Canada bans foreign buyers for two years
Escalating house prices and deteriorating affordability are spurring policymakers into action.
3 minutes to read
The ramping of buyer restrictions and cooling measures in response to the pandemic-induced house price boom, a trend we predicted in The Wealth Report 2022 has started in earnest.
Canada may be amongst the first to set out its stall, but we expect more countries to follow.
Forming a central part of Prime Minister Trudeau’s re-election campaign in 2021, the move to ban foreign buyers for a fixed period of two years from Canada’s housing market, has been on the cards for some time.
What are the new rules?
As part of Thursday’s Budget, Canada’s Finance Minister set out the new regulations.
Students, foreign workers and foreign citizens who are permanent residents of Canada will be excluded from the ban.
Canada will ban most foreigners from buying homes for two years and provide billions of dollars to spur construction activity and assist first-time buyers.
As yet, there has been no formal confirmation of when the rules will come into effect.
What impact will it have on the Vancouver market?
Home prices in Canada have increased by more than 50% over the past two years. The market saw a record monthly increase in February as buyers acted ahead of rate increases taking the average price of a home to C$869,300 ($693,000) according to Canada’s Real Estate Association (CREA).
However, sales were already starting to slow in key markets.
In Greater Vancouver, home sales were down 25% in March 2022 compared to a year earlier and average prices were down 13% over the same period.
Since 2016, British Columbia and Ontario, home to Vancouver and Toronto respectively, have introduced foreign buyer taxes, at 20% and 15% respectively, and these moves have significantly reduced the market share of foreign buyers. As a result, the two cities may be less affected by the new ban than other markets.
Kevin Skipworth, Managing Director at Dexter Realty, Knight Frank’s Partners in Vancouver comments: “It’s possible we will see an uptick in foreign buyers targeting off-plan projects that are two years or more off delivery.”
The Bank of Canada raised interest rates in March to 0.75 and a Reuters survey of economists suggests that it is likely to hike borrowing costs a further four or five times in 2022. What's unclear is whether this move towards tighter monetary policy could have been enough to cool the market.
A supply issue
The fundamental issue is a lack of supply which the foreign buyer ban will do little to ease.
Estimates suggest foreigners in Toronto accounted for just 1% of purchases in 2020, down from 9% in 2015 and 2016.
Although the government is doubling down on its efforts to increase affordable housing and expedite the construction process, there are new first time buyer initiatives that will boost demand further.
Amongst the new initiatives is a pledge to create a tax-free first home savings account for first time buyers under the age of 40 and a doubling of the tax credit too.
Not the first
Canada isn’t alone in banning foreign buyers, Switzerland was arguably amongst the first. Back in 1983 a ruling known as Lex Koller restricted the size and location of property available to non-Swiss residents - although holiday homes in key zones are still permissible.
New Zealand took similar steps in 2018. Although it’s worth studying the small print – foreign buyers in New Zealand are not permitted to buy existing homes but can still purchase new build properties. Plus, Australians and Singaporeans are excluded from the ban due to separate trade agreements.
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