Homes In Canada Have Gotten Too Expensive – But Who Is To Blame?

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There have already been a number of posts on our social media channels and even previous blogs that have discussed this issue, but we’ve researched and put together a nice and very brief summary of what has been going on in the last three years in the national real estate market.

In the summer of 2016, the market for detached houses in Vancouver and neighbouring municipalities was doing extremely well (for sellers at least). Prices were up more than 20% from the start of the year, pushing the increase over the preceding three years to about 80%. The cost of a house had gone from expensive to dizzying.

Amid all the mania, who was supposed to be blamed? Most of the speculation coalesced around an outside force: foreign money, particularly capital that seemed to be pouring in from mainland China.

The provincial government, after years of being passive, sprung into action. First reading of a surprise bill aimed at cooling the market came on July 25 of that year and received royal assent three days later.

The legislation created the foreign-buyers tax, a 15% levy on foreign nationals or corporations that purchase residential properties in the Vancouver region. The bill also amended the City of Vancouver’s charter to allow a vacancy tax. The measures were the first major moves to contain demand that helped drive housing prices higher, in particular demand deemed to be speculative.

Fortunately, a lot has happened since that summer and not just in British Columbia. The western province began by increasing the foreign-buyers tax to 20% and expanded it to more areas of the province; it also added a new vacancy tax in areas beyond Vancouver and new taxes on high-end properties.

What happened in Ottawa? A tough new stress test for mortgage applicants was introduced, making it harder to get a loan. Ontario imposed its own foreign-buyers tax of 15% in the Toronto region. Mortgage rates climbed through 2017 and 2018 – before sliding this year.

And sadly, in Vancouver and Toronto, money laundering has since been exposed as a factor in elevated real estate prices.

After the B.C.’s foreign-buyers tax was enacted, housing prices fell. Then, they rose again and eclipsed previous highs. In the past year or so, prices have fallen on the west coast, but are still rising in Toronto. The market has been volatile.

Given the ‘revolution’, it isn’t easy to disentangle one policy from another or to precisely measure the impact of any individual government decision.

However, these laws have not stopped foreigners from investing in Canada. In March, April and May of this year, one out of every 40 purchases in the Vancouver area have involved a foreign buyer – 2.5%. In 2016, in the months before the foreign-buyers tax was enacted, the rate of international purchases was 13.2% – more than one in eight deals, it was reported.

The data underscore several lessons. The decline in foreign buying shows a straightforward piece of policy, one that is easily understood and has a specific aim, can work well.

But the downs and ups and downs of real estate prices after the tax was imposed also shows the market for housing is complex and no single factor has an outsized influence, save for perhaps a spike in interest rates or a serious recession.

As well, the central factor that led to the foreign-buyers taxes and other policies still plagues Vancouver and Toronto: the cost, whether of a single-detached property, a townhome or a condo, remains well above the reasonable reach of local residents’ average incomes. The two cities are among the dozen most expensive housing markets in the world. Foreigners may have been affected, but Canadians even more.

With the population growing fast in both regions, it’s clear that rising house prices are not just the fault of foreign buyers, but are also linked domestically.

One particular factor stands out: Canadian housing policy is still largely rooted in the past. Too much of the land in Toronto and Vancouver is reserved for single-detached homes, which means the cost of the little land available for multifamily housing is unduly inflated.

In addition, too many owners of single-detached properties in Vancouver and Toronto oppose development under the guise of neighbourhood character – and these voices carry too much weight among elected officials. Understandably, they don’t want to lose a piece of history and an important tradition.

The foreign-buyers tax in B.C. shows smart government policies can work. But their relatively limited impact also shows housing policies must be more ambitious if affordable housing for Canadians is the goal.

Even though new policies to try to help Canadians are being put in place, was this new law for foreign buyers an impulse action to avoid a financial implosion, without giving a thought to how it would affect Canadians in the longer run?