Bank of Canada Governor Stephen S. Poloz stated on Oct. 9, 2015, that rising high household debt represents a key vulnerability of Canada's financial system. Not surprising at all, given that Canada's ratio of household debt to disposable income hit a record 164.6 per cent in the second quarter.
In the wake of other recent reports such as the Canadian Mortgage and Housing Corporation's findings that Toronto and other Canadian cities are at high risk of housing corrections, and particularly troubling surveys by the Bank of Montreal showing half of all Canadians to have less than $10,000 set aside for emergencies -- and one in six Canadians are unable to handle a $500 increase in their mortgage payments -- one should wonder aloud why our overheated and unaffordable housing should not have been one of the main election issues?
During his election campaign, Mr. Harper was advising Canadians to buy into an overheated real estate market, trying to achieve his goal of a 70 percent Canadian ownership rate. To his credit though, he also promised to study the impact of foreign buying, whereas Mr. Trudeau and Mr. Mulcair remained basically mum on the subject. This leads to the logical conclusion that all three candidates realized the housing issue is a "hot potato," too hot to become part of any constructive debate on how to solve it.
It should be pointed out that unusually high appreciation of our real estate has been mostly due to the ever growing influx of foreign buyers - along with local speculators and hedge funds counting on more resales to foreign purchases in the future. With the oil industry in Alberta becoming history, and the manufacturing sector at an all-time low, it seems as if the only engine running our economy is seemingly vibrant real estate, mostly fueled by foreign buyers.
At first glance, foreign investment may seem to be a welcome boost to the economy, but a very disturbing second thought comes to mind -- the rapid depletion of affordable housing for middle class Canadians. Notwithstanding its present economic woes, China produces legions of multi-millionaires who, almost as a rule, prefer to invest their money in residential properties outside of their country -- Canada being one of their preferred choices.
Even at their economy's reduced annual growth rate, given their enormous population of 1.4 billion, a large number of wealthy individuals will continue to emerge from China and continue to buy into Canadian residential properties for the years to come. The same can be said for emerging wealthy buyers from India whose population is close to 1.3 billion.
By allowing foreign buyers to buy Canadian homes in large numbers, affordability of housing for Canadian middle class citizens is only going to further erode, eventually to the point of them not being able to afford homes in their own country. Buying too many residential homes will soon put foreign buyers in a position to dictate Canadian home and rental prices, notwithstanding periodic real estate corrections. If the situation remains unchecked, residential prices will keep on soaring and eventually spread to other cities due to foreign demand.
Even worse may happen when the next market correction occurs. As properties lose their values, there may likely be a much stronger, secondary wave of foreign demand that could snap up Canadian homes at an even faster pace, creating a very serious problem of affordability for middle class Canadians. The only way to truly remedy this potential threat is to either severely restrict or otherwise exclude foreigners from buying Canadian homes. This would pave the way for domestic supply and demand to become an exclusively Canadian issue, where the prices of residential properties would adjust in line with its citizens' affordability factors.
While encouraging foreign buyers to invest in our economy is of vital importance to the country, allowing them to buy residential real estate and/or farms in large numbers may turn into a disaster.
Their unchecked and rampant buying of Canadian residential properties is indeed a sword that cuts both ways. On one hand, the country (temporarily) benefits by the influx of foreign capital. On the other, middle class Canadian buyers end up unable to keep the pace with ever increasing prices.
I strongly believe that in the absence of foreign buying, the construction industry would still continue to be viable as older homes, apartments and condominiums need constant upgrades. The industry would also continue to cater to new housing start-ups, this time encouraged by Canadians who can afford them, albeit at less expensive price tags. The only difference would result in developers making less profits along the way.
The most practical way of inducing a necessary correction in the real estate sector is to allow foreign buyers to purchase only the residences that are appraised at $1 million or more and impose a 100 per cent surcharge tax at the time of purchase. Effectively, they would be paying double the price. It seems like a draconian measure. But even under such an arrangement, I feel the market for foreign buyers would remain attractive, given how many want to buy into our residential real estate. It may be a good starting measure to dampen the demand somewhat and provide some relief to the Canadian middle class to compete in the marketplace.
If the next Canadian government doesn't take serious pro-active measures to ensure that the cost of sheltering for Canadians becomes affordable, there is a good possibility where, in a not so distant future, foreigners may become major landlords of Canadian homes, dictating their prices and rentals. Effectively, they'll become in position to hold Canadians at ransom in their own country.
The restrictive measures of foreign buyers should be coupled with responsible immigration policies, allowing new immigrants into the country that are not measured by the depth of their pockets, but rather, their professional skills that would enhance the Canadian labour force and its productivity.
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Foreigners who plan on spending less than six months a year in Canada can keep a home here without having to apply for residency. Those who buy a property and plan on living in it longer than that have to immigrate to the country and apply for permanent residency. If they rent out their property, they don't have to live here at all but do pay a 25 per cent withholding tax on rental income that, unlike for Canadian property owners, is usually taken off the monthly rent. Homebuyers from abroad are subject to all the same fees and taxes as Canadians when purchasing real estate -- although they can face higher property or land transfer taxes in some jurisdictions and are subject to different capital gains tax rules when they sell a property. If they take out a mortgage on their property, they have to do so at a Canadian bank and will usually be asked to put up a larger percentage of the purchase price as a down payment than permanent residents -- typically, 35 per cent versus the five or 10 per cent that is more common for Canadian residents. Most provinces treat foreign homebuyers the same as local residents. One exception is P.E.I., which imposes higher property taxes on anyone who is not a resident of the island -- not just foreigners -- and forbids them from owning more than five acres of land or 50 metres of waterfront without special permission from the Island Regulatory and Appeals Commission. -- CBC
Internationally, some of the most heated debate around foreign ownership of real estate in recent years has had to do not with urban or oceanfront properties but with farmland. The global land grab, as it's sometimes called, has seen governments and multinational agribusinesses from China, Saudi Arabia, India and elsewhere quietly buying up arable land across the African continent and in countries as far flung as Indonesia, Australia and Argentina. In Canada, several provinces have protections in place limiting the amount of agricultural land foreigners can buy. - Alberta limits non-residents to two plots of agricultural or recreational land not exceeding a total of 20 acres. - Saskatchewan restricts sale of agricultural land to foreigners to 10 acres. - Manitoba prevents non-residents from owning more than 40 acres of farmland and requires that they move to the province within two years of purchasing the land. - Quebec doesn't allow non-residents to purchase farmland at all without permission from the Commission de protection du territoire agricole du Québec. A non-resident is anyone who has lived in the province for less than 366 days within the 24 months preceding a real estate transaction. Canada's open-door policy is comparable to the approach to foreign property ownership in other countries, including the U.S., Germany, France and the U.K. There are some jurisdictions, however, that have taken steps to restrict foreign investment in real estate beyond simply imposing higher taxes on homebuyers from abroad. -- CBC
The country recently tightened its laws after a brief period of opening up real estate to foreigners during the economic crash. It reintroduced restrictions on ownership in 2010 after a surge in property prices made housing increasingly unaffordable, especially in major cities like Sydney and Melbourne. (In 2010, asurvey of housing markets in Australia, the U.S., Canada, the U.K., New Zealand and Ireland ranked Australia's housing market as the least affordable.) Today, the following restrictions apply to foreigners: - Foreigners -- regardless of whether they are temporary residents of Australia or live abroad -- are prohibited from buying existing housing stock (homes that have been previously owned or occupied for more than 12 months) for investment purposes -- i.e. as a rental or vacation property. - The exception to the above rule is if a foreigner buys existing housing stock that they plan to demolish and redevelop. The property must be redeveloped within two years, and the redevelopment must increase the number of housing units. The property cannot be rented out prior to the redevelopment. The new property can be rented out, sold or used by the owner. - Foreigners temporarily residing in Australia can apply to buy one piece of existing property to use as a residence provided they sell it when they leave Australia. This provision was meant to address complaints that Asian investors buying property for children studying in Australia were outbidding locals and holding onto property after their children left the country. These are some of the same complaints being raised currently in Canada. - If foreigners buy vacant land for residential development, they have to build on it within two years and are allowed to rent out, use or sell the built properties. - There is no limit to the amount of newly constructed real estate foreigners can own as long as the property has not been marketed exclusively to foreigners overseas. Such property can be used as an investment. -- CBC
Swiss real estate is some of the most coveted in the world, but the country also has some of the strictest rules when it comes to foreign ownership. - The government assigns annual quotas to the country's cantons limiting the number of houses or flats that can be sold to foreigners who do not reside in Switzerland. Each sale must still be authorized by the canton in which the property is located, and the cantons can set their own additional restrictions. Many limit foreign property sales to tourist regions, for example, or allow foreigners to purchase only property that is already foreign-owned. - Foreigners can buy only one property to be used as a holiday home or a secondary residence. They cannot purchase a property for the sole purpose of renting it out, although holiday homes can be rented out periodically on a short-term basis. - Property owners need special authorization if the surface area of their real estate exceeds 1,000 square metres. - In some cantons, foreigners are barred from selling their property for a certain number of years after purchasing it -- generally between five and 10 years. - If foreigners buy vacant land, they must build on it within a year. - Foreigners who live in Switzerland do not need to get prior authorization to purchase real estate that will serve as their main residence and can rent out the property or use it as a holiday home if they move to another part of the country. - One area that is exempt from restrictions on foreign ownership of property is the alpine ski resort town Andermatt, where luxury condominiums marketed to wealthy foreigners as vacation properties can sell for several million dollars. - Foreign nationals from EU members states and some other European countries who want to buy property do not require the same type of prior authorization as other foreigners. -- CBC
China imposed new restrictions on property sales in 2010 -- for locals as well as foreigners -- in order to curb rising prices and real estate speculation. It raised down payments, tightened mortgage rules, introduced property taxes in several jurisdictions where they did not exist and put in place new limits on ownership. - Foreigners can own only one residential property for their own use (permanent residents are restricted to two properties). - Foreigners must reside in the country for one year before they can buy property. - Foreign companies who buy commercial real estate must use it themselves. Recently, some cities have started easing or not enforcing the restrictions on their own in an attempt to boost the local revenue they get from property sales. -- CBC
Foreigners cannot, for al intents and purposes, buy land in Thailand and are generally restricted to purchasing condominiums, although they cannot own more than the equivalent of 49 per cent of the total floor area of all the units in a single condominium building. -- CBC
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