Banished

Last week the woman who wants to be prime minister took the latest wild fling at the issue which could thwart her. Housing, of course.

Chrystia Freeland announced that a ban on non-residents buying homes – in place initially for two years – would be doubled to four. Said she: “By extending the foreign buyer ban, we will ensure houses are used as homes for Canadian families to live in and do not become a speculative financial asset class.”

Well, real estate is already a financial asset class. For a majority of folks it represents the single biggest chunk of their net worth. Moreover, we’re obsessed. Smitten. The house lust has led to an indebtedness of $2.1 trillion in mortgages. One in five families own multiple properties. Currently there are more than 33,000 properties listed for short-term Airbnb rental, half of them illegal. Odds are that 16,000 owners are collecting income they do not report. That’s a crime. Meanwhile over $150 billion in equity has been sucked out of residential real estate in the form of lines-of-credit. Much of that money has been used to buy more… guess what… real estate.

So, obviously, the financialization of residential real estate is complete. In many ways, the tax code did that. We let people speculate on their homes, sell at a profit and keep the proceeds free of tax. We let landlords and short-term rental hosts write off a bevy of expenses, including mortgage interest.

The housing agency which reports to Cabinet allows buyers to have 20x leverage, and purchase a property with just 5% of its value in hand. CMHC insures mortgages, wiping away lender risk, allowing borrowing rates to fall. In fact a 5%-down, high-risk borrower can get a better deal than a guy with 60% equity – because of the feds. This encourages leverage, borrowing and higher valuations.

Freeland’s government also moved aggressively to cushion the effect of higher interest rates on real estate – least families would be financially impacted. Lenders have been instructed to waive fees and offer flexible repayment terms, for example, while renewers are now able to dodge the stress test. The ‘mortgage charter’ she announced in the last budget and financial statement are all about protecting our financialized homes.

So, high rates did not bring about significantly lower prices. Now 2024 will be the year in which those rates pivot and slowly decline. “This is a whole new world,” a prominent GTA real estate broker told me this week. “It’s only February and our phones are ringing. Showings and listings are up. There is no doubt where this is headed.”

So why is she fussed about non-resident buyers? Are there any left?

In Toronto about 5% of condos are owned by non-Canadians, with most of them rented (to Canadians). In BC the latest numbers (2021 – before the ban) showed 1.1% of buyers were not locals. So 98.9% were.

For years now Canada had had withering taxes in place telling the world to ‘go away.’ Ontario and BC slap mega taxes on non-residents. Toronto is debating throwing another 10% on top of that. And just consider what current taxes amount to for a non-resident in BC buying a newly-built $750,000 home. HST, provincial sales tax + the xenophobic provincial transfer tax add $200,500 to the price of that property.

But, as stated, none of this really matters. The non-Canadians are not to blame for the mes created by bad tax policy, politicians trying to stimulate housing demand (RRSP home buyer’s plan and FHSA are good examples), monetary policy mistakes (1% pandemic mortgages), societal house-lust and a weird Canadian embrace of unrepayable gobs of debt.

Scotiabank’s rockstar economist Derek Holt calls out Freeland for trying to mask bad housing policy with an ineffective and purely-political ban on people who aren’t actually buying our real estate. Realtors point out house prices are generally higher than when the ban was imposed.

“Non-Canadian property ownership makes up a small percentage of the overall housing market, therefore a ban on such ownership is not likely to improve access to housing in a material way,” says a Royal LePage guy. Asks Tom Davidoff, a UBC real estate professor, “How much juice is left in that lemon to squeeze? Because foreign buying has been obliterated in B.C. and Ontario by these taxes and so you’re left with markets that have been less adversely impacted.”

Some say Canada, and Ms. Freeland, have not gone far enough. Look at Singapore, they say, with a 60% tax on outsiders who want to buy, and an almost-90% home ownership rate.

Well, Singapore is a small place. Eighty per cent of the housing was built by the government, compared to 5% here. Most of those flats are leased on a 99-year basis to the ‘owners’. Investors, profit-driven owners and speculators domestic or otherwise, are considered evil.

And that’s us.

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