Welcome to my blog on housing, culture and design in Toronto, with occasion to cast my net more broadly. Like today, where I'm going to explore how the efforts of Provincial Governments to calm the frothiness of their specific urban real estate markets by implementing a foreign buyer's tax are contributing to a shifting - and reshaping - of other Canadian real estate markets. Although my apologies in advance if its reads as heavily Toronto-centric, but it's the lens by which I operate as a licenced real estate professional.
While there isn’t a great deal of hard data on foreign investment in Toronto real estate (which is part of the problem, which I’ll explore in further detail below) foreign investment is a well-known phenomenon. With restrictions around property investment, particularly in China, along with the lure of Canada’s livability and opportunities for prosperity, Canada is a hot investment spot for foreign investment. The flow of capital (and the swift price appreciation that resulted) has largely centered on Vancouver and Toronto, but there has been spillover to other cities, like Montreal.
Exactly how much has foreign investment pushed the affordability crisis in Vancouver and Toronto? It’s hard to say, statistically speaking.
Statistics Canada recently compiled a study around foreign ownership in the Toronto and Vancouver housing markets, released in 2017: “Non-Resident Ownership Of Residential Properties In Toronto And Vancouver: Initial Information From The Canadian Housing Statistics Program”. This report gives a good snapshot of the role of foreign investment, but the issue is that it is based on data from 2017 and doesn’t actually consider what has happened in years prior. We know that foreign capital has entered the markets in mass amounts in the past several years, but how much, where and in what kind of housing type, we aren’t entirely sure, statistically speaking.
Some findings of the Stats Can study show that foreign investor ownership is more prevalent in condominiums and that non-resident owned properties are assessed at higher values than resident owned properties on average. This story “In Vancouver, Foreign Capital Is Part Of The Housing Solution” talks about how foreign investment has played a role in domestic buyer behaviour by pulling supply from the market. Domestic buyers are battling it out with foreign investors for the limited stock that is available, pushing prices up and fueling “the fear of missing out
On the other side of the coin, suggesting that foreign investors don’t have as much impact on the market as some have suspected, is this Urbanation study. Read "Who Are The Condo Investors In Toronto? A New Study Sheds Some Light” The study shows that foreign investors only comprise 10 per cent of condo Buyers. In actual fact, many of the investors are middle-aged immigrants purchasing real estate as a long term investment for retirement or intending to help their children enter the property market down the road.
As we are well aware already, housing prices have far outpaced incomes in cities like Toronto and Vancouver. Chinese buyers have an additional advantage in addition to deep pockets. Chinese currency is more favourable in exchange dollar to dollar versus Canadians buying with their own currency, which has given foreign buyers already superior buying power an additional boost, heating up competition. Read “Toronto Housing Market Feels Effect Of Foreign-Buyers Tax”
What’s critical to me is - no matter how small a slice of the market foreign buyers hold - they generally wield the weapon of wealth. Basically, wealthy foreigners can cherry pick the properties of their choosing without the financial limitations of most Torontonians. If the value of all property is related to the location, size, and condition of all other property, no matter how small the percentage of foreign buyers there are, their capacity to pay top dollar (along with all other individuals who can buy without financial constraint) still impacts our prices. In our market, every sale sets a barometer of value for the next. And given Toronto is confined within boundaries - for example the greenbelt ringing our city, proximity and ease to public transit, a diminishing supply of freehold housing in the original city of Toronto, a select number of city-centre single family neighbourhoods (with detached houses) will always remain coveted for their status. Regardless of the bumps we've had - and will have (hello rising interest rates) - I believe anyone buying property with the aim of holding it for the next ten years will be making a prudent purchase. Why? Because the influx of people and capital from around the globe will continue to anchor our market.
This well-crafted highly-informative Globe and Mail article from August 2016 called "Meet The Wealthy Immigrants At The Centre Of Vancouver's Housing Debate" outlines how China is just emerging as a untamed capitalist nation akin to the robber barons of an industrializing America. It offers a point of view critical to the Canadian real estate market. In a nutshell, new immigrants from other countries - including Russia and the Middle East - have access to huge pools of money which they want to invest in Canada. Given our real estate system - and its historically loose governance - they've been allowed to purchase multiple dwellings (one for each family member for example) which has provided a phenomenal investment opportunity. Here's a recent post in Better Dwelling called China Deployed 3 Tricks To Curb Real Estate Speculation which shares how property purchases in China require really large down payments (that increase with multiple purchases) in addition to having restrictions on how soon one can sell a property which limits speculation nationally, and inevitably fuels investment in other countries like Canada. After all, why put 80% down on one property in China if you can buy four in Canada?
To help try to restore balance to the market and release constraints on supply, we have seen the introduction of Government policies to help curb the impact of foreign/speculative investment.
In 2016, Vancouver introduced a 15 per cent on foreign buyers. The purpose of this tax was two-fold; to deter speculative investment and open up supply, creating more affordable housing prices and to create a revenue stream, purportedly to assist with creation of more housing supply. A year-and-a-half later, prices weren’t falling like policy makers had hoped, so the tax was increased to 20 per cent. “In The Struggle To Get Its Red-Hot Housing Market Under Control, Vancouver Targets Chinese Buyers”
While housing prices have moderated somewhat in Vancouver, the luxury market has taken a nosedive, making high end real estate less attractive an investment: “Vancouver Luxury Property Market Ranked World’s Worst”. The November 13th 2018 headline by Better Dwelling is "Vancouver Detached Real Estate Sales Fall Over 32%, Price Declines Get Larger."
Toronto Real Estate & Its Foreign Buyer Tax
In Toronto (and in it surrounding Golden Horseshoe area) a 15 per cent foreign investor tax was introduced in 2017. This tax did cause the pullback of foreign investors and Toronto housing prices moderated. Although, as pundits are quick to point out, the BOC raised interest rates during this time period, limiting some buyers and they also cite a psychological impact from the changes on domestic buyers as having them retreat from the market. In short, it is hard to say if the price moderation was caused by one or a combination of these factors.
Federally, the CRA has been targeting shadow flippers with changes to the PRE, which I wrote about in Canada Revenue Agency Takes Steps To Discourage Fraudulent Real Estate Activity In Canada. As I wrote about in this piece, although there was an attempt to rein in fraudulent activity, the solution wasn’t comprehensive enough.
While there are some who believe a foreign buyer's tax is xenophobic, the introduction of this tax isn't intended to be exclusionary. It's an effort to calm middle class Canadians and reassure them that their elected provincial representatives remain committed to the belief that housing is a right and not a privilege. Ultimately, to rein in the skyrocketing prices of Vancouver and Toronto (and their outlying regions) it had to be the provincial governments in BC and Ontario who had to tame the flames of fury from their constituents. After all, it couldn't be our Federal Government who need to remain globally competitive, stay open to immigration, and invite foreign investment for the collective welfare of our nation. Apparently the onus is on our Provincial Governments to ensure housing is affordable for its citizens. However, as more focus has been channeled into how we regulate our property markets in Canada, it's only highlighted how many loopholes exist. With federal, provincial and municipal governments each responsible for the regulation of different facets of our shelter economies, ensuring full compliance and accountability is challenging. Especially in a global economy where capital flows without borders and money can be laundered through real estate investment.
The Shortfall Of Policies
Earlier this year Macleans Magazine explored how Canadian policy has made it easy for unscrupulous wealthy foreigners to dodge their taxes in "How To Fix Canada’s ‘Ghost Immigrant’ Fraud Problem", while Global News documented "How Over 46,000 Wealthy Immigrants Took A Back Door Into The Vancouver And Toronto’s Housing Markets" via the Quebec Immigrant Investor Program (QIIP). While these articles began to shed light on the issue, Better Dwelling revealed that "CIBC Kills Foreign Income Program, Makes Buying Canadian Real Estate Harder" which allowed foreign buyers to secure competitive conventional mortgages with down payments of 35% or more without having to verify income.
In spirit, policies are intended to assist with affordability for domestic buyers, while still generating capital from foreign investment to help fund domestic initiatives. It’s about balance really. There is a feeling that the policies introduced in Toronto and Vancouver are a good start, and have made inroads into eliminating a lot of the speculative investment. To introduce further restrictions may even have a counter effect on the market (click here to read: “Ban Foreign Homebuyers From Canada? Be Careful What You Wish For” that explores what has happened in New Zealand on the heels of a ban of foreign investment in a bid to slow down their housing market).
While the goal is balance in the market, there is no question a gap in the processes around foreign investment. Really, the Canadian (and respective Provincial Governments) have failed to adequately document, monitor and tax foreign buyers. When the process isn’t accurate, you inevitably fall short of the goal...
The system, as it stands, provides some rather breezy loopholes for fraud. In fact, there have been some downright shocking cases of immigration fraud, centering on wealth migration and property investment. Click here to read “Special Report: How Canadian Immigration Fraud Saw 860 Rich Chinese Blacklisted”. This story outlines several cases of apparent fraud: owners vastly underreporting income, foreign owners owning multiple properties kept vacant and buyers who return to China within days of sizeable property investment.
This article also tells the story of shamed Toronto lawyer Martin Pilzmaker. Pilzmaker recognized both the lucrative potential for wealth migration and the lack of regulation from the Government, so he exploited it. He bought several empty houses to use as “backstory” for wealthy investors, as well as getting fake passports and fabricating information regarding income etc. for taxation. Pilzmaker got caught and was arrested and disbarred. He eventually took his own life in the 1990s.
Also referred to in this article is fraudster Sunny Wang who was able to make use of similar loopholes to perpetrate what is reportedly the biggest immigration fraud in the B.C.s history. In Wang’s scam, he secured false passports for Chinese Nationals and provided them with fake addresses and jobs, allowing them to claim permanent residency and/or citizenship, when in fact these clients lived full time in China. The purpose of this was to fuel millionaire migration from China by circumventing many Canadian policies around residency and taxation. There are numerous stories of wealthy investors snapping up multiple properties and spending very little time at all in Canada, for a variety of reasons.
As this scheme was uncovered, upwards of 860 of Wang’s “clients” have lost immigration status with Canada. Click here to read, “Anatomy Of A Scam: How Rich Chinese Gamed Canadian Immigration”
These loopholes have made Canada not only an attractive destination for ill-intentioned property investors looking to skirt the system; it has also made it attractive for money launderers of all kinds. Click here to read “The City That Had Too Much Money” and “How criminals used Canada's casinos to launder millions”.
This CD Howe report talks in detail about how the system as it is all but opens the doors for fraud, with negative influence on the property market and the society as a whole.
One problem in particular is the issue around beneficial ownership, which is different than legal ownership of a property. A legal owner of a property is the “official” owner (i.e. the owner listed on the registry). However, a beneficial owner benefits from equity or income that is generated from the property (i.e. proceeds of a sale). You can be both the legal and the beneficial owner of a property, but given the lack of clarity and precise documentation around these terms allows for fraud and tax evasion. This facilitates shell ownership, which is how speculative and absent property owners are able to work around the system. This insightful article from the Globe and Mail:" Failed B.C. money-laundering case shows ‘snow-washing’ is thriving in Canada" talks about Canada's unfortunate reputation as a destination to launder money, made easier by issues around beneficial ownership.
There has been a call from policy makers to close this loophole and make property investment transparent. Recommendations from the CD Howe report on how to fix this problem include:
· Reforming corporate registries from all levels of government to establish a central publicly accessible registry of corporations and select trusts;
· Put onus on corporations and trusts to disclose all ownership information
· Make reporting entities (i.e. real estate agencies) reveal ownership information
· Follow standards set by Europe that promote beneficial ownership transparency
There are steps being taken in B.C. to promote this kind of transparency. Starting on January 1, 2019, developers in B.C. will be required to collect information around the terms of assignment, including business name and/or information, SIN and name and then turn that information over to the CRA. This information will be collected in an online registry to be managed by Land Title and Survey Authority of British Columbia.
The B.C. Government has done a number of other things to close loopholes, including establishing a Federal/Provincial working group on tax fraud and money laundering and investigating legislation around setting up a registry of beneficial owners of real estate in B.C. that would be accessible to the public.
To learn more about this, read “Federal Agencies Suggest Foreign Home Buying Isn't That Extensive, But Try Telling That To Vancouver Residents” and “B.C. Moves Forward On condo, Strata Assignment Register”.
The question remains: will the Ontario Government follow suit?
While policy has had some impact in pulling back foreign investment from Vancouver and Toronto, Canada remains a very attractive destination - and regional policies simply haven't been enough to reign in the potential impact on supply and affordability with an influx of foreign investment. It just changes the target. While taxation and tighter processes are a good start, the solution needs to be more comprehensive in order to assist with affordability and to make homeownership an even playing field for all homeowners in Canada.
A pattern has developed worth noting here. Foreign investment succeeded in pushing up house prices and putting extra pressure on tight supply in Vancouver. A tax was introduced in Vancouver. Shortly afterwards, there was a similar impact on the Toronto market, as foreign investors moved east. Now - with taxes introduced in The6ix - Montreal has become a hot spot for foreign investment. In fact, home sales in the city jumped 11 per cent in October from the same month a year earlier, the city's real estate board reported on Wednesday. The condo segment was particularly strong, with sales up 22 per cent in a year. This has sparked concern from Montrealers, who are worried about international investment pushing real estate into a bubble. Municipal pride is at an all-time high with sentiments like, "Montrealers must be able to own their own city”, emerging from the ongoing narrative. Soon, we may see Montreal put pen to paper to guard themselves: "Foreign Buyers Tax May Become Reality In Montreal As Housing Market Beats Toronto, Vancouver"!
This article : “Montreal Real Estate: Wealthy Chinese Increasingly Investing In Properties Overseas” talks about how Chinese wealth is increasing rapidly and that international property investment continues to be a popular choice; Chinese property investment in Canada has declined in recent years, most likely because of the taxes introduced in Vancouver and Toronto. In fact, Chinese investment dropped by 55 percent in 2017. However, Montreal as a city is seeing the opposite impact as investors continue to look for opportunities in Canada. Montreal offers a more lucrative investment; property prices are lower than in Toronto and Vancouver; returns are less eroded because there aren’t taxes and fees like there are in Toronto and Vancouver. Residents and investors get the benefit of similar big-city amenities as well.
Listings are increasing on Juwai.com (which is an international real estate portal, very popular with the Chinese investors) and CMHC has documented an increase of foreign buyers in Montreal. Click here to read, “China's Real Estate Buyers Flock To Montreal As New Taxes Take Toll On Toronto, Vancouver”.
Juwai.com released a report looking at Chinese property investment and the flow of wealth. There are now more billionaires in China then there are in the U.S.. Overseas investment and opportunity for education continuing to draw these investors to Canada.
Interestingly there is a parallel here. There was a documented increase of foreign buyers in Montreal in 2017. There was also an increase in property prices in 2017. Is it only a matter of time before Montreal suffers the same real estate fate of swiftly decreasing affordability, if the role of fraudulent property investment is attended to in a reactionary measure? Surely, the solution lies in being proactive with comprehensive policy before affordability shrinks even more.
It is one thing to theorize around what shapes real estate in Toronto, but I have my own perspective on the impact of foreign investment from the real estate trenches. Stay tuned for Part Two of this post, where I share my own experiences.
Are you interested in what influences Toronto real estate? Check out these recent Urbaneer posts:
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