When it rains, it pours. With governments around the world dealing with a flood of foreign buyers piling into their local real-estate markets, many are looking to stem the tide. Singapore, for example, has banned foreigners from purchasing or acquiring restricted residential properties since 1973. Denmark has required permanent residence or at least five consecutive years of residence before foreign buyers can purchase residential property since 1994. And in 2018, New Zealand moved to ban non-residents from buying existing homes in the country.
Canada’s the latest country to enact such a ban in hopes of improving housing affordability, with an act banning foreign buyers from purchasing residential property taking effect on Jan. 1. Similar to the U.S., home prices in Canada skyrocketed during the pandemic, largely due to low interest rates. Diana Mok, a professor of real estate finance and economics at the University of Toronto, told Fortune that affordability has been a problem long before the pandemic, with the average Canadian’s income around ten times less than the average home price, where a healthier ratio would be around three or four. Still the country’s recently enacted ban on foreign buyers is unlikely to have any significant impact in improving housing affordability, and it may have some unintended consequences, to boot.
Mok said all three levels of government, from federal to provincial to municipal, have been trying to address the issue. At the provincial level, for example, they’ve imposed taxes on foreign buyers but never bans.
The recently enacted Prohibition on the Purchase of Residential Property by Non-Canadians is a federal ban. Essentially, it bars what it defines as “non-Canadians” from buying Canadian residential properties for two years, with the intent of lowering housing prices. As Canadian Prime Minister Justin Trudeau put it: “Homes are for people, not investors,” blaming skyrocketing prices on the desirability of Canadian homes attracting foreign investors.
But experts have told Fortune that foreign buyers are not the problem, owning less than 6% of Canadian residential property as of 2020. Mok said that because the intended impact of the ban is to cool down a very hot market that’s only recently slowed because of rising interest rates, simply isolating a very small group (i.e., foreign buyers) won’t significantly affect affordability.
“I suspect it’s more like a political gesture, to indicate to Canadians that this federal government is willing to try our best and move heaven and earth just to support Canadians [and] ease the affordability issue,” Mok told Fortune.
“It's like a big thunderstorm, but then it's followed by a little drizzle,” Mok said, explaining that the impact of foreign residential ownership restrictions is minuscule compared to something like changes in interest and mortgage rates.
Richard Halinda, an attorney whose practice largely involves real estate law, echoed Mok, telling Fortune that banning non-Canadians from buying property won’t solve the problem because it only represents a small fraction of the market. The real reason the market has been so crazy, Halinda said, is because of low interest rates and more and more people investing in real estate versus stocks.
Halinda said the act, in his opinion, is unnecessary because there were already protections in place, such as taxes. In Ontario, there was already on the books a 25% tax on foreign buyers (up from its previous 20%), and in British Columbia, there’s a similar 20% tax.
“That was already drying up much of the market of non-residents buying because they didn't want to pay an extra 20%,” Halinda said.
It’s not just taxes that’s pushed down foreign investment in residential real estate. Brendon Ogmundson, chief economist of the British Columbia Real Estate Association, told Fortune that foreign investment in residential real estate fell during the pandemic as borders were closed.
The ban will obviously lower demand, not significantly, but it’s not the solution for Canada’s affordability issues, Ogmundson said. It’s a supply issue, Ogmundson said, there’s just not enough housing. The little supply that would be freed up because of the ban is still not enough. Additionally, foreign buyers are typically purchasing luxury homes, which isn’t necessarily what’s needed for the average Canadian, he said.
Despite the act being passed last year, Liza Kaufman, founding partner at Sotheby’s International Realty Quebec, told Fortune that her clients weren’t and still aren’t aware of it. Kaufman said it was “buried somewhere in the middle of their legislation,” and people are still trying to understand the impact of the act.
Kaufman said she’s already seen potential buyers change their plans to avoid the ambiguity of the act, even though there are several exceptions like non-residents who are married to citizens, refugees considered temporary residents, and international students. Meanwhile the ban also excludes areas outside of the census metropolitan areas or census agglomerations (large and populated centers).
Besides the unpopularity of the act amongst those in the residential real estate sector, there’s ambiguity within the act and its supplemental regulations that are hitting the commercial real estate market.
One being, the classification of what a residential property is. The regulation defines it as “land that does not contain any habitable dwelling, that is zoned for residential use or mixed use.”
Andy Gibbons, a partner at Torys, whose practice focuses on commercial real estate, told Fortune that the vast majority of commercial buildings in downtown Toronto are zoned as mixed-use. So for the purpose of the act, those buildings would be considered as residential. Therefore, in fear of being subjected to the penalties, which range from a $10,000 fine to a forced sale, some foreign buyers are putting their transactions on hold.
Gibbons called it an “unintended consequence” that’s having a “chilling effect” on the commercial real estate market. And all the while those within the residential real estate sector are calling it a political move, unlikely to significantly affect the country’s housing crisis.
In other words, it’s drizzling out there north of the border.
