Will a federal ban on foreign real estate sales drive down house prices?

Workers are seen on an elevator at a condo tower under construction in Vancouver, Wednesday, April 15, 2020.DARRYL DYCK/The Globe and Mail

Ottawa’s proposed ban on foreign buyers of residential real estate, included in Thursday’s federal budget plan, comes years after some provinces have already imposed substantial taxes on foreign buyers on the purchase of properties. The federal ban will do little to cool the housing market, BC’s housing minister predicts, and to temper it, some critics are calling for increased regulation of the arena more broadly.

Real estate speculation by wealthy foreign landlords has been blamed for pushing home prices beyond the reach of many Canadians. But as BC’s follow-up indicates, the issue isn’t big enough to really move the markets today.

“Foreign purchases represent less than 2% of the total market,” David Eby told reporters. “For British Columbians, they shouldn’t expect a dramatic impact, given the steps we’ve already taken.

The impact of a ban will be difficult to measure as provincial tax levels change and mortgage rates rise.

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But the British Columbia experience gives some indication of the influence of foreign ownership.

British Columbia sought to tackle its overheated real estate market in 2016, when it imposed a 15% foreign buyer tax on residential real estate transactions in Metro Vancouver. When then-Prime Minister Christy Clark first introduced the Foreign Buyers Tax, house prices had reached record highs and housing affordability was becoming political football. “There is now evidence to suggest that very wealthy foreign buyers have raised the price, the overall price of housing for people in British Columbia,” Ms. Clark said at the time. The reaction to the tax was immediate: sales to foreign buyers plummeted, particularly in some communities in Greater Vancouver.

In July 2016, foreign buyers accounted for almost 30% of real estate transactions in the City of Burnaby and 27% of sales in Richmond. In August, when the tax took effect, foreign buyers made up 1% of Burnaby buyers and 2% of Richmond buyers.

House prices quickly cooled – but then started to rise again. Housing prices have since broken new records. In 2018, the NDP government increased the tax rate for foreign buyers and broadened the scope, saying “foreign demand continues to put pressure on our housing stock.” The province added a speculation and vacancy tax in 2019, which also primarily targets foreign landlords and satellite families.

Jill Atkey, chief executive of the BC Non-Profit Housing Association, said investors are undoubtedly driving up home prices across the country, but foreigners make up a fraction of those homeowners and have ceased to be the force. they were in and around Toronto and Vancouver 5-10 years ago.

Instead of a ban, she said, Ottawa should address the distortion caused by Canadian homeowners buying second, third and fourth properties. Real estate investment trusts (REITs) also corrode accessibility on a larger scale than foreign buyers, she said, and should also be more strictly regulated. REITs are picking up rental properties across the country for the sole purpose of driving up rents and getting a higher return on those investments, she said.

“When we look at places like New Zealand that have banned foreign ownership, they’ve seen the same thing over the last few years: out of control property prices that they’re really struggling to cope with,” said Ms. Atkey, whose organization represents some 800 non-profit housing providers on Canada’s west coast.

She doesn’t expect the ban to have a big impact in Canada, but it will come when rising interest rates begin to cool the market, making it harder to discern the effects.

“We now have a situation where in most urban centers across the country – unless you get some form of intergenerational wealth transfer – you’re not going to make your way into the market: you can’t save enough and fast enough to make your way as a first-time home buyer,” Ms. Atkey said. “And that unearned equity is now being transferred from generation to generation and really exacerbating wealth inequality in this country. that’s the far bigger risk and we don’t see a whole lot of action in this budget to block soaring prices or cool the market at all – that takes a lot more guts.”

Hafiz Rahman, an economics professor at Thompson Rivers University in Kamloops, British Columbia, said Statistics Canada considers foreign buyers to be 5% of the overall market across the country, but banning them could still have an impact. on prices in some major cities.

Research published last year by Dr Rahman and his colleague Jabed Tomal, a statistician who teaches at the same university, found that prices stopped skyrocketing in Chilliwack when the British Columbia government extended its levy on foreign buyers to this suburb of Vancouver in 2018, while Kamloops – a similar market further inland that remained levy-exempt – saw its house prices continue to rise rapidly over the next two years.

Vancouver lawyer Richard Kurland, who has helped international clients immigrate to British Columbia for 25 years, said the ban will have no effect. This is mainly because even unsophisticated foreign buyers can get around the problem by partnering up with an international student or someone on a work visa who can transfer money from a Canadian bank account.

“He gives politicians sound bites to make it look like they’ve done something,” Mr Kurland said of the ban.

Many foreign investors have left British Columbia and “crossed the Rockies” to other provinces over the past year, he said.

However, the tax burden on foreign ownership of Canadian real estate has increased.

In an attempt to quell speculation in the housing market, the Ontario government introduced a tax for foreign home buyers in 2017. In March, it raised the rate from 5% to 20% and loophole that allowed students and foreign workers to obtain a tax reduction on real estate purchases. Nova Scotia has also just introduced two controversial tax measures: a 5% transfer tax on homes purchased by non-residents and a 2% tax on properties owned by people who normally reside outside. of the province.

In British Columbia, the province collects about $100 million a year from its foreign purchases tax, which last year accounted for about $1.9 billion in real estate sales.

Mr. Eby said he hopes the federal government’s focus on foreign buyers of real estate will be tied to greater market regulation.

The housing minister, who is also BC’s attorney general, criticized Ottawa for not investing enough resources to ensure that foreign capital in Canadian real estate markets is properly taxed. “Hopefully that means they’ll be more interested in things like beneficial ownership records,” he said. British Columbia has introduced the country’s first public registry of landowners which aims to end the use of trusts, corporations and partnerships to shield transactions from public view. But this delayed the implementation.

Eby said Revenue Canada needs more resources to track the information BC is beginning to collect. “I hope this opens the door for them to have, frankly, a heavier hand on this kind of activity in our housing market, because until now it felt like only BC was doing this work.

With files from James Keller in Calgary

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