Foreign Buyer Ban as is: a Path to Affordable Housing or Just Optics?

Starting January 1, 2023, non-Canadians will be prohibited from purchasing residential real estate in Canada for a period of two years under the newly enacted Prohibition on the Purchase of Residential Property by Non-Canadians Act. The Canada Mortgage and Housing Corporation (CMHC) states the goal of the ban is to ensure Canadians have access to the Canadian housing market before anyone else can. Canadians under its enactment should find some hope in seeking affordable housing. Under this act, foreigners, whether individuals or businesses, are unable to purchase Canadian residential properties for two years.?

While it may look as a promising piece of legislation, in reality it will most likely has very limited effect on housing affordability, it at all. It does, however, satisfy a “government looking tough on foreign interference” political agenda and will, of course, impress the voters.?

According to the CMHC, residential property is defined as “buildings with three homes or less, as well as parts of buildings like a semi-detached house or a condominium unit.” This act also includes lots zoned for residential building in their criteria for a residential property. If a person or business fails to comply, they risk a $10,000 fine and possibly lose their property.?

There are several exemptions. The CMHC has the exemptions listed on their webpage, but we will cover a few here together. First, temporary international students may be exempt if: they study at a recognized Canadian institution, “have filed income tax returns for each of the 5 taxation years preceding the year the purchase was made,” have been in Canada for at least 244 days each year for 5 years prior to the purchase, did not violate the prohibition, and do not spend more than $500,000 on the purchase of a property. Similar criteria follow for those in Canada for work. Refugees may also be exempt if they have refugee status and are covered under the Immigration and Refugee Protection Act. Basically, anybody with Permanent Resident status is exempt from the new Act, therefore leaving the passages for the flow of foreign cash pouring into the Canadian real estate market virtually still unrestricted.?

Why was this proposed? A very interesting study, published by American Economic Association on December 30, 2020, and authored by Isaiah West and Matthew J. Botsch found that foreign buyers could potentially increase the house prices in any given area. The study, conducted as a natural experiment in Vancouver, also analysed the usefulness and the implications of the Foreign Buyers Tax and found that while there was a limited immediate effect, likely caused by uncertainty and concerns over further government actions, the long-term effects on local house pricing were slim. This led the researchers to conclude that the tax wasn’t very helpful. They found that foreign investors were able to take advantage of housing prices and rent out these properties for profit. The CMHC reports that many Canadians were presented with data and policy proposals and asked for feedback. Many Canadians appeared to be in support of the ban despite the questionable results of the said policy, which demonstrates the desire among the Canadians to see real changes in the housing affordability area. Seems that the government has different plans, however.?

While it sure sounds logical, you may wonder how this will actually affect house prices, especially given that the tax didn’t work. The Globe and Mail proposes that the global decline in markets probably will give foreign investors more of a reason to buy within their own country than here in Canada. For this reason, many experts are doubtful. Many provinces have also raised the Foreign Buyer’s Tax. This along with the vacant homes tax should ideally protect Canadians and reduce the profitability for foreign buyers. However, experts who cite data following the foreign buyer’s tax and vacancy tax from 2016 and 2018, respectively, have observed negligible benefits for housing availability and affordability.?

So, is this plan truly going to work, or is it a nice mask the government is putting on? Is this actually going to help, or just make it look like we are being helped? Minimal data is available on similar circumstances, but experts find reason to remain skeptical on the utility of this plan.

As we have said repeatedly, the real solution to the affordable housing crisis is building an environment where great jobs are created. We need to lower taxes and reduce government spending. We need to arrest inflation. We need to adjust immigration levels to where the new population can be responsibly absorbed into the economy. Reducing the price of houses will diminish the value of most Canadian Citizen’s main and largest asset. It discourages new construction. It hurts business. Increase the buying power of Canadians and you solve the housing crisis and much, much more.??