In the last few years or so, Canadian housing prices have seen mostly one type of change: an increase.
It was news that took up a lot of airtime, alongside the pandemic. Canadian housing prices went through the roof as, it was said, people moved from renting in larger urban areas to buying homes in smaller ones.
The big migration from larger metropolitan areas put pressure on housing inventory in smaller cities and affected the rental market. As homeownership became a dying dream for many Canadians, the pressure mounted on the federal government to act. And recently, they did just that, claiming the move could potentially help put home ownership within reach for many Canadians.
House prices have now started cooling down, in part due to sustained high mortgage lending rates. The federal government, however, believes there’s more to be done, so Ottawa has come forward with a plan it claims can lend a hand in further lowering house prices.
On January 1, the foreign homebuyers ban came into effect. The law that helped ring in 2023 will last for two years. The federal government touts the move to ease housing speculation, making homeownership achievable for Canadians.
Before we can decide whether the ban is good or bad for the Canadian housing market, we’ll take a closer look at the legislation.
The law, officially known as the Prohibition on the Purchase of Residential Property by the Non-Canadians Act (the Act), prevents non-Canadians from buying residential property in Canada until 2025.
Who are foreign buyers?
The Act defines foreign buyers as people who aren’t Canadian citizens, permanent residents of Canada, or persons registered under the Indian Act.
Refugees are exempt from this ban.
Another category of potential foreign buyers excepted is that of international students, who meet certain criteria. Foreign students qualify to buy a house if they have spent the majority of the last five years (244 days annually) in Canada and filed income tax returns for all those years. Caveat though, international students that
fulfill these requirements may only purchase a property up to $500,000. That’s a magic trick we haven’t yet managed to perform in the current market.
Another exclusion is that of foreign workers, who have worked and filed taxes in Canada for at least three out of the four years they’ve been here.
Also omitted from the ban are diplomats, consular staff, and members of international organizations working in Canada.
The law also exempts purchases from foreign buyers who have Canadian spouses or partners.
Further, the legislation also bans some forms of corporations from buying housing of certain types. Corporations based in Canada are considered foreign buyers if they are privately held, not listed on a stock exchange in Canada, or are controlled by someone who is non-Canadian.
So, what’s a residential property?
According to the Act, residential property is defined as buildings with three homes or less. The definition also applies to parts of buildings, like a semi-detached house or a condominium unit. However, the ban neglects to cover multi-unit buildings.
The law also extends to vacant land that does not have livable buildings but is zoned for residential or mixed-use.
The legislation does not ban foreign buyers from purchasing larger buildings with multiple units or recreational properties, which include cottages, cabins, lake houses, and summer homes.
But what if a foreign buyer falls through the net?
If a buyer is identified as foreign, they will be fined up to $10,000 for breaking the law. Realtors who knowingly assist a foreign buyer can also be subject to the same fine.
According to the federal government, the property speculation equation could be balanced by taking foreign buyers out of the home-buying market.
But the numbers don’t really back that math. According to 2020 data from the Canadian Housing Statistics program, foreign-owned residential properties in British Columbia were 4.7 percent of the total, while in Ontario they were 3.4 percent of all properties owned.
As interest rates began to climb, the home buying and selling frenzy started to ease a bit toward the end of 2022. But single-family homes in Toronto and Vancouver will still easily sell for over a million dollars.
So, is bringing down the sledgehammer on foreign buyers really the way to go about cooling the housing market?
Experts seem to think not.
Banning foreign buyers seems like a convenient solution — only it’s not.
Many real estate experts believe that the move will not have the desired effect of making home ownership more achievable. Some seem to think the government reached for low-hanging fruit just because it had to do something. Other experts seem to think it’s an overreach by the federal government into a matter better handled at the provincial and municipal levels.
Real estate agents say the number of homes purchased by non-Canadian buyers (as shared above) is a drop in the bucket. Banning them is likely not going to cool the housing market or bring homes within Canadians’ reach.
Critics think there are better solutions out there. Vancouver, which has been dealing with high housing prices far longer than Ontario has, had already enacted a 20 percent foreign buyer’s tax. In 2022, Ontario also raised its non-resident speculation tax from 20 percent to 25 percent.
The government and the public might be convinced that it’s foreign investors and foreign money driving home prices. But those that have been studying the matter deeply will blame other factors. For instance, the lack of available housing to meet the high demand or the unprecedentedly low-interest rates at the beginning of the pandemic.
Another downside of this legislation, like all other new laws, is the usual implementation chaos that follows. Real estate agents and real estate mortgage brokers have had to scramble to understand the minute details of the ban, so they’re not caught in the middle by mistake. Fortunately, professional associations and groups helped out. For example, the Canadian Real Estate Association (CREA) has already sent out new forms that will be used to verify the origin of homebuyers.
Real estate experts that have studied the housing issue closely feel new immigrants will find it harder to enter the market under this new ban. This might leave the
465,000 new permanent residents Canada plans on welcoming this year in the lurch.
Some experts think this ban will deter high-skilled workers from coming to Canada. Temporary workers are not allowed to buy properties and have to obtain permanent resident status and jump through a few more hoops before they can even enter the homebuyers’ market.
There are those that also believe that the Act may finally show Canadians the true causes of the housing crisis. And the effects, or the lack thereof, of the law, will present a clearer picture that foreign buyers are not the cause of high housing prices. Seeing the truth, the public may even demand better solutions and policies to address the crisis.
Unfortunately, there is no magic bullet to fix the issue.
Housing availability and affordability are complicated matters, impacted by many factors that have been gathering steam over the years. As previously mentioned, experts point to a severe lack of housing supply.
Policy analysts signal the most obvious way of easing the demand: building more housing. But the Canadian housing development and construction industry has been unable to keep up with the country’s population growth over the years.
A Canada Mortgage and Housing Corporation (CMHC) 2022 report said that close to 19 million housing units are needed by 2030 to meet growing housing demands.
Industry experts tend to believe the reason for the lack of initiative from builders and developers lies elsewhere. Thought leaders point to obstacles at provincial and municipal levels that can be reduced to encourage and incentivize new home builds.
Specifically, experts are talking about provincial land-use regulations, strict municipal zoning rules, and the multitude of red tape laws that prevent shovels from breaking ground.
More recently, housing market experts have pointed to the buying frenzy during the pandemic as what has pushed the shortage to crisis levels. A section of the population that could work remotely decided to take advantage of the situation and moved from bigger cities, buying homes in smaller towns. The move may have reduced their commute, but they may also have unintentionally contributed to heating up the market.
It may not be a bad idea to hold off on buying or selling in some areas of Canada, for a bit, to see how the effects of this law play out. For the Region of Waterloo, we have a strong housing market and a strong rental market. It is wise to buy within your means as your rent will be high as a tenant. Buying within your means will allow you to trade up once the market stabilizes and you will have equity build up rather than just paying a landlord. In our area, there is never a bad time to buy, so 2023 continues to remain steady and we may have seen the worst behind us!
Want to have a deeper discussion with a mortgage expert? Reach out to us and book a call but affordabilty of payments is the key to this market!