Canada’s rules against foreign homebuyers haven’t done much for affordability, but may be doing damage to our image as a good place to invest.
Over the past year, as pandemic restrictions were lifted and people began to travel again, many of the world’s hottest real estate markets reported a surging new wave of interest from foreign buyers.
Digital nomads seeking to escape the daily commute, investors looking for income properties and wealthy people who wanted second homes jumped into markets from London to Portugal to California. In the US, the National Association of Realtors reported an 8.5% jump in foreign-buyer spending on homes, breaking a three-year run of declines.
But nothing of the sort happened in Canada, despite decades of popularity among the international real estate crowd. And the reason for that is clear: Over the past six years, one government after another has enacted increasingly strict rules designed to limit the flow of money from foreign nationals into the housing market. It was a response to years of relentlessly rising house prices that were pricing out the younger generation of Canadians from homes in their own communities.
British Columbia was first out of the gate in 2016, with the provincial government announcing a 15% surtax for non-residents of Canada, which got bumped up to 20% a year later. The law also allowed Vancouver to impose a vacant property tax to encourage more of the city’s housing stock to appear on the rental market.
Ontario followed in 2017, introducing a “non-resident speculation tax” of 15% of the purchase price for the Greater Golden Horseshoe Area around Toronto. This year, in the wake of a massive run-up in house prices during the pandemic, Ontario’s government bumped up the tax twice -- first to 20%, and just recently to 25% -- and expanded it to include the entire province.
But all that pales in comparison to the federal two-year-long ban on foreign buyers, which the federal Liberals announced in their spring budget and is set to take effect nationwide on January 1, 2023. At least for the next few years, Canada will have one of the strictest regimes prohibiting foreigners from house purchases to be found anywhere in the developed world.
And that has some industry insiders worried. They’re concerned Canada may be developing a reputation for being hostile to foreign investment -- and all in the name of policies that don’t seem to have improved housing affordability. What’s more, with Canada seemingly headed into a housing-market correction, a foreign-buyer ban could be a drag on the eventual recovery.
It’s not so much the foreign buyer ban itself, “it’s more the message we’re sending out to the international community. How long will that message last, versus how long will that tax remain?” asks Andy Taylor, a broker with Sotheby’s International Realty Canada in Toronto.
While he expects the federal foreign buyer ban will have little direct impact on the market, Taylor worries about the reputation Canada is developing abroad, as one restriction on foreign buyers after another makes the international news.
“We’re creating an environment where the world is looking at us in not a good light, in terms of a place to bring investment and bring capital,” Taylor says.
Taylor is concerned that many foreign buyers around the world may be misinformed about the extent of Canada’s restrictions. The federal ban is targeted narrowly, covering only a small portion of the people in Canada who might consider themselves “foreigners.” Those with permanent resident status and temporary residents, such as students and people on work visas, are exempt. That accounts for the vast majority of demand for housing from non-Canadians.
But Taylor says his real estate partners around the world are now under the impression that “Canada is completely against foreign investment.”
That could put the country at a competitive disadvantage, at a time when many other jurisdictions are actively seeking new investors and migrants from abroad.
Amid the pandemic, many countries -- especially those dependent on tourism -- saw an opportunity to take advantage of the growing work-from-home phenomenon. They stepped up efforts to attract migrants, especially those with money, says Kate Everett-Allen, head of international research at real estate consultancy Knight Frank.
“They’re trying to attract the tech types, freelancers who don’t have to go into an office and can hop from one place to another,” she says.
Governments from Iceland to Portugal and Bali introduced or expanded programs that allow foreigners to set up shop, provided they have an independent income. These programs are expanding like wildfire today; a new country is added to the list of digital nomad visas every few weeks.
But a handful of countries, like Canada, New Zealand and Singapore, have gone in the opposite direction. These places have something in common: They have seen massive increases in house prices, and they have small populations compared to their neighbours. In fact, it was tiny and wealthy Singapore that first began the trend towards taxing foreign buyers a decade ago, Everett-Allen says.
“It’s indicative of what we’ve seen over the past five years or so, with policymakers opting to regulate the housing market more in order to … improve affordability, particularly for first time buyers and the lower end of the market,” she says.
But in Canada there has been little evidence that these rules have improved affordability. In fact, affordability eroded to its worst level in three decades this year, on the back of rising mortgage rates. Other factors -- like an apparent shortage of new housing, and people moving further away from the city amid the pandemic -- seem to have far more influence on the market these days.
That may simply be because foreign buyers just aren’t a major part of the Canadian market anymore. Kevin Skipworth, managing broker and owner of Dexter Realty in Greater Vancouver, estimates that the share of foreign buyers in his region has dropped from between 6 and 9% of all home purchases prior to the foreign buyer rules, to around 1% today.
The federal foreign buyer ban “won’t affect our market much because we’ve been operating essentially under a ban because of the tax,” he said, referring to British Columbia’s 20% foreign buyer tax, which he says “has not had any impact on affordability.”
Vancouver had once been a hotspot for real estate investment by Chinese nationals. The city’s housing market developed a reputation for being a good place to park wealth, and stories abounded of empty homes jumping from one owner to another.
But since 2015, China’s government has been steadily tightening the country’s capital controls, making it harder and harder for Chinese residents to move money out of the country -- sometimes to ridiculous extremes. That, and the slowdown in travel during the pandemic, had a big impact on foreign buying in BC, Skipworth says.
He believes prices will stay high in Vancouver, which has repeatedly placed at or near the top of world’s least affordable cities lists in recent years.
“Certainly for Canada and major cities, it comes down to lack of supply,” he said. “[There is] a growing population and a demographic shift among buyers. The millennials are coming into a time when they're looking to purchase, the Baby Boomer population for the most part are not giving up homes on their end. There are other things that affect affordability more.”
The real pressure on Vancouver’s housing market is coming from a different group of “foreigners” -- the large numbers of immigrants from abroad and migrants from other parts of Canada who are flocking to the temperate west coast province.
“I don’t see foreign buyers being much of a factor going forward,” Skipworth said. “I don’t see Vancouver becoming more affordable. … It has limited geography and limited supply, so unless there’s a significant increase in supply, it [will be] very hard to satisfy the demand that’s there.”
Taylor says much the same for Toronto, noting that the region’s population continues to grow quickly thanks to immigration. He urges governments to focus on ways to accelerate housing construction, rather than on foreign buyer bans.
“It’d be interesting to ask the government, what are you doing with that money that you’re raising? Are you allocating it right to affordable housing?”