Tax on foreigners leaves Vancouver real estate exposed, analysts say

With a new tax on foreign homebuyers in Vancouver expected to slow purchase activity, there is a greater risk the city's lofty real estate prices would be vulnerable to a potential jump in local unemployment, Fitch Ratings said on Monday.

The new tax will likely be effective in tamping down buyer activity, Fitch analysts wrote, but with signs that the market may have begun to cool even before the tax, that leaves Vancouver home prices more exposed to potential changes in Canada's economy.

"We feel that foreign investors have been propping up real estate in Vancouver, creating more demand, which is raising prices," said Susan Hosterman, director of U.S. structured finance at Fitch Ratings.

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"With them potentially out of the picture, Vancouver is more susceptible to Canadian supply and demand behavior, which is mainly driven by employment."

While Vancouver's job growth has been strong, Hosterman said it was a question of how long itwill last given lackluster job creation in other parts of the country.

Real estate drop could fuel unemployment

Simon Fraser University professor Andrey Pavlov says the real issue isn't that higher local unemployment might make the local market unsustainable absent foreign buyers it's that without foreign buyers, the region's already low unemployment rate won't be enough to support the market.

"We're hooped even if there's no change in employment," he said. "Clearly our prices have nothing to do with local economic fundamentals. They're driven by intergenerational transfers and foreigners and migration within Canada."

"I wouldn't worry about unemployment. If we're going to have to worry about local economic activity to support these prices, we're in trouble anyway."

Pavlov says the Canadian economy as a whole is more dependent than even the U.S. economy was prior to the financial crisis. That means if real estate prices tank, it could take many jobs with it.

For that reason, University of British Columbia professor Tsur Sommerville says if the region were to experience a sudden spike in unemployment, the most likely culprit would be the real estate sector.

"It's not just that there's less buyers in the real estate market: you've got all these people whose jobs are dependent on the over-exaggerated real estate market. They're taking a hit, too," he said.

"Whether they be Realtorsor people in construction or stores that sell granite countertops or Maserati dealerships, they're going to see an effect from it."

With files from Liam Britten