After a huge run-up in prices, Vancouver’s average property prices fell 3.7 percent in the latter half of 2016.

While each market is unique, offshore investors and the banks that lend to them can draw some lessons from Vancouver’s experiment.

Following concerns about the lack of affordability in the metro Vancouver property market, the provincial government has imposed a 15 percent tax on foreign buyers.

The Vancouver real estate market has long been a darling of wealthy foreign investors — particularly those from Greater China — and has been among the most unaffordable in the world.

In 2016 UBS put Vancouver at the top of its Global Real Estate Bubble Index, above London, Hong Kong, and Sydney.

As a result of the recent property tax, prices in metro Vancouver have declined roughly 3.7 percent from mid-2016 and volume was down 40 percent overall compared to the same period in 2015, according to the Canadian Real Estate Association.

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In contrast, other Canadian property markets such as Toronto and the nearby city of Victoria, which previously had tracked closely with the Vancouver market but were not covered by the tax, saw no change.

With other governments eyeing similar drastic measures to cool their own overheated property markets, what lessons can be learned?

Scope makes a difference

Other cities have tried to curb price inflation by imposing large taxes but have failed to move prices in the same way.

For example, Hong Kong imposed a 15 percent stamp duty on non-first home buyer residents in the secondary market, but that simply moved demand into the primary (new-build) market, where prices have soared.

Meanwhile volumes in the secondary market have only declined. In contrast the tax imposed by the government of British Columbia encompassed any and all residential property sales, and so affected prices across the board.

The Vancouver tax also affected a large proportion of the market, initially including all foreign nationals except permanent residents.

This was unusually extensive in scope and affected even those foreigners living and working legally in British Columbia, such as those on TN visas or other temporary work permits.

As a means of comparison, in Australia this would have affected the large 457 visa population and other longer-term visas. Statistics from the British Columbia government showed that foreign buyers accounted for 13.2 percent of purchasers before the tax, and this fell to 1.3 percent post-tax.

The tax has since been narrowed to exclude those foreign nationals in BC with valid work permits and who pay tax in the province.

Similar restrictions introduced or increased in the Australian states of Queensland, New South Wales, and Victoria that apply just to offshore investors, not resident foreigners, are therefore not likely to have the same impact as their scope is much smaller.

However, a change to the negative gearing laws in Australia reducing the use of this tax benefit would affect roughly 60 percent of investment properties, which themselves account for around 35 percent of outstanding Australian residential mortgages.

Something that affects the investment calculations of over 20 percent of buyers would definitely lower prices.

Only when governments or regulators are motivated enough to enact such large and sweeping changes to tax and affordability for a large proportion of buyers – likely over 10 percent of the market – will the investment calculus be sufficiently altered so as to truly affect property prices.

And that doesn’t seem to be the case in most of Asia, Australia, or New Zealand.