The last few years have been hell on the global economy. The COVID 19 pandemic brought supply chains to a grinding halt, forcing prices on everyday goods and services to climb to unprecedented heights.
The effects of this price hike touched literally every part of the global market, including real estate. Real estate in both the US and Canada saw active surges in some markets. Homebuyers struggled in bidding wars with each other and large investors in an effort to purchase prime properties.
While bidding wars are excellent news to current homeowners looking to sell, the climbing prices of existing homes forced many potential buyers to wait for lower prices and interest rates. Real estate investors found themselves searching for the right properties at the right prices before pulling the trigger on new investments.
Canada Canada Outlaws Foreign Investors From Purchasing Real Estate
Now there is a new challenge to investors who were previously looking to invest in foreign countries. Canada has passed a law that essentially outlaws foreign investors from purchasing residential real estate in the country.
The law comes after Canadian home prices surged upwards continuously in the wake of the pandemic. Canadian Prime Minister Justin Trudeau is hoping to stem the tide of real estate investors from other countries in an effort to make homes available to individuals within the country.
His campaign website contains a statement to this effect.
“The desirability of Canadian homes is attracting profiteers, wealthy corporations, and foreign investors. This is leading to a real problem of underused and vacant housing, rampant speculation, and skyrocketing prices. Homes are for people, not investors.”
According to CNN, the Canadian Real Estate Association's (CREA) price index is still up 38% from what it was in 2019. This is after prices began to fall in 2022, bringing the average price of a home down from mid pandemic highs.
It appears the law is aimed at slowing the number of homes, in metropolitan areas like Toronto, that are being purchased by big investors from outside Canada. Toronto property managers for investors are part of a very active real estate market.
The average home price in Toronto is currently more than $1.2 million, according to CREA. This makes owning rental properties in the area a very lucrative business. Rental rates increased by 11% between August of 2021 and the same month in 2022. These increases padded the pockets of investors with healthy profits, and it is unlikely rental prices will fall to pre pandemic levels again.
The new law, which went into effect on January 1st of 2023 is essentially a ban on foreign investors that will last for 2 years. While this may be bad news for investors from the US and other countries, it is an open door for Canadian real estate companies to pick up properties with less outside competition.
There are exceptions made within the language of the new law. These provide the ability for immigrants and permanent residents who are not citizens of Canada to be able to purchase properties. So, there may be loopholes that investors can use in order to acquire real estate, even if they are from another country.
The CREA released a statement that brought up several concerns regarding the new law and its effects.
“Canada has built a reputation as a multicultural nation that welcomes people from around the world. As currently proposed, the prohibition on the purchase of residential property by non-Canadians can impact our reputation as a welcoming nation. The potential benefits of the ban are likely to be modest.”
Drawbacks Of The Law
The group went on to point out that many Canadians purchase homes in other countries. This is especially true in the US, where many Canadians purchase winter homes and investment properties. A reciprocal law from the United States could cause more harm to Canadian investors than the law from Trudeau's government could counteract within Canada.
“If Canada places a ban on Americans owning property in Canada, we should expect them to respond in kind.”
According to CBC, the ban will make further exceptions for foreign students. The provisions for this exception include being able to purchase a property for no more than $500,000. It also stipulates that students must have spent most of the last 5 years inside Canada.
Foreign workers who have worked and filed tax returns at least 3 of the last 4 years will also be provided with an exception. This provides oil field and transportation employees who have been working in Canada with the ability to purchase homes to live in if they intend to stay in the country on a more permanent basis.
The ban also provides a protective clause for refugees and non citizen residents who are fleeing conflict. Many Ukrainian refugees have traveled to Canada to avoid the conflict with Russia in their home country.
While there are mixed opinions on whether the law will actually be beneficial to the Canadian people or not, there is no doubt it has stifled foreign investment in real estate. The millennial generation has heavily invested in real estate. According to Bankrate, millennials made up 43% of home buyers in 2022.
This includes not only first time buyers who are purchasing a starter home, but also investors who are looking to acquire rental properties. Flipping houses for a profit is a huge moneymaker for millennial real estate investors.
It remains to be seen if Canadian investors will take advantage of the reduced competition and begin purchasing more properties than they previously intended.