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Tuesday, January 31, 2023

Canada Bans Foreign Buyers in the Home Real Estate Market

Justin Trudeau, Canada’s prime minister, has suggested a two-year restriction on some foreigners buying properties.

The move comes as the country grapples with some of the world’s most severe home affordability problems.

Prices have risen by more than 20%, bringing the average Canadian home to about C$817,000 ($650,000; £495,000) – roughly nine times the average household income.

However, industry experts say it’s unclear if a prohibition on foreign purchasers will solve the problem.

Although data on overseas purchases in Canada is sparse, research shows that they make up a modest portion of the market.

“I don’t believe it’ll have a tremendous impact,” said Ben Myers, head of Toronto-based consultancy company Bullpenn Research & Consulting, who determined that foreigners accounted for just 1% of sales in 2020, down from 9% in 2015 and 2016.

“It’s a rather small amount, and let’s face it, the individuals who truly want to buy… will find other methods to do it.”

Mr Myers said that rising housing costs are a result of significant population growth and a supply shortfall, which is exacerbated by restrictions that limit construction.

Since the epidemic hit in 2020, when officials in Canada and elsewhere reduced interest rates to stabilize the economy, decreasing borrowing costs and raising demand even more, the problems have become worse.

According to OECD statistics, the moves have fueled surging property prices in numerous economies throughout the world, but the divergence between home prices and wages in Canada is one of the most significant.

During his election campaign last year, Mr Trudeau promised to address housing affordability.

In addition to the temporary prohibition on foreign purchasers, his government’s budget proposal, released on Thursday, allocates billions to encourage new building and offers additional programs, such as a tax-free savings account for first-time buyers.

Mr Trudeau has also talked about prohibiting some bidding systems that favor investors, who, according to some estimates, have bought one out of every five properties in Canada since 2014.

Permanent residents, foreign students and workers, as well as those purchasing their principal house, would be excluded from the proposed prohibition on foreign purchasers.

The idea adds on existing measures such as specific taxes levied against out-of-town and foreign buyers in select parts of Canada.

For example, in Ontario, Premier Doug Ford has announced intentions to increase an existing tax on foreign buyers from 15% to 20% and to extend it outside Toronto to the rest of the province.

While overseas purchases are not the cause of affordability concerns, taxing them does provide cash that may be used to solve them, according to Steve Pomeroy, the founder of Focus Consulting, a housing policy consultancy.

“If you outlaw them, you’re not going to have much of an influence on growing housing values, and you’re going to lose money,” he added.

In 2018, New Zealand enacted a similar law prohibiting foreign purchasers.

Mr Pomeroy continued, “It’s wonderful politics because it’s simple to blame a victim that no one cares about.” “I don’t believe it will make much of a difference.”

Mr Trudeau’s idea, according to Paul Kershaw, a professor at the University of British Columbia and the founder of Generation Squeeze, is unlikely to curb price hikes or meaningfully address affordability.

“It’s not obvious that the housing policies will be enough to break Canada’s addiction to high and growing property prices,” he said, adding that the high prices enable existing homeowners accumulate money.

As the central bank boosts interest rates, Mr Pomeroy expects price appreciation to decelerate in the coming months. The Canadian housing market is particularly vulnerable to such shifts, since many purchasers opt for five-year mortgages rather than the longer-term mortgages found in the United States and the United Kingdom.

Higher borrowing rates, on the other hand, will make it more difficult for first-time buyers to enter the market, he said.

Unless policymakers address supply, Mr. Myers believes that hot markets like Toronto and Vancouver will become controlled by rentals in the long run, as normal purchasers are pushed out of the market.

Mr Pomeroy, on the other hand, believes that high development costs mean that increasing supply will not inevitably lower prices, unless the increases are significant.

“Unless you’re born into the proper family,” he continued, “the prospects for young purchasers are bleak.”

Cedric Blackwater
Cedric Blackwater
Cedric is a journalist with over a decade of experience reporting on local US news, and touching on many global topics. He is currently the lead writer for Bulletin News.

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