During a federal budget presentation this week, Canadian finance minister Chrystia Freeland announced a proposal to ban foreign buyers and non-Canadian companies from purchasing residential real estate in Canada for two years.
Home values across Canada have soared more than 50% since 2020 and foreign investment has played a role in this surge of home prices. Homes in Kelowna have increased 32% in just the past 12 months alone.
In 2016 British Columbia introduced a foreign buyer tax, which was originally set at 15% of the fair market value. The tax has since been increased to 20% in an effort to cool the housing market due to foreign investment in Vancouver, Kelowna, and other areas of BC. The foreign buyer tax seemed to slow the market down when it was implemented in 2016 at a 15% tax rate and then raised to a 20% tax rate in 2018.
Some buyers will be exempt from the new foreign buyer ban including students, refugees, foreign workers, and permanent residents. Some industry experts have raised concerns about whether the foreign buyer ban violates the US-Canada-Mexico Trade Agreement and other international trade agreements by discriminating based on nationallity. Others have pointed out that most international investment is done through friends and family members who are exempt from any taxes or bans.
Some have argued that this may not have much of an effect on prices as the vast majority of investment is coming from Canadian investors and landlords buying multiple properties to rent out. It will be interesting to see how this plays out.
Billions Of Dollars Towards Creating More Housing Supply
Also announced was a plan to provide billions of dollars to increase new home construction in order to increase supply to match the demand for new housing. More inventory would hopefully curb further inflation of the housing market.
Several billion dollars will be allocated to building affordable housing and to helping local governments and municipalities update their building permit systems to allow faster construction of new homes. Some argue that the price surge in Canada is due to a fundamental lack of supply and this should help that problem. There still remains the issue of increased cost of supplies for building so it is unclear whether it will reduce the prices of new home builds, but it should relieve some pressure on resale homes.
Possible Ban On Blind Bidding
Discussions have also been brewing about banning the closed bidding process in Canada. The current bidding system leaves buyers out of the loop regarding the price of competing offers. This is believed to have caused an increase in the rate of inflation of house prices as many buyers are making significantly higher offers without knowing how high they need to go. Some homes have sold for hundreds of thousands of dollars over their list price.
Also in the budget proposal is a program for a tax-free savings account for first-time home buyers.