2022 Federal Budget - What does this mean for Real Estate in Toronto?

Amongst one of the main items was how the government was going to try and get home pricing under control and it “spicier” sub measure to restrict foreign home purchasing for 2 years.

As I have been saying for months, the challenge is one of supply and demand.  Increase the number of homes being built and helping developers and home builders to do this and the supply will go up thus lessening the demand.  I don’t say this is the ONLY answer as with everything in life, a single answer doesn’t fully complete the question, but this would be a large step.

I want to address this single budget initiative, to prohibit foreigners from purchasing property in Canada for 2 years.  I can’t tell you the number of times I have read or heard people say some variation of “how can our children afford to buy a home when x (input a foreign person or country) is buying up all the homes”?  

It is always easy to blame someone else, especially a foreign person.  You see political leaders doing it all the time throughout history.  Everyone wants to blame a foreign country or a certain group whether they are political, racial, religious or just different.  But this same budget was also saying that they want to increase foreign investment.  How can they take on an isolationist policy in real estate but a global strategy for investment?  Isn’t home purchasing a form of investment? 

The interesting thing about this budget rule change is ironic but not surprising.  The general thought is that it won’t have much of an impact on home pricing because, depending on who you speak to, foreign buyers only account 1-5% of the overall purchases in Canada.  StatsCan has the number at 3.4% in Toronto 5 years ago.  Ben Myers of Bullpenn Research & Consulting has it at 1% in 2020 for Condos down from 9% in 2015 and 2016.  The other thought is that if a foreign investor wishes to buy in Canada he or she will find a way (through a Canadian citizen proxy).

The other challenge to this rule is one of lost tax revenue.  A short while ago Premier Doug Ford announced a 15% “Foreign Buyer Tax” for Toronto Real Estate which he wanted to increase to 20% and include the entire province.  While I am not sure how much that tax revenue was, it will all now go away.

"It's a fairly low number and let's face it, the people that really want to buy ... are going to find alternative ways to do it."

Mr Myers said the soaring housing costs reflect strong population growth and a shortage of supply, due in part to rules that restrict development.

In Ontario, for example, provincial Premier Doug Ford recently announced plans to raise an existing tax on foreign buyers from 15% to 20% and expand it beyond Toronto to the entire province.  As Steve Pomeroy, head of Focus Consulting, a housing policy firm said, "If you ban them, you don't really have much of an impact on suppressing rising home prices and you give up the revenue".  New Zealand introduced a similar measure banning foreign buyers in 2018.  "It's good politics because it's easy to blame a victim that nobody cares about," Mr Pomeroy added. "I don't think it will have much of an impact." 

https://www.bbc.com/news/business-61027374

To be clear, I have also said and continue to say that a 20% increase in sale prices is not healthy.  It is an unrealistic expectation for the seller, it makes purchasing a huge burden and is not good for the economy to be so lopsided and extreme.  Yes, home owners should expect a healthy return on their “investment”.  To be able to own a home, live in it, perhaps raise a family in it or event own it as an investment so another family can live in it is a wonderful thing but a financial return is also a reasonable expectation.  But what is that reasonable expectation?  6-10% annually?  Not 15-20% or more.

Unfortunately, the government has done what many have done before it and will do again and that is take the populist approach and blame “the other guy” with a policy that will be ineffective and probably detrimental but sounds good in the short, short term.