In an attempt to reduce high prices, the Liberal government of Canadian Prime Minster Justin Trudeau proposes a ban on foreigners buying homes in Canada. If the small number of existing foreign homebuyers and other countries’ experience are anything to go on, it won’t do much good.
We will stop foreign buyers buying homes in Canada to store their cash. In a forward to Canada’s 2022 budget, Chrystia Freiland, Canada’s finance minister said that she will ensure houses are used for their own purposes and not as commodities to trade.
For a two-year period, the plan would prohibit foreign businesses and permanent Canadian residents from buying “nonrecreational residential property”.
Some may find it offensive to exclude foreign buyers from housing markets. It’s still a win-win situation for Canada.
After last year’s presidential elections, Trudeau (leader of rival Conservative Party) proposed that foreign buyers be banned. Bloomberg. Left-leaning New Democratic Party suggested a 20% tax on non-Canadians who buy homes.
A ban on home purchase from foreigners has certain logic. A reduction in demand would, over the short term, lower prices. All of these benefits will go to remaining Canadian homebuyers.
Problem is, foreign buyers make up a very small portion of the overall housing market buyers. It does not help to curb demand by excluding them. Soon, the demand for native Canadian products will overwhelm it.
Fifteen-years of evidence shows that policies designed to reduce foreign buyers on housing markets have had a limited impact on affordability.
The British Columbia province imposed an additional 15% property transfer tax for foreigners who bought homes in Vancouver Metro. This was in effect from 2016. This tax was increased from 15 percent to 20 percent in 2016 and expanded to include other parts of the province. Data from provincial property transfers shows that foreign-involved purchases have declined dramatically since the introduction of the tax. They now account for 1 to 2 percent of property transfers.
Although the effect was small on housing affordability, it had minimal effects. A study of the tax showed that it had a 1 percent reduction in house prices, but that effect faded after seven months. The foreign home purchase market continues to make up about 1% of the total British Columbia home buying. This is still the most expensive place in Canada to buy a property.
In 2018, New Zealand also largely banned foreign nationals from purchasing homes—estimated to be about 3 to 4 percent of home sales. Home prices have risen by 12 per cent in 2019, 18 per cent in 2020, 23 percent in 2018, and 24 percent over the past year.
Eliminating supply constraints would be more effective in reducing housing costs than merely marginally reducing the demand.
Canada has many of same restrictive policies regarding new housing as the U.S., including price increases. Local and provincial governments limit new density housing in the urban core, as well as suburban development near city edges. Many cities also have rent control which discourages even further investment.
Steve Lafleur, of the Fraser Institute in Canada, writes that we shouldn’t chase villains but should instead seek out solutions. If policymakers are looking to improve housing affordability for families and young people, they must reduce housing construction barriers.
Reduced home construction barriers would increase affordability. However, it could also reduce the political viability of foreigners blaming Canada for its high domestically sourced housing cost.