Canada Addresses Real Estate Crisis By… Banning Foreign Ownership?
The Canada Mortgage and Housing Corporation has issued regulations regarding the restriction on foreign homebuyers as the new real estate law is expected to take effect for two years starting 2023.
On paper, it makes sense: as the crown corporation puts it, the new law will “help make homes more affordable for people living in Canada.” But the reality is much more complicated.
In summary, non-Canadians and corporations owned by non-Canadians are prohibited from purchasing residential property in Canada for two years under the Prohibition on the Purchase of Residential Property by Non-Canadians Act. Residential properties are defined to be “buildings with 3 homes or less, as well as parts of buildings like a semi-detached house or a condominium unit.” The law also applies to vacant lands that are zoned for residential use or mixed-use and are located within a census metropolitan area.
Among those who are prohibited from buying residential properties are non-Canadians, privately held corporations based in Canada, or companies and entities controlled by someone who is a non-Canadian.
To determine if a corporate entity is controlled by a non-Canadian, the CMHC defined this as either a direct or indirect control of the corporation, or direct or indirect ownership of 3% or more equity or voting rights.
The regulations, however, have exemptions: temporary residents studying or working in Canada, refugees, and accredited members of foreign missions. In terms of qualifying a “purchase,” exemptions also include acquiring ownership through a divorce, separation, gift, death, or resulting from the exercise of a security interest or secured right by a secured creditor.
The new law also doesn’t apply to the rental of a dwelling unit to a tenant for the purpose of its occupation by the tenant.
Non-Canadians who violate the restriction face a $10,000 punishment and may be forced to sell their property.
Despite the regulations and its exemptions, arguments could be made if the legislation would actually free up real estate space for Canadians looking for homes. Many foreign investors or corporations can choose to channel their real estate funds through what could pass as a Canadian entity under the new law, thereby potentially bypassing the regulations.
The regulations also didn’t outline how the new law would ensure that once the residential properties are all owned by Canadian persons and corporation, the dwelling places would serve Canadians looking for affordable homes.
Toronto was recently placed as the most at-risk city to a real estate-induced market collapse. The ranking was made by UBS Global Real Estate Bubble Index which evaluates the top 25 major cities in the world based on the risk of a market collapse, assigning index scores to the housing market in each city, with scores over 1.5 signaling that a city is likely in a bubble.
The index warns that Toronto, with a score of 2.24, and Vancouver, with 1.70, are the two most at-risk cities in North America – while Toronto is the most at risk globally.
Information for this briefing was found via Canada Mortgage and Housing Corporation and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.