Foreign buyers ban won’t fix housing market – could make it worse, experts say

Click to play video: 'New Federal Foreign Buyers Rules'
New Federal Foreign Buyers Rules
WATCH: The federal government has enacted a foreign homebuyers ban. Tom Davidoff from the UBC Centre for Urban Economics and Real Estate talks about what impact he thinks the move will have on the housing market – Jan 3, 2023

For most Canadians, News Year’s Day was heralded by crackling fireworks and clinking champagne flutes. For Parliament, it marked the beginning of a two-year ban on non-Canadians purchasing homes.

The Prohibition on the Purchase of Residential Property by Non-Canadians Act was passed on June 23, 2022, in an effort to tackle Canada’s ballooning affordable housing crisis.

Under the ban, non-citizens, non-permanent residents, and foreign commercial enterprises are blocked from purchasing Canadian homes — with some exceptions for international students and temporary residents. Those who violate the ban will face a $10,000 fine and may have to sell the offending property.

Read more: Canada’s ban on foreign homebuyers comes into effect on Jan. 1. Here’s what to know

“Homes should not be commodities,” Minister of Housing and Diversity and Inclusion Ahmed Hussen declared in a press release when regulations for the prohibition were finally released on Dec. 21, less than two weeks before the measure came into effect.

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“Through this legislation, we’re taking action to ensure that housing is owned by Canadians, for the benefit of everyone who lives in this country. We will continue to do whatever we can to ensure that all residents of this country have a home that is affordable and that meets their needs,” he said.

Click to play video: 'CMHC report: no quick fix to Canada’s affordability crisis'
CMHC report: no quick fix to Canada’s affordability crisis

It’s a powerful talking point, and one that will certainly be popular among Canadians who blame foreign investors for boxing them out of homeownership. But the prevailing opinion among housing experts is that this measure is politically motivated, and will do little to make housing more affordable for Canadians.

Read more: Foreign homebuyer ban: What it could mean for markets where the new rules don’t apply

“I can tell you with full confidence, it will have zero effect on house prices,” said Elton Ash, executive vice-president for Re/Max in Western Canada. He says that non-Canadian homeowners don’t make up a significant amount of real estate transactions — at least, not enough to make a real difference in the housing market.

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According to 2020 data from Statistics Canada, all surveyed provinces saw non-resident ownership rates in the single digits.

In B.C., 4.1 per cent of residential homes were owned by non-residents in 2020, down slightly from the year prior. In Ontario, that rate was just 3.0 per cent — hardly a consequential market share.

Non-resident owners also include Canadian citizens living abroad, meaning the share of non-Canadian foreign ownership is ostensibly lower — and that is who this legislation is targeting.

Read more: Canada needs skilled immigrants to help build home supply, housing minister says

Ash points out that B.C. has already dabbled in discouraging non-Canadian home ownership with a foreign buyers tax, imposed in 2016.

“We had that initial 15 per cent tax on foreign buyers that was increased to 20 per cent a couple years ago. And, of course, what have we experienced? Continual increases in prices.”

Despite the minimal effect of the foreign buyer’s tax, the measure remains a popular one in B.C.

Click to play video: 'Victoria businessman claims to be unfairly hit by foreign buyers tax'
Victoria businessman claims to be unfairly hit by foreign buyers tax

Nathanael Lauster, a UBC associate professor of sociology who researches housing, shares Ash’s critique that home ownership by non-Canadians is simply not a large enough phenomenon to affect house prices.

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“I don’t really think (the federal prohibition) is likely to have an effect across other parts of Canada, given how little effect we’ve seen out here in B.C.,” Lauster told Global News.

According to his research, the B.C. foreign buyers tax had a temporary price effect of about 5.0 per cent that went away after a year or two.

“Those measures did not have, as far as we can tell, a big impact on prices to begin with because (foreign ownership) just wasn’t as prominent as people thought it was.”

Ash notes that the recent ballooning in Canada’s housing prices was in part driven by the low-interest rate environment experienced during the COVID-19 pandemic, when “Canadians were hoarding money like crazy and spending it on real estate.”

Read more: Canada housing market outlook 2023: Here’s what buyers and sellers can expect

To that same end, Lauster notes that domestic investors in Canada’s housing market have a much larger impact on prices than foreign investors do – at least four times as much, by his estimate.

So if non-Canadian home ownership has such a minimal effect on the housing market, why has the federal government implemented such a heavy-handed ban?

Ash and Lauster point towards the convenience of scapegoating foreigners for Canada’s housing woes, when the real solution lies in increasing supply — a much harder issue to tackle that will require cooperation between federal, provincial and municipal governments.

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Click to play video: 'Feds ban foreign buyers from purchasing homes in Canada for 2 years'
Feds ban foreign buyers from purchasing homes in Canada for 2 years

For Lauster, the prohibition on foreign homeowners is especially bizarre given how much foreign property Canadians own.

“We have a whole society dedicated to Canadian snowbirds, many of whom own condos in Florida. And yet we’re concerned about foreign buying here in Canada.”

“This is not something that we should really be devoting serious policy efforts to,” Lauster said.

Could the prohibition actually make the housing market worse?

While Lauster and Ash agree that the federal prohibition will have a minimal to zero effect on house prices, one scholar from Simon Fraser University believes it will actually be detrimental to affordability in the long run.

“The timing and the scope are just very, very misguided,” said Andrey Pavlov, a professor at the Beedie School of Business specializing in risk management.

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He says that housing development investors, both foreign and domestic, may be spooked by the federal government’s extreme measures to curb rising prices, and may be less willing to cough up the capital to build new homes in Canada. They might turn their attention to other countries deemed to be safer places for their investments, or they may require a higher return to compensate for the higher risk.

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“The moment you increase the required rate of return on investment, you just get less of them. So we’re going to get less housing, which in the long term is going to reduce affordability.”

On top of that, the housing that does get built will be more expensive, Pavlov argues, to reflect the risk that investors take when building homes in Canada.

Pavlov notes that the prohibition itself doesn’t inherently make Canada a more risky place for housing development investment, but it does show a “willingness and ability” by the government to implement heavy-handed measures that go against the prevailing opinions of housing experts.

He says that investors may be nervous about “additional misguided government intervention in the future.”

Read more: Hoping for a steep drop in home prices next year? It’s unlikely, Royal LePage says

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Pavlov says that this phenomenon has already played out in B.C. with the implementation of the foreign buyers tax and the vacancy and speculation tax that penalized Vancouver homeowners for not occupying their homes, or for renting them out.

His research found that building permits for about 2,000 units were dropped after the vacancy and speculation tax was introduced in Vancouver. Moreover, data from the B.C. government shows that the value of new building permits declined about seven per cent after the foreign buyers tax was introduced.

The prohibition on foreign homebuyers also poses negative impacts outside of housing affordability, with Lauster noting that the measure lends credence to the idea that “crazy rich Asians” are to blame for the hot housing market.

“Again, I don’t think the policy is gonna have a big effect on housing. Will it have an effect on legitimizing some of these narratives? Maybe. That really is a concern, I think.”

As B.C. implemented its housing restrictions, discourse was dominated by the idea that rich Chinese families were buying up Vancouver real estate at the expense of “real” Canadians. And those perceptions have not gone away, as evidenced by Star reporter Joanna Chiu’s difficulty navigating racism as she attempted to buy a home in Vancouver.

Read more: B.C. court strikes down lawsuit that claimed foreign buyers tax is unconstitutional

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“I don’t know if we can fully trace it to some of the rise in the hate crimes that we’ve seen out here that have also been documented,” Lauster notes. “But I have a picture myself of a development site that was defaced with totally racist slogans that was directly related to all these narratives.”

Both Ash and Pavlov are also concerned about how this measure will come across to prospective immigrants, and whether this will harm Canada’s reputation as a welcoming place.

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Pavlov notes that the federal government is ramping up immigration numbers and plans to welcome 465,000 new migrants to Canada this year, but says visa application delays and the inability for newcomers to purchase property without permanent resident status are counterproductive.

“It’s like having a welcome sign, but the door is locked on it,” he said.

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Read more: Concerns about effectiveness, racism as Canada prepares to test travellers from China for COVID-19

Ash notes that Canada desperately needs to attract skilled immigrants, like doctors, to address the health-care crisis — but if new immigrants cannot purchase a house while they wait for their permanent resident status, will they really want to choose Canada as their new home?

While there are exceptions, the bar is high enough to discount a large number of newcomers. Temporary residents need to have filed three income tax statements in order to qualify to buy a house. International students need to have filed five income tax statements.

In a joint statement from the Canada Housing and Mortgage Corporation and the Ministry of Housing and Diversity and Inclusion, government officials also noted that the “biggest issue” facing Canada’s housing market is supply, and that foreign buyer prohibition is just one piece of a larger puzzle.

“It is supported by many other programs and initiatives under the National Housing Strategy that are tackling issues from every angle.”

The statement added that the regulations were developed following “broad-based consultation inviting a diverse range of impacted stakeholders and Canadians.”

“The purpose of this law is to make sure that housing is owned by Canadians instead of foreign investors and foreign-controlled corporations,” they said.

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