How Real Estate in Vancouver May Affect the Cost of Your Home in the U.S

Home values in a specific market are affected by a variety of factors, including the general condition and age of the properties, local demand, the state of the area's economy, outside interest and national confidence in the economy. But have you considered whether your city could put policies in place to influence home values?

That's what's happening in Vancouver, British Columbia.

As a well-positioned hub for international business, Vancouver attracts foreign buyers -- largely from China -- who are interested in homes and properties throughout the city. But in the last year in particular, home values skyrocketed and quickly began pricing out local Canadians looking to buy. In June, the MLS Home Price Index by the Real Estate Board of Greater Vancouver reported a composite benchmark home price at $917,800 for the city, a 32.1 percent increase from June 2015.

In an attempt to curb foreign investment and keep domestic homeownership viable, a new property tax went into effect in July that tacks on an additional 15 percent for foreign buyers.

"Vancouver is trying to make the real estate market a level playing field so middle class people aren't priced out of the market. And so that 15 percent tax would potentially reduce property values," says Seth Kaplowitz, a lecturer at the College of Business Administration at San Diego State University.

Vancouver officials aim to deter some foreign investment with this significant property tax increase. And in the luxury market, the money adds up pretty quickly. "If you are going to buy a $1 million property -- in Vancouver that's pretty normal -- now you have to shell out $150,000 of cash," says Rohit Gupta, CEO of Genworth Mortgage Insurance. "That has already started slowing down that [higher-priced] part of the market."

The Real Estate Board of Greater Vancouver reported earlier this month that the number of home sales in September decreased by 32.6 percent compared to September 2015. The month's sales were also 9.6 percent below the 10-year monthly sales average.

Vancouver's experiment is being closely watched by other markets, and if it achieves its desired effect of keeping homes affordable for the middle classes, it's possible we'll see similar policies in other cities. Home values across the U.S. have the potential to be changed by Vancouver's approach and future policies like it, for better or worse.

[Read: How to Think Like a Luxury Real Estate Agent When Selling Your Home.]

What's Next for Vancouver?

It's only been a couple months since Vancouver's international homebuyer tax went into effect, but reactions have been swift.

"The market was impacted almost immediately by the tax that was initiated," says Ed Mermelstein, an international real estate attorney based in New York.

He notes the Big Apple has already been a beneficiary of foreign investment from individuals deterred by Vancouver's new tax, along with similar events making other global cities less desirable, including the Brexit vote for London's real estate.

But Kaplowitz notes the tax may simply drive foreign buyers to another part of the Vancouver real estate market.

"Foreign nationals might adjust where they buy or what they buy. If they're in Vancouver, they might start looking at the lower end of the market, where a 15 percent tax on top of their purchase would have less of an impact," Kaplowitz says.

If this were the case, more moderately priced homes could see more demand, and values would increase anyway, pricing out domestic buyers at a different level, he says.

At this point, it's a matter of waiting to see which direction Vancouver's home values go. And if the hefty tax proves detrimental for the city's real estate, Gupta notes it doesn't spell doom for the market because it's always possible to lower the tax, if necessary. "In politics, typically overshooting is not bad -- but if you undershoot, you might not get another chance," he says.

[See: The 20 Most Desirable Places to Live in the U.S.]

What's Next for International Investors?

With the Vancouver market cooling in the short term, it's safe to say at least some international investors are looking for other places to put their capital. "They may go to other cities and put their money [where there isn't] this additional tax," Kaplowitz says.

In particular, other Canadian markets like Toronto and Montreal, and major U.S. cities could become even more attractive.

"Many investors that were previously considering those markets [are] all of a sudden looking at an extremely strong market like New York or San Francisco that doesn't have those boundaries -- whether they're political or financial," Mermelstein says.

While the tax will likely have an ongoing impact, other factors could also change the demand from international buyers. China's economic woes from stock market crashes in the summer of 2015 led to domestic restrictions on transferring more than $50,000 cash out of the country annually. This shows how the ebb and flow of currency values, national economies and market demand around the world will continue to alter the focus for international buyers moving forward.

[Read: Does Your Home Appeal to Overseas Buyers?]

Will Other Markets Adopt a Tax?

It's hard to say whether the property tax will have the positive, long-lasting effects that Vancouver city officials desire. But many cities are paying close attention to learn from the experiment and either repeat it for positive results or attempt to improve upon it.

If the tax actually lowers home prices, or at least slows the growth of prices to allow for more middle class buyers to enter the market, Gupta predicts Toronto will create a similar policy to try and slow its surging single-family home prices, which were 21.5 percent higher in September than the same month last year, according to the Toronto Real Estate Board. Success could inspire U.S. markets such as New York and San Francisco that struggle to remain affordable for middle class residents to adopt a similar tax.

"If it works in those cities, at what point do you get there in San Francisco and New York? I would think that it's a matter of time," Gupta says.

But Mermelstein believes the chances of U.S. markets are slim, even for the most competitive markets such as New York and San Francisco because domestic buyers remain in the game. "There really doesn't exist a market in the United States that is to the extent of Vancouver or London dominated by foreign investment," he says.