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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