Should Canada follow New Zealand’s lead and ban home sales to foreigners?

New Zealand’s new, 37 year old Prime Minister elect, Jacinda Ardern has just introduced legislation to ban home sales to foreigners.

“Foreign ownership and a housing shortage in New Zealand’s larger cities were prominent issues in the lead-up to the September 23 election, which brought an end to nine years of rule by the conservative National Party.”

Sound familiar?

Partnering with the NZF (New Zealand First) party to form a majority government, she announced that, “We also have plans around farmland and other critical infrastructure. New Zealand is no longer for sale.”

Whether this will work to drive down the cost of housing in NZ remains to be seen, but it is one government’s attempt to allow New Zealanders an opportunity to get into their own housing market.

By comparison, efforts to adopt a “locals first” approach in Canada have been slim to none, as both the provincial and federal governments have inexplicably in my opinion, considered off-shore purchases of Canadian real estate foreign investment, and hence, encouraged it every step of the way.

The recent introduction of a foreign buyers tax by the BC and Ontario governments in Metro Vancouver and the GTA respectively has produced modest results at best.

Certainly, banning or sharply reducing foreign buying of Canadian homes (particularly in Vancouver and Toronto) will have a significant effect on pricing (how many locals have $2.5M for a tear down on the west side?), so one would have to both expect and be prepared for an erosion of the current equity position of existing home owners.

Those who bought recently would be most affected, while those who purchased ten or twenty years ago have made windfall gains in home equity which could not have been reasonably expected based on any historical data available –so they could weather a correction of 25-50% and still make a tidy profit.

As the housing market in Canada represents directly and indirectly almost 20% of the GDP, the governments are in a quandary. If they deflate the housing market too much they risk the significant possibility of mass foreclosures and a severe backlash from existing home owners.

On the other hand, if they do little to nothing as they have done for decades, more and more young Canadians will not be able to participate in the dream of home ownership, which represents both a secure place to live and an investment for retirement.

The government’s inaction for too long tends to precipitate drastic measures –which are likely to destabilize the market in a negative way.

Instead, perhaps a more gradual approach would be in order such as:

  • Extending the foreign ownership tax to the whole province (and ultimately the entire COUNTRY which would of course require cooperation from other provinces), including commercial property and farmland;
  • Increasing said tax by 1% per year until the desired effects are realized;
  • Taking away the 50% capital gains exemption for foreigners disposing of Canadian real estate or other assets;
  • Requiring foreign buyers to actually disclose by documentary evidence, the source of purchase funds;

The latter two suggestions would require cooperation of the federal government as the Income Tax Act and the FINTRAC legislation are both federal laws.

These measures would not eradicate foreign ownership in Canada, but they would certainly “tighten the noose,” so to speak on the foreign property speculators, money launderers and those who just want to park some funds in this country for safe keeping.

Disclaimer:  The foregoing is for information purposes only and not intended as legal advice to the reader.  Always consult with an experienced real estate lawyer when modifying the standard real estate contract in use in BC. In addition statutory law as well as case law may change from time to time which could render this analysis inaccurate in the future. 

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