While Canada seeks to curb the housing bubble by banning foreign property purchases, such a measure is unlikely to have a dramatic effect on the housing market. Foreigners make disproportionately high offers for Canadian homes, skewing the market for Canadian buyers. Fortunately, the ban will be more psychological than actual. Let’s look at why this measure might be effective.
The prime minister has been under pressure to do something about the housing crisis. As a re-election candidate last year, Justin Trudeau pledged to look for solutions. His plan includes a temporary ban on foreign property purchases, billions of dollars to boost new home construction, and new stimulus programs for first-time buyers. He also discussed banning bidding processes that favor investors. This policy, he says, will have minimal impact on taming the housing market, but it will be politically savvy.
Although Trudeau’s plan has some merit, industry experts are not convinced that banning foreign buyers will actually help curb the housing market. The government has promised to spend $10 billion over five years to implement the plan, and new policies will increase housing inventory and discourage foreign buyers from outbidding Canadians. Meanwhile, the foreign buyers ban will apply to single-family residential units, condos, and apartments. Foreign workers and students will not be subject to the ban, as they are considered permanent residents. The ban will be enacted in legislation, and potential judicial powers will address non-compliance cases.
Canadian politicians may be paying the price of house prices by imposing new taxes on non-residents. The new tax in Ontario, introduced in April 2017, targets foreign homebuyers. Although foreign investors are not the primary cause of the housing affordability problem in Canada, the new taxes can help the province collect additional revenue. But even with the additional tax revenue, a ban on foreign property purchases is unlikely to curb house prices and would merely dampen speculative investment activity.
The government plans to ban most foreigners from buying residential property in Canada for two years. The move is meant to stabilize the housing market and stifle the real estate bubble. It will also ban commercial enterprises from buying residential property and will keep the market more affordable for Canadians. However, it must be understood that such a ban alone will not correct the housing market, and more countries may soon enact similar restrictions.
Despite the fact that the Canadian economy has a strong economy, it is a fact that foreign property purchases are a major source of illicit funds. The country’s real estate market has become “hedge city” in recent years as home prices skyrocketed and non-residents were left with empty properties. This situation is a prime example of the unintended consequences of globalization.
Adding more supply is a necessary way to prevent a price bubble. It is important to note that adding more supply will not necessarily lower prices, because the costs of development are high. In contrast, a drastic increase in supply will probably have the opposite effect. In the end, the real estate market is unlikely to crash, and instead, will remain hot. But the government’s action is a good way to suppress prices and prevent a real estate crash.