CIBC's Tal on foreign buyer ban: "The damage is real"

Economist outlines possible impact of ban on non-resident homebuyers

CIBC's Tal on foreign buyer ban: "The damage is real"

Unintended consequences of the “Prohibition on the Purchase of Residential Property by Non-Canadians Act” would require amendments to the clause banning foreign homebuyers from participating in the housing market, according to Benjamin Tal of CIBC Capital Markets.

The legislation, which came into effect on January 1, applied restrictions on any direct or indirect purchase of residential property by non-Canadians for a two-year period.

“The motivation of course is to improve affordability by eliminating a source of housing demand that is often less price sensitive than local buyers,” Tal said.

Tal acknowledged the argument that foreign buyers are a negligible factor at best, noting that non-Canadians own a minimal share of the housing stock in the hottest markets (at 2.2% in Ontario and at 3.1% in British Columbia).

“But the counterargument is that whatever marginal role foreign buyers play, eliminating its impact on home prices is better than nothing,” Tal said. “There is nothing to lose. And that’s where the issue is. In fact, there is plenty to lose.”

While the language surrounding the legislation is “straightforward”, there might be some disagreements with the terms “residential property” (which also includes “any developed or vacant land that does not contain any habitable dwelling and that is zoned for residential or mixed use and also is located within a census metropolitan area”) and “non-Canadian” (which the Act defines as any entity with 3% or more foreign ownership, wording that inadvertently includes most publicly traded Canadian REITs, Tal said).

“Consider the language around the term ‘purchases’,” Tal added. “It refers to a direct or indirect purchase, which means that any acquisition of a lease or a mortgage tied to a residential property by a non-Canadian is prohibited.”

The immediate consequences have been an unwelcome surprise for the industry, Tal said.

“The damage is real,” Tal said. “Many commercial real estate deals have been cancelled or are on hold despite the fact that they have nothing to do with residential housing. Developers that are partly foreign-owned or rely on foreign equity cannot proceed with purpose-built developments that, in our view, are the most effective tool to tackle Canada’s housing affordability crisis.”

Policymakers should immediately take stock of the situation and buttress the market against further undesirable consequences by “[amending] the Act in a way that is consistent with what it was intended to achieve — focusing only on single units being purchased by foreigners while exempting development of new supply from the impact of the new legislation,” Tal said.