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Restricting foreign ownership

Real Estate
|Written By Marg. Bruineman
Restricting foreign ownership
Illustration: Matthew Billington

Rules preventing non-residents from owning property are nothing new, but they are back in the spotlight with a red hot real estate market.

Overheated housing markets with rampant property speculation and skyrocketing land values have resulted in restrictions on foreign buyers by two provincial governments as stories of residents and workers being pushed out of their communities abound. And while the initiatives are designed to impose some sort of control in communities where many are having trouble accessing housing, restricting who can buy land is not a new approach.

Last July, the British Columbia government implemented a property transfer tax of 15 per cent on Metro Vancouver home sales by foreign buyers, on top of pre-existing fees. An exemption was later introduced for those on work permits, often considered high-demand foreign workers and experienced entrepreneurs.

On April 20, the Ontario government introduced a 15-per-cent non-resident speculation tax on residential property in the Greater Golden Horseshoe Area by those who are not citizens or permanent Canadian residents. It is part of its new Fair Housing Plan containing 16 initiatives, including rent control.

Ontario initially dismissed imposing any additional controls, but the persistently hot Toronto market rekindled the discussion. The property market in Toronto, along with Vancouver, is considered a major magnet for some of the massive capital flight out of China.

There was also concern that one of the impacts of B.C.’s foreign buyers’ tax was shifting the interests of foreign investors from Vancouver to other Canadian cities. Sotheby’s International Realty Canada released a report in conjunction with Chinese property website indicating that inquiries for properties in Vancouver slumped immediately after the B.C. tax was announced. Meanwhile, property inquiries shot up in Calgary, Toronto and Montreal, it reported, adding that the increased interest showed no indication of translating into higher sales in those cities.

Controls over property ownership is not a novel concept. Other countries, including Australia, Britain, Hong Kong, Singapore and Switzerland, have imposed some sort of restrictions upon speculators or residents of other countries purchasing property in those countries. They range from having to ask for permission to additional taxes for foreign property buyers. In New Zealand, property investors now require minimum deposits of 30 per cent and there has been a call to ban offshore buyers.

Prince Edward Island, with its tiny, fertile land base tucked in among the Maritime provinces, has long been concerned about off-island ownership. Those concerns date back 400 years when the island was divided into 65 lots granted to British Lords who would then have the local population work the land, leaving out the possibility of locals buying and profiting directly from the land.

“There’s zero economic benefit to have someone in Ontario or Alberta own the land here and simply hire someone to farm it, because all of the farm profit leaves,” says Scott MacKenzie, chairman and chief executive of the Island Regulatory and Appeals Commission. “P.E.I. has had a long history of problems with absentee landlords.

“That historical . . . concern about absentee land ownership, it just continues right through the culture here.”

P.E.I. restrictions going back to the 1970s and adapted over the years focus on both farm land and the shoreline. The rules require those buying more than five acres of land or 165 feet of shoreline to apply to the commission, which reviews the application. Anyone purchasing more than five acres or 165 feet of shoreline must be living in P.E.I. 365 days over the course of 24 months. Prior to the May 2016 changes, purchasers were required to live on the island for 183 days. But MacKenzie says there were instances of people meeting that requirement and then moving away after successfully purchasing property. P.E.I. also limits land holding of 1,000 acres for any individuals and 3,000 acres for corporations.

P.E.I. officials looked at regulations elsewhere leading up to its latest rule change. Quebec, Saskatchewan and Alberta all restrict who can buy larger parcels of farmland. Like P.E.I., non-residents in Quebec include anyone not living in the province.

But, other than the shoreline restrictions in P.E.I., it’s only this past year that speculation and foreign ownership of residential property has been targeted by legislation.

In its announcement introducing the new rules, Ontario cites two consecutive years of double-digit gains, resulting in an average house price in the Toronto region of $916,567 this past March, up 33.2 per cent from a year earlier. It also referred to RBC Economics information showing that housing affordability in Canada’s largest city during the last quarter of 2016 was at its second-worst level since the mid-1980s and a vacancy rate in Ontario of 2.1 per cent and 1.3 per cent in Toronto.

In the years leading to British Columbia’s new rules, Vancouver was also experiencing dramatic increases in property values. Former civil rights lawyer and NDP housing critic David Eby, who was busy running for re-election this spring, said immediately upon his election in the riding of Vancouver-Point Grey in 2013 that he was hearing concerns about how escalating values were pushing people out of the housing market.

“What was going on in the constituency increasingly is people using real estate as an investment rather than a place to live,” says Eby, who during his campaigning found many houses vacant. But he says his lightbulb moment came when reading about Laurence Fink of Blackrock, the world’s largest private investment firm, advising other investment firm heads in Singapore to buy modern art or condos in London, Manhattan or Vancouver. “It’s a good indication that something has really shifted in your housing market and it’s no longer about providing shelter for people who live, work, pay taxes in your community.”

When British Columbia brought in its foreign buyers’ tax, however, there were concerns that it was too sweeping, penalizing those recruited from other countries to Vancouver on work permits, some of whom hoped to become Canadian citizens, as well. That resulted in an amendment earlier this year.

But there was criticism that the new rules came abruptly, allowing just a five-day window to close deals. “Needless to say, those five days were very busy,” says Vancouver real estate lawyer Kenneth Pazder. Millions of dollars’ worth of transactions went through during that period, but some deals that couldn’t make the deadline were dropped. The new rules also attracted a proposed class action alleging Charter infringement.

Pazder would have preferred a more gradual introduction of a foreign buyers’ tax. And a grandfather clause allowing deals already in place to go ahead would have made the transition easier, he adds. He also thinks new rules should have been introduced much sooner because much of Vancouver’s residential real estate is now largely out of reach for the average family.

The end result, says Pazder, is a shutting down of the single-family housing market over $3 million. “The market here is still pretty brisk for anything under say $1 million, $1.5 million; it’s still moving pretty well. But once you get over $2 million upwards, a huge percentage of that market was foreign,” he says.

B.C. started tracking foreign property purchases prior to implementing its legislation, showing foreign ownership represented 10 to 13 per cent of sales. Early indications in B.C. showed a significant chilling in foreign interest of single-family property immediately after the introduction of the foreign buyers’ tax, dropping to one per cent in August and then climbing back up to 3.5 per cent. Volume of sales also dropped 40 per cent from the previous year and detached houses in the City of Vancouver dropped five per cent, to an average of $2.67 million.

But preliminary analysis by CMHC suggested that the B.C. market had started slowing down prior to the introduction of the province’s foreign buyer’s tax. Bob Dugan, chief economist with Canada Mortgage and Housing Corp., says the true representation of foreign property purchases eludes officials in the rest of Canada, although Statistics Canada is expected to widen its data collection.

CMHC has, however, included that information in its annual survey of condominium structures across the country since 2014. The latest survey showed 2.3 per cent of the condominiums purchased in Toronto were foreign buyers, 2.2 per cent in Toronto, 1.1 per cent in Montreal, 1.2 per cent in Halifax and the rest of the country’s census metropolitan areas were less than one per cent.

“What we do see is that buildings that have been built since 2010, the share of foreign owners is higher than the general stock,” says Dugan. In Toronto, 3.9 per cent of condominium units constructed since 2010 were purchased by foreign buyers, which jumps to five per cent in Vancouver, with slightly higher rates in the downtown areas.

Both those markets showed price acceleration and overvaluation — indications of speculative activity, adds Dugan. But he warned against any restrictions on foreign buyers in the absence of supportive data.

Eby says there’s still room for improvement. A Transparency International Canada report found a disconnect between the purchases of some of that city’s most expensive houses and the income of the beneficial owners — many listed as homemaker, student, a trust or a numbered company. “So there’s an obvious question about where that money is coming from in our real estate market,” he says, adding there is also a role for the Canada Revenue Agency to play here. “At this stage of mobile flows of capital, it is negligent of government not to understand what is driving prices of land and property in our communities.”

Ontario’s new rules

Unlike the rollout of B.C.’s foreign buyers’ tax, which allowed five days for deals to close, Ontario’s new 15-per-cent tax exempts binding agreements of purchase and sale signed by all parties prior to its introduction on April 20. Other details include:

•     It applies to noncitizens or permanent residents, taxable trustees and foreign corporations in the Greater Golden Horseshoe area stretching from just north of Orillia and Peterborough south to Niagara Falls and just west of Waterloo and Brantford;

•     One hundred per cent of the value of the consideration for the transfer is taxed if any one of the purchasers is a foreign entity;

•     Affected properties are those with at least one and no more than six single-family residences;

•     It doesn’t apply when the purchase is part of a mutual fund trust, real estate investment trust or specified investment flow-through trust.