Canadians, rightfully, consider themselves a welcoming people. In 2014, Canada welcomed over 250,000 new permanent residents. We celebrate our diversity. We don't build walls -- we open doors.
Except, perhaps, in real estate. Surging house prices have led to a hunt for a culprit -- and for a large number of Canadians, foreign buyers are to blame, leading for calls to ban foreign ownership of Canadian homes.
But what is this other than another sort of wall?
Teranet data shows that the average resale house price jumped 14.5 per cent and nine per cent annually in Vancouver and Toronto respectively in February. The most commonly repeated explanation for the price surge last year and into 2016 is an increase in foreign buyers, especially Chinese buyers looking to launder their ill-gotten funds. Anecdotal evidence of this happening is at record high, but actual data to support it is severely lacking.
The Canadian Mortgage and Housing Corporation (CMHC) has started its own investigation into the phenomenon, but is apparently finding the task challenging. Statistics Canada has been promised $500,000 in the Federal budget to tackle the issue.
For Fortress Real Developments' latest Market Manuscript report on the state of the Canadian residential real estate market, we surveyed mortgage brokers and agents regarding their client base. Survey respondents indicated that approximately eight per cent of their clients were foreign buyers or recent immigrants. This is consistent with many surveys done on foreign ownership nationally, but belief is that the share is much higher in the core markets of Vancouver and Toronto.
Is it worth the potential damage to our national reputation as a welcoming nation?
This means that foreign buyers are having an effect on the market. Simply having this five per cent to 10 per cent additional demand will lead to price growth (assuming builders and developers are not building an equivalent number of homes to offset this demand). But the real difficulty lies in determining how much more these foreigners are paying than the next highest bidding domestic buyer. That is, how much are foreign investors driving up prices, compared to rich locals? Another extremely important factor is speculation: are they short-term flippers, or long-term investors that are renting units to people who live in the market they're investing in?
Instead of trying to answer all these difficult questions, should we simply just ban all international buyers? A quarter of the mortgage professionals surveyed for the Market Manuscript indicated that banning foreign buyers would help prevent a housing correction in Canada. This potential solution creates new dilemmas: In a country of immigrants, do we truly have the right to say "we were here first?" With tourism, immigration and construction being strong contributors to economic growth, do we really want to discourage potential second-home owners and future Canadians from coming here? Is it worth the potential damage to our national reputation as a welcoming nation?
More importantly: Would this solution even work?
More tepid measures to stem foreign ownership in Australia have not succeeded in slowing price growth in that market. Foreigners in Australia can purchase homes if they prove that their investment will increase housing supply, which essentially limits them to buying new homes. An outright ban of foreign buyers would likely reduce supply in Australia and Canada, where many investors like to buy pre-construction condominiums and townhouses. This decreased supply would have the opposite impact as desired, and could further drive house prices up.
Before Canadians and our government make a decision to ban, restrict or add taxes to foreign buyers, we need to consider the potential negative side-effects and consequences of such actions: less tourism, less immigration, fewer consumers, less new construction, marred reputation.
Hopefully we don't let anger prevent us from examining many of the other forces driving up house prices in Canada, and finding a solution to our mismatch of supply and demand.