Vancouver Condo Bubble Takes New Hit: Murky Condo Flippers Targeted in Pre-Sale Tax Hunt

The changes pose real threats to the highly speculative pre-sale condo market.

By Steve Saretsky, Vancouver, Canada, Vancity Condo Guide:

Starting September 17th, the BC Government will move forward with a new property transfer tax that will require people to report additional information, including their name, citizenship, and social insurance number, if they purchase through a corporation or trust. They will also mandate property developers to collect a database of pre-sale buyers and remit those to the BC Government. The efforts are aimed at curbing tax evasion and reigning in money laundering which are believed to have contributed to runaway house prices in the province.

The changes pose real threats to the highly speculative pre-sale condo market.

In recent years, pre-sale buyers have made out like bandits, securing pre-sale contracts with no proof of funds, financing, and in many cases no intention of closing upon completion — ultimately flipping the contract to another buyer for windfall profits, with most of the gains earned on the leverage of price inflation.

These profits are largely tax-free as flippers choose not to self-report capital gains to Canada Revenue Agency (CRA, equivalent of the IRS in the US). Because there is no title registration through BC land titles, the best CRA can do is take the developer to court in order to obtain the list of pre-sale buyers who have flipped their contract.

And that’s exactly what CRA has done — most recently targeting the developers behind Vancouver’s Trump Tower, the sprawling Wall Centre Central Park project near the Vancouver-Burnaby border, and Amacon’s Tempo project in Richmond.

With the job of CRA auditors set to get much easier come September 17th, it leaves us with the potential impacts on the pre-sale market.

The sudden chill in the Vancouver condo market has also leaked into the pre-sale space. According to MLA Advisory, which works closely with pre-sale condo developments, the absorption rate for new condo sales in Greater Vancouver and the Fraser Valley’s housing market has plunged from 94% in January to 49% in June.

“Overall, the market has experienced a downward trend for pre-sale absorptions, indicating a shift from the hyperactive levels experienced over the past two years to more normalized market conditions,” MLA said. “Historically, normalized pre-sale activity is viewed as projects experiencing 50% to 65% sales absorptions within the first 6 to 9 months and sell-out periods of 12 to 24 months depending on the size and complexity of the project.”

While the trend is certainly unwelcoming news for condo developers, the current absorption rate is nothing to panic about, not yet at least. What could trigger a cold sweat are current market trends continuing at a time when housing starts sit at record highs.

New developments are also competing with a slowing re-sale market which is witnessing prices cool and inventory surge 45% in June. This has triggered a growing chorus of bonuses to brokers and decorating allowances to prospective buyers.

To think it was just 12 months ago when buyers were camping out-front sales centers! The deteriorating sales data, however, came prior to the upcoming tax reporting changes implemented by the BC government, suggesting things may get even slower.

The move by the BC government to crack down on tax evasion by requiring developers to collect and report information on pre-sale condo assignments to ensure buyers are paying the appropriate taxes may, according to real estate consultant and architect Michael Geller, “take investors out of the market, especially those whose primary motivation was to flip the agreement before they closed.” The result may be that projects will be “put on the back burner because they can’t achieve their pre-sale targets demanded by the bank.” By Steve Saretsky, Vancity Condo Guide

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