Foreign Investment in the Canadian Real Estate Sector
By: Adam Ionico
Over the past few years, real estate prices have been rapidly rising across Canada; specifically in the metropolitan hubs of Vancouver, Toronto and Montreal. In particular, Vancouver is a magnet for Chinese investors. Just last February, a Vancouver house sold for $735,000 over asking price for a total of $4.23 million. The benchmark price of a single detached home in Vancouver rose 27% (to $1.3 million) in February 2016 from the same month a year ago. Much of the rising prices are due to the foreign investment in the real estate sector. Housing prices continue to rise above average income growth rates, making it difficult for Canadians to be able to purchase a home and putting the Canadian housing economy at risk of a crash if significant foreign investment is diminished too quickly. Some are speculating that these rapidly rising prices are creating a housing bubble reminiscent of those in the past.
The specific details of the foreign investment are, however, unclear to the federal government. Exactly how much is being invested by foreigners and the extent it has on housing prices is not known. This data is essential for the government in order to understand the flow of money into our country and proactively mitigate the risks it has on our economy. On March 22nd Bill Morneau, Canada’s Finance Minister, presented the 2016 Federal Budget and stated “Currently it’s not possible to understand the role of foreign homebuyers in Canada’s housing market since a comprehensive and reliable data set on the number of homes sold to foreign homebuyers does not exist.” In the budget, a mere $500 thousand will be allocated to Statistics Canada to collect and analyze this data. However, the federal budget did not contain any new measures to help cool the Canadian housing market or curb rising levels of household debt; but in December the government stated it would require double the minimum down payment for government insured mortgages for home prices between $500 thousand and $1 million. There has also been broader movement in government agencies to track foreign investment in Canada, specifically after BC implemented a measure to require buyers to disclose whether they are Canadian citizens.
On March 9th, the Bank of Canada decided to leave the benchmark interest rate unchanged at 0.5% as the central bank waited to see how the federal government presented the March 22nd federal budget. The hot housing market in many cities could lead Bank of Canada officials to cut the rate next month, which would further increase the appeal of foreigners to invest here. However, if the central bank were to increase the rate in April in an attempt to cool the housing prices, we could potentially see a quick sell off in the real estate sector pushing the Canadian economy down.
Given the lack of data which Canada currently has on foreign investment in the Canadian real estate sector, we are unable to speculate with any degree of confidence on the true effects foreign investment has on the Canadian economy and what proactive measures can be taken to prevent another housing crash.