The Canadian economy continues to grow, albeit at a tumultuously slow rate. Real GDP hit 0.2% for the month of January which continued its eight-month streak.1
But despite positive, incremental growth during a period succeeding a global pandemic, other economic factors have stolen Canadians’ attention.
For starters, inflation recently hit a near 30-year high, last tracked hitting 5.7% back in February.1 But higher food and gas prices worry economists far less than domestic home prices.
Within the last two years (calculated from the end of February) the average home price reached a whopping $868,400.2 That translates into a 51% increase in home prices according to the Canadian Real Estate Association.2
In an effort to provide relief to potential homebuyers, the government has instituted a broad spectrum ban on foreign real estate buyers for the next two years with the goal to free up inventory for domestic buyers and help reduce competition.
Many financial experts attribute foreign investment as a contributing factor causing upward pressure on home prices. Others are skeptical of the influence foreign investment has on the housing market, citing contradicting metrics related to the pandemic, as well as periods during which new taxation policies (to curb growth) were implemented.
So, the question is, what are the real impacts of this new ban on foreign real estate buyers going to be on the housing market? How will these changes affect local investors?
Let’s take a deeper dive into how forcing out foreign investors might have a myriad of effects on the real estate market as a whole.
The Impacts of Banning Foreign Real Estate Buyers
The purpose of the two-year ban on foreign real estate buyers is a moderate attempt to cool the Canadian housing market and make homes more affordable for more prospective buyers. Many new buyers have been priced out of the market even despite low financing costs.
The ban also includes provisions to disincentivize sellers who choose to sell a property they have owned less than a year. This means investors using a fix-and-flip model should expect higher costs to eat into net profit.
In some cases, it might make more sense to pivot to holding investment properties and rent them out for a year or longer, rather than sell them, to help mitigate the impact on your return on investment (ROI).
Another reason switching business models might be the smart play is that rents have increased sharply over the last few years. This means you can take full advantage of the market and maximize your property’s cash flow potential.
While banning foreign real estate buyers might help free up properties for some of those would-be new homeowners, it’s doubtful it will have quite the intended impact.
First, the ban exempts foreign students attending school in Canada. It also exempts those foreign workers that hold permanent residency status.
Recent data shows foreign buyers only make up a small percentage of overall sales, meaning any pricing relief that did result from the ban would be marginal. In 2020, it’s estimated that foreigners only made up 1% of all home purchases.3
Similarly, it opens a void that domestic investors can fill to help expand their own portfolios. Investors with more cash on-hand or assets to leverage should have no problem eating up any inventory that is intended to go to the average Canadian homebuyer.
Furthermore, another study also notes that many domestic purchases occur from Canadian citizens acting on behalf of family overseas, essentially circumventing the ban altogether and rendering it mute.2
While the ban might have a bigger impact on more metropolitan epicenters, such as Vancouver or Toronto, but even here it would be minimal. Even high-ranking industry professionals agree that the impact would probably be immaterial on a larger scale.
Real estate investors across Canada, including the Windsor-area shouldn’t have much to fear in terms of the recent ban on foreign real estate buyers. While the new two-year ban should help provide a minor bit of relief to home prices, the bigger issue lies with household income and inventory.
Some investors employing a fix-and-flip investing methodology may need to temporarily revise their business model, but overall, most investors should see minimal impacts.
If anything, forcing out foreign real estate buyers is equally good for domestic investors as it is for prospective home buyers because it reduces competition. It also opens up more opportunities for expansion, probably more so in more urban cities.
Similar bans have occurred in other countries such as New Zealand, which had positive results with respect to supply and demand but failed addressing systemic affordability issues.3
1 Statistics Canada. (2022, April 14). Canadian Economic Dashboard and COVID‑19. Retrieved April 15, 2022, from https://www150.statcan.gc.ca/n1/pub/71-607-x/71-607-x2020009-eng.htm
2 Austen, I. (2022, April 9). Canada Moves to Ban Foreign Real Estate Buyers for Two Years. The New York Times. Retrieved April 15, 2022, from https://www.nytimes.com/2022/04/09/world/canada/foreign-real-estate-buyer-ban.html
3 Wheatley, M. (2022, April 12). Canada introduces home buying ban for foreigners. RealtyBizNews: Real Estate Marketing & Beyond. Retrieved April 15, 2022, from https://realtybiznews.com/canada-introduces-home-buying-ban-for-foreigners/98769773/