Canada’s foreign buyer ban has been in effect for only a few hours, prompting discussions about loosening it. Interestingly, just 86 days after imposing limitations on non-resident buyers, the country quietly relaxed restrictions for non-resident investors and temporary residents. It’s possible that the ban was simply a diversion from speculation originating from within the country.
Canada Once Again Allows Foreign Investors To Buy Vacant Land
Canada is changing course by allowing non-resident home buyers to purchase vacant land that is zoned for residential or mixed-use development. The country has cited this as a means of increasing the housing supply, but the changes emphasize that the land can be utilized for “any purpose.” While the benefits of development are clear, what are the drawbacks? Given that only two months have passed and no information on beneficial ownership has been released, it’s evident that the impact in one critical area – land banking – hasn’t been studied.
Land banking involves buying and holding land “for development.” However, without a timeline, it’s unclear when this land will actually be developed. Land banking has always been an issue, but it grew significantly after the global financial crisis (GFC) as low rates intersected with global capital flows, leading to the purchase of land all over the world as a means of diversifying exposure from a single market. Even BlackRock was advising wealth managers for Asia’s super-rich that cities like Vancouver were excellent places to store wealth.
While global capital entering your market is generally positive, it needs to be on the same page as your own interests. Inviting non-resident capital to utilize vacant land as a deposit certificate to be redeemed (i.e., developed) without a timeline is certainly an interesting choice for a country that claims to be experiencing a housing crisis and a shortage of vacant land. This move could put additional pressure on home prices.
Canada Loosens Real Estate Rules For Non-Resident Companies
Canada is relaxing its regulations on non-resident companies purchasing land. Public Canadian companies are now exempt from these restrictions, even if they are controlled by non-residents. Moreover, private companies are not excluded from these changes. The 3% cap on non-resident ownership has been raised to 10%, enabling firms to have a non-resident major shareholder.
Canada Loosens Rules For Temporary Residents Buying Property
Temporary residents on a work permit are also benefitting from the rule changes in Canada. Those with at least 183 days remaining on their permit are now allowed to purchase a home. It is worth noting that the minimum requirement is the number of days left on the permit, not the number of days the permit holder has spent in the country.
Previously, non-residents were not prohibited from purchasing homes, but they were required to have filed taxes for the previous five years, have been physically present in the country for a minimum of 244 days in each of those years, and the property could not exceed $500,000 in value at the time of purchase.
This is a significant shift from requiring five years of residency to being able to buy a home on the first day, as long as the work permit is valid for 183 days. The market for buyers seeking to purchase property on a temporary visa before paying taxes in Canada is apparently substantial and was unfairly penalized.
Canada has not made any other changes to the rules for non-resident home buyers. Non-residents are still allowed to purchase recreational or vacation property and buildings with more than three units. Moreover, the restrictions only apply to census regions with a population greater than 100,000 people, so most of the country does not have any restrictions at all.
Real estate-like purchases remain largely unregulated, with few restrictions. For example, pre-sales assignments can still be bought and flipped before the development is finished, since the property is not considered a home until it is complete. The buyer only has an assignment for that home. Conveniently, assignments are not subject to non-resident speculation taxes until the home is complete and transferred.
There is little evidence that non-resident speculation has been a significant part of the market since the “foreign buyer mini-bubble” in 2017-2018, which was largely concentrated in Greater Toronto and Vancouver. British Columbia’s beneficial ownership registry has shown very little buying activity in recent years.
The record price growth during the pandemic was mainly due to excessively cheap credit and an explosion of domestic investors. However, nearly one in four (38%) federally elected officials invest similarly, so the ban served as a useful distraction during the last election. The announcement that made headlines worldwide was also a way to prove that a promise had been kept. Now that no one is paying attention, and rate cuts are predicted by year-end, elected officials who are also speculators are evidently attempting to develop a market. Or at least enough of a market to increase domestic sales and bolster prices.
