Canada’s foreign homebuyer ban may have unintended consequences that could harm the real estate market and beyond, warns Benjamin Tal, managing director and deputy chief economist for CIBC Capital Markets Inc.
The “Prohibition on the Purchase of Residential Property by Non-Canadians Act,” which came into effect on January 1st, prohibits non-Canadians from purchasing residential property for two years. The goal was to take pressure off the price of housing and improve affordability.
Confusing and ambiguous language
However, in a weekly memo, Tal highlights that the language of the legislation has created ambiguity and confusion, leading to unintended consequences.
The economist writes, “The language of the Act appears straightforward until you show it to a lawyer.” Tal explains that the definition of “residential property” is broader than most people would expect. It includes any developed or vacant land that does not contain a habitable dwelling, is zoned for residential or mixed-use, and is located within a census metropolitan area.
This means legislation includes commercial real estate assets on land zoned for residential or mixed-use, encompassing the entire downtown Toronto area.
Additionally, based on the language, it prohibits non-Canadians from purchasing farmland located within a census metropolitan area, which may not have been the intended target.
The economist writes, “While real estate lawyers are smiling, the rest of the industry is not. We have been in contact with many real estate players in recent weeks. The damage is real.”
The unintended consequences of the foreign homebuyer ban have already been felt, with many commercial real estate deals being cancelled or placed on hold, even those unrelated to residential housing, writes Tal.
Projects cancelled or on hold
Developers that are partly foreign-owned or rely on foreign equity are unable to proceed with purpose-built developments, which Tal argues are the most effective tool to tackle Canada’s housing affordability crisis.
The Act is also having a negative impact on REITs, which Taj says are “by far the most capable and motivated potential builder of purpose-built units.”
The economist believes the legislation may harm not only the real estate market but also other industries, such as private equity funds with minority foreign investors trying to acquire shares in a manufacturing or pipeline business located on land zoned as residential or mixed-use.
Tal is calling on the government to make changes, writing, “Policymakers should immediately take another look and amend the Act in a way that is consistent with what it was intended to achieve — focusing only on single units being purchased by foreigners while exempting development of new supply from the impact of the new legislation.”
Read the full memo here.
Jordana is the editor of Real Estate Magazine. You can reach her by email.
I agree with Mr Tal, this 2 year ban was not thought out well enough nor discussed with stakeholders, or the real estate industry as a whole. I can understand the intent, however this was rushed. Hopefully policy makers & politicans can come to a consenus and revisit this sooner than later. Thanks
Typical of our Federal Government. Put something into effect with no study. Then try to deal with the fallout later.
…then any real estate agents will take the fall.
History has proven, whenever any form of government gets involved in the real estate market they screw things up.
Just plain irresponsible!
I agree. Lower priced homes have been a scarcity at least since the 70’s. Back then as vice president of the Ontario Landlords Association, I was on CTV, Canada AM Tv. I was asked to comment on this problem. I explained that government controls at all 3 levels, rent control, and the fact that private enterprise was reluctant to build low cost housing because it wasn’t profitable, were all part of the problem. I warned that there would be thousands living on the street as homeless people. Some things never change. Government doesn’t act and seldom reacts
As usual, government interference without enough consultation from actual experts in the field has created additional problems we certainly don’t need. Not good for Canada’s International reputation.
Another government blunder. They should stay out of always interfering in the real estate industry. Why would the Federal government bring in this legislation in and hurt the real estate industry? The Ford government increased the non-resident tax to 25%, which would have provided the Province additional money to spend on services, but that was too good for Ontario, so the Federal Government has to step in and place this 2 year ban on foreign buyers Act , which nets Zero Dollars for Ontario.
We need governments who write policy based on facts as opposed to photo ops! This has gone on too long and will continue until they put re-election second and the problem first ! God forbid the politician put the people first!
This is just another example of how this sad government we have does very quick and damaging knee-jerk reactions.
Just as people are feeling comfortable investing in the Canadian Markets – they slam the door and give them a slap in the face.
I know it’s not Trudeau himself – he’s not smart enough for stuff like this – this is his party pushing their own agenda through and the puppet plays along so he can feel like a big man.
The only problem is – we, as a country – don’t have any one else that we can honestly rely on to take over…
More and more we’re being seen as a joke in the eyes of the world market..
Try to go to a foreign country as a Canadian with no other citizenship to purchase real estate, commercial or farm. This should have been done many years ago.
Absolutely correct!
Pretty much every European country allows foreigners to buy real estate, no strings attached. I don’t know which rock you live under, but in most Western Democracies buying real estate is allowed to anyone, Citizen, Resident or Foreigners alike. And most don’t even have preventative taxes for foreigners in place. Everyone is being treated equally.
Another negative consequence is at a more grassroots level. Many temporary residents have been studying in Canada for several years and then graduated and got jobs here. They don’t qualify for exemption under the education component, because they are no longer enrolled, but they also haven’t worked long enough to qualify under the working exception. A method of blending the two exclusions would allow these new Canadians to purchase their first home and start their permanent life in Canada. And for the most part, these folks are buying at an entry level, not the type of “foreign” investment the government is trying to control. Our country is reliant on immigration to continue to grow our economy, but this legislation does nothing to promote that.
Government fails to realize that many foreign buyers purchase homes that end up in the rental pool. Thus leaving a rental shortage and rental rates high. Very poorly thought out legislation
“The nine most terrifying words in the English language are ‘I’m from the government and I’m here to help.’”
Just another “head tax”.
Why is it that the Liberals and NDP want to penalize anyone who is a “go-getter” in this country????
The “lefties” call themselves progressive and we watch our reputation and standard of living dropping faster than any country in the Western World.
Everyone has an opinion, and everyone presents it in the way they see it. Including Mr. Tal!
Ask another economist and they will see it differently again.
BTW – Lawyers wrote the wording to begin with!
Reality, no mater what you do (good or bad), always has consequences. Even bad decisions can bring good results!
Here, I see everyone agreeing how bad this is and worrying more about the foreign buyer than the buyers at home. The homegrown! The ones whose parents and grandparents built this country!
Sure, lets open the doors to the foreign buyer. They have the funds to purchase, thereby increasing the property values and leaving our homegrown forced to rent from a foreign buyer. Wow!
Then Mr. Tal suggests that foreign owned projects are on hold due to the foreign buyer ban. Really?!
So what’s the reason domestically owned companies have placed their projects on hold as well?
Economy! Corrections! Unaffordability! Speculators! All over inflating the value of real estate. Remember them?
We can spin it anyway we like. The reality is most people rarely stop to think before they state their opinion and simply choose to take the opinion of another, or the opinion at hand.
If Mr. Tal or another had written differently, all comments herein would likely have agreed with that comment.
Don’t mean to offend. That’s just the way it is.
Let’s also consider the housing shortage.
So…… we have a housing shortage. How is the foreign buyer solving that issue? By buying a home your kids, grandkids and those working to buy in their country now can’t purchase.
But, that’s ok! We can always rent from them!
How is opening up to more immigration solving the housing shortage? By adding to the existing or creating a bigger shortage?
Sure! Let’s create the same problem with another over inflated market, and mortgage everyone as much as they can’t afford to live a decent life.
Yes, sales are down and we are not selling as many homes as we’d like!
Take your blinders off and face reality! Nothing goes up and nothing stays down forever.
Cycles in the economy, remember?! Correction is not such a bad beast!
Any person capable of adding 1 + 1 could have recognized that the problem with the shortage in housing stock has nothing to do with foreign buyers and indeed foreign buyer capital was resulting in extra housing starts which eventually added housing stock to the market.
But let’s face reality, a government that creates an abysmal mess of introducing and marketing recreational marijuana likely is incapable of adding 1+1 and getting 2 !!
I was negotiating sale of a 150 acre development site in halton with a foreign financed developer – the deal has died as the international partner can not participate and now 350 homes won’t be built !
Congrats and credos to the liberal /ndp group that have no concept of economic theory which says increasing supply dampens inflation – they must have skipped that part of their education –
Another moronic piece of legislation by our well-meaning idiots in Ottawa. It is right up there with FINTRAC on the bonehead scale.