Is the Upcoming Foreign Buyer Ban the Right Move?

Starting in January 2023, the Canadian government will prohibit foreign nationals from purchasing homes. However, exemptions will be available for temporary and permanent residents, including international students and temporary workers.

The ban is part of the Budget Implementation Act, 2022, an act that was designed to take some of the demand of a housing market that remains hot despite the recent rise in interest rates. According to Finance Minister Chrystia Freeland, this ban is required to keep home values in Canada to stop spiraling. If prices keep rising, young adults in Canada and members of the working class will have an even more difficult time finding an affordable home to purchase. Freeland noted, “We will make sure that houses are being used as homes for Canadian families rather than as a speculative financial asset class.”

Additional home construction also implemented to cool housing prices

The Canadian government is also suggesting measures to double new home construction in collaboration with territorial and provincial governments, city governments, and not-for-profit and private sectors. The purpose of this investment is similar to the purpose of the foreign purchase ban – to reduce the number of barriers that Canadians face when entering the home ownership market.

The ban is supposed to last two years; the hope is that the increase in new construction will also work to bring down the prices in homes, so that the ban on foreign purchases can lapse at that time. However, the ban may not need to last that long, as economic analysts have already started to predict a downturn in the residential real estate market across Canada.

Aren’t home prices already dropping?

Economist Claire Fan released an RBC Economics report titled Canada’s Housing Markets Keep On Cooling, which included the conclusion that Calgary, Ottawa, Montreal, Vancouver and Toronto all saw drops in home sales during June – due to the higher interest rates from the Bank of Canada.

For example, in Vancouver, home sales declined by 35 percent year-over-year in June, and the number in Toronto was 41 percent. Sellers have continued to show a desire to get rid of their properties, but buyers are waiting to see what happens with interest rates and home prices. In Toronto, the benchmark house price index was 18 percent higher in June, year-over-year, but it was also down three percent from May, including seasonal adjustments. The likelihood of continued hikes in interest rates will only make housing less affordable – which will keep more buyers out of the market and ultimately push prices down. According to Desjardins, a Canadian financial services cooperative, Canadian home prices between February 2022 and December 2023 should drop by 15 percent.

Did you know that the ban was coming?

The ban on foreign purchases of Canadian residential real estate was passed on June 23, 2022, but even many people in the real estate profession remained unaware of the law after its passage. According to Elton Ash, the executive vice president of Re/Max Canada, “I brought [the ban] up at our internal…regional development group…and they all looked at me like, ‘What are you talking about?’”

What impact will the ban actually have?

Ash compares the likely effect of the foreign investment ban to a tax that was implemented on similar transactions in 2016, followed by a tax on speculation and vacancy two years later. Both of those were restricted to British Columbia, but neither had significant impact on the market, as foreign owners simply ate the added expenses, and foreign ownership still continued to climb. He noted that foreign investors owned about three percent of the residential real estate market in Vancouver.

Ash also notes, “I think there’s a bigger issue with the reputation of Canada accepting immigrants, accepting people coming into this country and especially when a lot of our immigration policy is tied to wealth. The wealthier an immigrant is, the easier it is to get into the country…part of that is buying a home. Now the way that the act has been passed, it’s a prohibition. This isn’t a tax. It’s a prohibition on buying property in Canada.”

In the long run, Ash sees the impact of the ban more for its potential sullying of Canada’s reputation for welcoming people from other countries than its possible impact on reducing the prices of homes in the country.

Phil Soper, the CEO and president of Royal LePage, points to an ongoing tradition in politics in Canada associated with pointing the finger at foreign investors as causing a problem for Canadians who want to afford homes. Soper cites studies that have found the number of housing transactions with foreign purchasers who had no intention of moving to Canada was so small that it has never impacted affordability.

Soper points out, “But it’s an easy target. It’s easy to point to foreigners and say they’re the challenge and then put in place legislation, whether it’s taxes or a more draconian outright ban and say that’s the problem and we’re taking action. It’s much harder to address the real problem, which is a grave shortage of housing in this country, and get municipalities working with provinces working with the federal government to fix that problem.”

Limits on the law’s effectiveness

The law would only last two years unless the Canadian government renews it. The temporary nature of the law will likely provide protection from challenges on the basis of free trade agreements. Also, the ban does not exclude recreational property, but property that is zoned as residential. Given that Canadians make up one of the largest buyer groups of recreational property in the United States and also invest heavily in Latin America and other places, that sort of ban could have led to reciprocal bans from other countries.

The solution is supply

For housing prices to drop, another solution has to do with adding to the number of available units for purchase. Obviously, the issue of supply is not something that the government can fix overnight. Starting initiatives that lead to more housing construction can make a difference, but acquiring and developing properties is a process that takes months, if not over a year, and that is not a measure that will influence prices today.

The increase in interest rates represents a potential problem that could lead beyond the housing market, threatening a recession. The Bank of Canada is expected to raise interest rates for a fifth (and possibly final) time this week in its efforts to keep inflation from continuing to grow. Tiff Macklem, the governor of the Bank of Canada, has set two percent inflation as the target range, and he has said that he will continue increasing interest rates to get there, even if that means that housing prices continue to fall or if the nation’s economy develops a recession risk. There is a point, of course, where rising interest rates will lead to chaos in the global financial systems.

We just saw this happen a few weeks ago, when the Bank of England suddenly lost interest in fighting inflation when the pension system and the bond market in the United Kingdom faced imminent collapse, thanks to the economic policies of then-Prime Minister Liz Truss, who later had to resign after just 44 days in office.

What do real estate investors need to know?

The priority of the Bank of Canada (and its counterparts elsewhere, such as the United States Federal Reserve and the Bank of England) ultimately centers around avoiding the sort of crisis that most recently scuttled the global financial system in 2007 and 2008. At present, there are some unusual factors associated with the current trend of inflation, such as the record profits that so many corporations are recording despite their claims of increased costs – and the need to pass those costs on to the consumer. In terms of real estate investing and the short term, the ban on foreign purchasers does not seem likely to have a significant impact on housing values. As a policy decision, it seems more like a ploy against foreign ownership for the purpose of creating a sense of isolationism for the electorate than anything else, the sort of political gesture that gets the patriotic crowd excited.

For those outside Canada thinking about investing in real estate, the fact that the ban does not cover recreational property means that it is still possible to turn a profit, but instead of condos in Toronto or Vancouver, finding recreational properties in other parts of the country becomes an inviting target. Thanks to such services as Airbnb and VRBO, investors can turn recreational properties into lucrative revenue streams after they find a management company that they can trust.

For those considering investment in Canadian real estate – but not planning to dwell in the property – there are still avenues. However, given the rise in interest rates, it might be wise to see how coming increases in rates affect pricing.

If you are looking to invest, get in touch with Amansad Direct Lending Group. We have worked with many individuals and corporations in the real estate private lending sector and compliment their existing portfolios; while also assisting those that are unable to meet the traditional lending requirements.

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