Why is Canada banning foreign homebuyers?

Montreal, Canada – Canada has barred most non-citizens and foreign-owned companies from buying homes across the country, but experts question whether the ban alone will be able to fulfil Ottawa’s goal of bringing down Canadian housing prices.

The new housing law, which went into effect on January 1, prohibits “the purchase of residential property by non-Canadians” for a two-year period.

The measure includes exemptions for permanent residents and refugees, among others. But home-buyers who violate the law can face thousands of dollars in fines, as part of the government’s efforts to “curb unproductive foreign ownership”.

“Through this legislation, we’re taking action to ensure that housing is owned by Canadians, for the benefit of everyone who lives in this country,” Ahmed Hussen, Canada’s minister of housing and diversity and inclusion, said in a statement last month.

Canadian legislators passed the prohibition in June of last year, in response to soaring housing costs in major cities across Canada.

Home prices had been increasing for years but reached new heights during the COVID-19 pandemic, spurred in part by low interest rates and higher disposable incomes.

Rents also have been on the rise, pricing many people out, especially in urban centres.

Thomas Davidoff, director of the Centre for Urban Economics and Real Estate at the University of British Columbia (UBC), said the new law will likely do little in Toronto and Vancouver, two of Canada’s largest cities and most expensive real estate markets. Increased provincial taxes have already targeted foreign home-buying there, he said.

However, Davidoff told Al Jazeera that reducing demand overall is expected to lead to lower prices, and the ban could have an effect in Canadian cities that do not already impose high taxes on foreign real estate investments.

“It’s not a problem if there’s foreign investment in the market. What is a problem [is] if there’s empty homes that are pied-a-terre, vacation-type places,” he said.

“If somebody from overseas wants to buy an apartment and rent it out to somebody who lives locally, that’s not a problem. I think it’s misguided to focus on the nationality of the owner rather than the use of the property.”

Canada’s housing market

The prohibition on foreign ownership is one of several housing policies adopted by Prime Minister Justin Trudeau’s government, which unveiled Canada’s first-ever, national housing strategy in 2017. The 10-year, multibillion-dollar plan aims to help build new houses – including for low-income Canadians – and provide tax benefits and other incentives for new buyers.

Affordable housing was also part of last year’s federal budget, with Trudeau saying new investments “will put home ownership in reach for more Canadians, protect renters and buyers, and expand Indigenous housing across the country”.

The new ban applies to properties with three units or less, as well as parts of semi-detached homes and condominiums that are located in and around “census metropolitan areas”, which is where much of the concern around soaring costs has been in recent years.

In March 2021, the Canadian Real Estate Association said the national average cost of buying a home had reached a record of $524,324 ($716,828 Canadian dollars), a 31.6 percent increase from 2020. That leap was driven largely by property values in and around Vancouver and Toronto.

A month later, a Royal Bank of Canada poll found that 36 percent of non-homebuyers aged under 40 had given up hope of ever owning a property.

“People who can’t get into the market are renting, but so much of their income is now having to be used for rent. We really need to be addressing that. We need to be addressing housing for low- and middle-income people,” said Penny Gurstein, director of the housing research collaborative at UBC.

Gurstein told Al Jazeera that while the government’s foreign homebuyer prohibition sends “a message that there is concern about global capital coming into our housing market”, it remains unclear what concrete effect it will have on prices.

Foreign owners only account for a small share of the Canadian real estate market. According to Statistics Canada, a government website, non-residents owned 2.2 percent of residential properties in Ontario and 3.1 percent in British Columbia in 2020. The percentages were 2.7 and 4.2 in the Toronto and Vancouver metropolitan areas, respectively.

So while some foreign capital is involved, Gurstein said other factors are at play, such as Canadian real-estate investors buying up properties. She added the government could do more to address the affordability problem by allocating more funds towards building co-ops and social and community housing.

In the meantime, steadily rising interest rates coupled with slowing demand have led prices to drop slightly, raising optimism.

But Gurstein said that, over the long term, a move away from the private sector will be critical. “We need to be thinking about housing as infrastructure, housing as a way to encourage other sectors of the economy and not just the real estate industry.”

‘Small segment of market’

Davidoff at UBC’s Centre for Urban Economics and Real Estate pointed to another long-term hurdle: zoning restrictions. Most land designated for housing in Canada is limited to the construction of single-family, detached homes, which are unaffordable for most people, he said.

“And while the federal government doesn’t directly control zoning, it certainly does have the power to say to provinces, ‘You don’t get any money for anything until you ban the practice among your municipalities of enacting restrictive zoning’,” said Davidoff. “So that would be much more effective, certainly in the long run, than banning foreign buyers.”

Yet, despite the complexity of Canada’s housing problem, foreigners have shouldered a great deal of public blame for the housing crisis. In Vancouver, reports of wealthy investors from mainland China buying luxury properties have spurred a backlash against the city’s large Asian-Canadian population.

“What I like to say is, supporting a ban on foreign buyers doesn’t make you a racist, but if you were a racist it’s something you would like,” Davidoff told Al Jazeera.

Diana Mok, an associate professor at Western University in Ontario, told Al Jazeera that by singling out “a culprit” – in this case, foreigners – the government is trying to show it is taking action to reduce housing costs.

“It’s a small segment … that we can put a label on easily. Call them foreigners – not us, them,” she said.

Mok said she doubts the ban will stabilise prices in the long run. Echoing Gurstein, she said a wider approach should be taken to address housing affordability, including ensuring salaries keep up with increased living costs.

“Be creative in thinking about all sides of the problem”, she advised, “and not just [that] one single measure will do the job”.