Pressure has been mounting on the federal government to take action against rising home prices caused by foreign investment—and earlier this week it did just that, with a new measure that limits tax incentives for out-of-country buyers.
On Monday, Finance Minister Bill Morneau announced tax exemptions for the sale of principal residences will no longer apply to buyers who don’t live in Canada the year their home is purchased.
Prior to these changes, anyone selling their principal residence would enjoy tax-free profits if their home had increased in value. It’s a perk that’s been allegedly abused by foreign investors using a method known as flipping. According to recent reports, large numbers of out-of-country buyers have been purchasing and designating multiple homes as primary residences and then selling them at a profit. It’s a practice that critics say has contributed to skyrocketing housing prices in Toronto and Vancouver real estate markets.
The government hopes that limiting investors’ potential profits will cool their interest—and as a result, home prices. But will these measures actually make housing more affordable in Canada?
Responding to pressure
The federal government has already made a number of efforts to calm the market, from tweaking amortization and down payment requirements, to increasing scrutiny on mortgage lenders and insurers—but this is the first time it’s targeting foreign buyers with housing policy.
Scrutiny on whether foreign investors are negatively impacting the market has reached fever pitch, with criticism from both the media and local homebuyers, who feel they’re at a disadvantage in their own markets. Recent reports that have unveiled the extent of real estate fraud and the ease at which foreigners can qualify for mortgages certainly haven’t helped with this perception.
In Vancouver, where the impact of outside investment is most felt, a few efforts have already been made at the provincial level. A 15% tax was applied to Metro Vancouver homes purchased by out-of-country buyers in August, and Vancouver mayor Gregor Robertson is pushing for a vacant homes tax, which would charge up to 2% on investment homes sitting empty.
Are foreign investors really to blame?
While it was clear action had to be taken against tax abuse and fraud, critics are wary of discouraging investment in Canada, especially as the housing sector has been a main economic driver following oil’s collapse. And, while blocking some foreign buyers may help alleviate price pressure, experts argue recent changes to “stress test” more mortgages—and the rate increases that could potentially follow—will have a more dramatic effect, pricing more buyers out of the market than foreign investment activity.
Record low mortgage rates, rather than outside buyers, are the real culprits behind unsustainable real estate prices, pundits say. This move against foreign buyers, while a flashy headline, may do less to cool the market than an interest rate increase.
The bottom line
Whether declining investment interest in Canada’s market will translate to lower real estate prices remains to be seen, especially in the hottest markets. All eyes are sure to be on market data in the months to come.