Why Canada decided to ban the purchase of real estate by foreigners

Canadian Prime Minister Justin Trudeau announced last week that foreigners would be banned from buying property in the country for the next two years.

The measure, according to Trudeau, is an attempt to stabilize prices in the real estate market in the country, which faces one of the biggest problems of access to housing in the world. The ban exempts foreigners who have permanent residence in the country and students and workers coming from other countries.

In the last year alone, prices have increased by more than 20%, bringing the average sale value of properties to 817 thousand Canadian dollars (US$ 650 thousand or more than R$ 3 million), equivalent to more than nine times the average income. annual family.

Specialists assess, however, that the ban is not a decisive solution to the problem, and that the country also needs initiatives to increase the offer of real estate.

Data on the purchase and sale of real estate in Canada is limited, but the information available indicates that foreigners account for a small fraction of the market.

“I don’t think it will have a significant impact,” says Ben Myers, president of Bullpenn Research & Consulting in Toronto. According to him, foreigners represented only 1% of real estate acquisitions in the country in 2020, compared to 9% in 2015 and 2016.

“It’s a pretty low number, and let’s be realistic, people who really want to buy… will find alternative ways to do it.”

The analyst attributes the high cost of real estate in the country to a strong population growth combined with a shortage of supply, this in part a reflection of the rules that restrict the expansion of the real estate market.

The problem has been worsening since the beginning of the Covid-19 pandemic, when Canada reduced interest rates to reduce the impacts of the health crisis on the economy, a measure that, by reducing the cost of indebtedness, ended up stimulating demand.

This same equation has been observed in several countries, but according to OECD data, the mismatch between home prices and household income in Canada is one of the most dramatic in the world.

campaign promise

Trudeau pledged to seek a solution to Canada’s housing price problem during his re-election campaign last year.

In addition to the temporary ban on foreign consumers, the proposal released on Thursday (7) provides billions to boost new home construction and launches new stimulus programs, such as a tax-free savings account for first-time buyers.

The prime minister also discussed the possibility of banning certain bidding processes that favor investors (to the detriment of those who seek the property to actually inhabit it). Statistics indicate that, since 2014, investment properties represent about one in five traded in the country.

other measures

Trudeau’s plans ended up having echoes in the provincial administration of some regions of the country.

In Ontario, for example, Provincial Prime Minister Doug Ford announced his intention to raise a tax levied on foreign buyers from 15% to 20% and to expand it from the city of Toronto to the entire province.

While foreign-owned deals are not at the root of housing affordability problems, increasing taxation can bring the province additional revenue that can be applied to initiatives put in place to try to address the high price issue, says Steve Pomeroy, director of Focus Consulting, a company oriented to the area of ​​housing policy.

“Banning them would not have much of an impact on curbing rising house prices and would still represent a waiver of tax revenue,” he adds.

Paul Kershaw, a professor at the University of British Columbia, also does not believe that Trudeau’s proposal will be enough to contain price increases or have a significant impact on the issue of access to housing.

Pomeroy, in turn, believes that property values ​​should fall in the coming months, but due to the monetary tightening of the Canadian Central Bank, which raised interest rates.

The country’s housing market is particularly susceptible to rising and falling rates, as many Canadians take out five-year mortgages — rather than the long-term mortgages common in the US and other countries.

If, on the one hand, rising interest rates should contribute to lowering prices, says Pomeroy, on the other hand, it should make housing less affordable for potential buyers trying to enter the market.

Myers, from Bullpenn Research & Consulting, states that, in the long term, the trend is that in hotter markets, such as Toronto and Vancouver, there is less and less buying and selling and more and more rents, unless public managers adopt measures to address the supply problem.

Pomeroy also adds that, given the high construction costs, even an increase in supply would not significantly reduce prices, unless it happened significantly, with a much larger number of projects.

“Unless you were born into the ‘right’ family… the prospects for young buyers are less than rosy.”