Canada currently houses one of the most expensive housing markets in the developed world. Home prices have been growing for years but have skyrocketed since the onset of the pandemic. Public backlash about rising inflation and the growing inaccessibility of housing has forced the Canadian government to announce measures that it claims is intended to curb the market’s growth.
As part of these measures, contained in Finance Minister Chrystia Freeland’s budget, the Canadian federal government will impose a two-year ban preventing foreigners from purchasing Canadian properties. This ban will not apply to foreign citizens holding Canadian permanent residency, foreign workers, or international students.
Freeland and Trudeau claim that this foreign ban comes out of an effort to balance Canada's severe supply and demand problem within its housing market. Because there is a limited supply of housing across the country, growing demand has slowly pushed property prices higher and higher. By limiting outside buyers, the government claims it hopes to reserve the current housing supply for Canadians. Chrystia Freeland’s budget furthermore details multi-billion dollar plans to fund the construction of affordable housing across the country in an attempt to increase supply.
The reality is that this appears to be an action aimed at appeasing voters who do not thoroughly understand how easy it is for foreign buyers to circumvent this policy. Foreign investors are easily able to bypass this policy by purchasing through other Canadian friends or family members, purchasing through a corporation they setup in Canada, and more. All this will do is increase the levels of fraud that we are currently seeing in the real estate market. For affluent and resourceful foreign investors, a rule like this one will do little to prevent them from purchasing real estate in Canada.
Furthermore, foreign buyers account for only a very small percentage of Canadian real estate owners. If the government truly wanted to impact the Canadian real estate market rather than merely appease a large portion of the Canadian population using a smoke and mirrors policy, they have many other ways to do so.
Even so, the federal government is not the only body imposing restrictions on foreign buyers. Within Ontario, Premier Doug Ford announced his plans to increase the current 15% tax on foreign buyers by as much as 5%. He also suggested expanding the tax beyond Toronto to apply to housing markets across the province. Proponents of the new provincial policies argue that while foreigners are not the cause of our housing crisis, increasing taxes can help fund other initiatives to cool the market.
The Canadian housing market has exploded in recent years, with rising prices and inflation threatening to push new buyers out of the market. In just the past two years, prices have increased by over 50%. According to the Royal Bank of Canada, the average price of a Canadian home hit an all-time high of $816,720 CAD this past February, making the average cost of a home nearly nine times greater than the average household income.
At the start of 2022, the Royal Bank of Canada announced its plans to increase interest rates around March to combat inflation and cool the red-hot housing market. In preparation for the increased overnight lending rate, many buyers sought to act ahead of the policy change and buy properties they would no longer qualify for under the new stress test, pushing prices up to record highs in February.
As prices climbed higher and higher, it became increasingly difficult for first-time homebuyers to enter the market. Last year’s supply chain crisis drove up the cost of lumber and other construction materials, severely limiting their accessibility. As a result, developers found it challenging to finish enough projects to meet demand. A limited supply of housing combined with increasing demand has turned the Canadian housing market into a bidding war, driving prices up to record highs. However, this seems to have started to change since the last two interest rate increases by the Bank of Canada.
The Greater Toronto Area in particular has seen the number of homes sold has decreased by 27% from this past March to April, and the average price of homes decreased by only 3.5% March 2022 where the average selling price in the GTA was $1.3 Million to April 2022 where the average price decreased to $1.254 Million, based on TREBB’s MLS system.
Supply chain concerns have also forced business owners to charge higher prices for goods and services across industries, increasing the cost of living. Although prices have risen across the board, wage increases have failed to keep up with inflation— making saving up for a home even more difficult than before.
Foreign buyers, especially those from Mainland China, have often been blamed for the increased cost of housing in pricy markets such as Toronto and Vancouver despite owning only a small percentage of the total housing supply. In Toronto and Vancouver, foreign-owned condos or properties account for just 2.2% of the market. It is also important to note that China tightened its capital export rules in recent years, making it difficult for foreign buyers to move money across continents.
Due to the relatively limited pull that foreign buyers have on the Canadian housing market, and the fact that they can easily, although perhaps not through honest measures, circumvent these less than useful policies, it is unlikely that these new policies will significantly impact housing prices.
As a result of the recent rate increases, the increase in inventory, and other economic factors, we have already started seeing properties sit on the market longer and listed at prices that are more in line with their market value, instead of ultra-low listing prices in hopes of generating a “bidding war”.
My feeling is that this trend will continue, however we will not see a crash of any sort. We will only continue to see the market begin to normalize where homes will take 2-3 months to sell, will continue to be listed at more realistic values, and buyers will be less frustrated because they will no longer be putting in offers on a home listed for $750,000 that ends up selling for $1,000,000+.
This is much healthier overall for our economy and for people’s psychological states. Buying a home can be a stressful experience for many in a regular market. When that stress is exacerbated by the emotional rollercoaster of having to compete with multiple bids and getting outbid over and over again, it can be detrimental to a homebuyer’s or family’s psyche.
In the short term, we are likely to see top Canadian housing markets such as Toronto, Vancouver, and Hamilton become overrun with renters as the prospect of homeownership becomes increasingly inaccessible. The cost of rent is also likely to continue increasing as demand for rented properties rises, despite the record prices already in place. We will likely see a continuation of the migration out of urban centers and into the suburbs, as newly funded developments will likely expand past the outskirts of previously established cities.
In the long term, and I have said this before and will keep saying it, we will likely see more and more lenders re-introduce the 40-year amortization option. We have already seen some of our lending partners bring back this option for mortgage borrowers, and as the rates continue to increase, I strongly believe that we will see more and more lenders offer a 35-year and 40-year amortization period once again. Firstly, to help borrowers continue to qualify for the mortgage amounts they need, while also helping to keep monthly mortgage payments affordable. As this continues to happen, we will start seeing more buyers getting back into the market, which in turn will help keep home prices growing at a more stable and manageable pace.
If you are an aspiring homeowner looking to navigate the current market, you are not alone. Clover Mortgage is here to help. Our expert team of mortgage brokers will assess your current financial position and connect you with the best lenders and contracts for your unique situation. Contact Clover Mortgage to schedule your free consultation today!