Let me begin this article by reminding you kids that I think Canada has a massive real estate bubble and it should be something that concerns us. Back in 2012 I even went as far as shorting Canada’s banks (using options) as a way to bet on this. This investment didn’t go well.
And if you read my stuff over at Motley Fool, I’ve probably written at least a dozen articles in the past year alone pointing out various concerns about the market. I firmly believe anybody investing in Toronto or Vancouver real estate is setting themselves to lose a metric assload of money. That’s more than an imperial assload, btw.
I also that we should be doing things to attempt to pop this bubble, and to their credit, governments have been trying. Mortgage insurance has become more and more strict as the years have passed, although many still believe it’s far too lax. Certain cities have set up land transfer taxes to make buying all the more expensive. And apparently even banks are getting in on the act, slowing lending to markets they feel are overvalued.
Oh, the restraint.
And yet, even though all those changes were implemented to make it harder for folks to buy property, the two big markets are like my rockin’ dance moves, refusing to quit. What gives? What was happening?
For many observers, the blame rested at the feet of one group of people, and that’s the damn immigrants. They felt the same way Moe Szyslak felt about the immigrants. Take it away, Moe.
Oh man Frinkiac is my favorite thing ever.
So they reacted in a very predictable way. After years and years of getting upset that rich Chinese and Middle Eastern folks were showing up and making houses unaffordable, British Columbia passed a special 15% foreign buyer’s tax on any property in the province not purchased by Canadian citizens.
The many problems with the foreign buyer’s tax
For an issue that governments have apparently been studying for years and years, the B.C. government sure did botch the passing of this bill.
The biggest mistake made was making the bill effective immediately. When the foreign buyer’s tax was passed, it was passed with no implementation period. That means even if a foreign national bought a house three months before and was set to close on it in a couple days after the bill passed, these folks would be forced to pay the foreign buyer’s tax.
Put yourself in that person’s shoes for a minute. You decide to make a decision that involves spending the better part of a million bucks. Everything is going fine and then all of a sudden some bureaucrats sign a bill and you’re looking at an extra hundred grand that you have to pay. You’d raise all sorts of hell, and rightfully so.
It’s not that governments can’t change the rules, because of course they can. But they have to change the rules in a fair way. That includes not making people who entered into a transaction in good faith pay tens or hundreds of thousands in a tax they never agreed to.
A seller can’t go back and demand extra cash from a buyer in the middle of a transaction. They’re bound to that contract. Governments should follow the same rules.
Why are we targeting foreigners?
I’ve heard all the arguments, and they all have a variation of the same theme. Foreign money pouring into Canada is the reason why house prices are so high. Vancouver is dominated by Chinese money, while Toronto has been a haven for Middle Eastern oil cash.
There’s a certain amount of truth to that, I’ll admit. I’ve been to both Vancouver and Toronto, and it doesn’t take a genius to see how multi-cultural both of those places are. It’s obvious foreign money is propping up real estate markets in those two cities.
But at the same time, Canadians are playing a huge role in prices in those cities as well. So many otherwise smart people are putting all their eggs in the real estate basket, buying a place before they feel priced out of the market forever. Low interest rates are helping landlords buy up supply that gets rented out for peanuts. And population growth to both centers is robust as tens of thousands of Canadians move to the largest centers each year.
In other words, foreign buyers are the tipping point, but we’ve done most of the heavy lifting ourselves.
One of the great things about Canada is we have a free economy. Americans, Brits, Chinese, or anyone else is free to invest in our market, own a company, or buy real estate with very few limitations. Hell, you can even buy your way into Canada (Quebec only, but still) for the low cost of $800,000 and a net worth of $1.6 million.
We roll out the welcome mat for foreigners when its convenient for us and make them the scapegoat when we decide they’ve taken advantage of the rules. We’re happy to accept their money when it suits us and then we slam the door shut (and disparage the crap out of them) when they have the audacity to want to invest in our country.
It comes down to this. Canada has done all sorts of things to make buying houses easy for the average family. Mortgage default insurance is (relatively) cheap and banks regularly give 25-year old borrowers loans of 20 times their original investment with nobody batting an eye. Millions of Canadians feel they have a right to buy an affordable home in our most popular markets.
And yet when foreigners want a piece of the same action, we think it’s okay to slap a foreign buyer’s tax on them and only them.
Ultimately, I do not believe putting restrictions on foreign cash is a way for an economy to get ahead. If we want to cool down certain housing markets, we should do so by putting the same rules in place for everybody.