamp down on shadow-flipping deals involving real estate agents, requiring sellers to be informed and requiring that any profits from contract assignments go back to sellers.

The real estate boards immediately objected to the announcement.

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