Do falling house prices ultimately affect local and provincial revenues?
While governments in Canada are focused on halting house price growth to promote affordability, the unintended consequences of steeper-than-planned falls also merit consideration. ] Municipal and provincial revenues are tied to property taxes and as house prices fall, tax revenues in real estate also fall. However, the costs for delivering municipal services continue to rise, often with a higher percentage than the inflation rate.
Such divergence in costs and revenues at local government level creates a financing gap that is often curtailed by higher levels of government. However, a steep and sustained decline in house prices will also affect the income of higher authorities, which means they have fewer opportunities to adequately support local authorities.
Howard Chernick and co-authors presented a paper to the Stedelijk Institute in 2017 where they investigated the negative impact of declining housing values on the revenues of local authorities
Their analysis of 91 cities in the United States revealed that since the Great Recession, marked by a collapse in housing markets, the inflation correction per capita income and expenditures remain (d) below their pre-recession levels "in many of those cities.
And even when local tax revenues increased , cuts in federal funding to local governments reduce the budgetary challenges at municipal level
] In the latest tightening of regulations for the housing market in Canada, the BC government has even proposed higher transfer tax rates on foreign home buyers and new annual taxes on homeowners who are not residents of British Columbia.  These extra allowances have been announced within a few weeks of tightening up the mortgage rules that oblige federally regulated lenders to all borrowers for a stress test that, among other things, qualifies for a mortgage rate that is considerably higher than the contracted rate.
The cumulative effect of stricter mortgage regulation and speculation taxes was a softening of the housing market in Vancouver and Toronto where prices and sales took place. significantly decreased.
Have the falling housing values had an impact on the municipal income in Vancouver? Not yet.
The reason for the resilience of municipal income is the delay between the estimated values of real estate and market values. Often, the assessed values are lagging behind the market value by a few years. Even when the market value falls, the estimated housing values can continue to rise.
Consider Vancouver, where house prices fell in 2017 compared to house prices in 2016. However, the estimated value of real estate property rose by 32 percent in 2017, resulting in a moderate increase in real estate income. withholding tax
When the real estate values continue to fall, the estimated values eventually reach their balance and the income from the property tax decreases. A countermeasure may be an increase in the withholding tax rate or a larger transfer of funds from higher levels of the government.
Announcing the new restrictions on housing markets earlier, Carole James, the B.C. Minister of Finance, explained that their goal was to influence a decline in house prices. How strong this deterioration will be is an important question, especially when the tightening of regulations could force many borrowers under water where their mortgage loans would be greater than the housing values.
The minister acknowledged that the Ministry of Finance had not modeled the scale and scope of the effects of the new regulations. "We are taking some very daring steps … There are firsts here," said the minister.
Falling house prices affect other sources of income. Firstly, the fall in tax revenues on land transfers, which is based on selling prices and not on assessed values. Next is the decrease in sales tax due to depletion of equity. And finally, a continued decline in the value of real estate contributes to lower estimated values, which results in a decrease of the income from the property tax.
The government balancing act is to determine whether the additional revenues from new speculation taxes, which can be substantial, will be large enough to offset the eventual decline in property tax revenues due to a continued decline in house prices. to go.
But the real reservation applies to the unintended consequences when the housing markets experience a steeper decline than had been anticipated. The experiences in Toronto and Vancouver suggest that the uncertainty associated with a change in regulation may even scare those who have not been affected by the new regulations.
Municipal authorities therefore have to build reserves while house prices are rising. Why? Because if there are indeed bubbles in the houses, they are followed by busts.
Saving for bad times is just as important as spending in good times for smart local authorities.