Big losers in Canadian election could be foreign real-estate speculators
The biggest losers of Monday’s federal election may not be a political party, but foreign homebuyers and homeowners, who are facing the possibility of new taxes levied on them by a Liberal minority government supported by the New Democrats.
Prime Minister Justin Trudeau and the Liberals vowed in their platform to “limit the housing speculation that can drive up home prices” with a national tax on vacant homes owned by non-Canadians who are not living in Canada. According to a backgrounder, the Liberals are aiming to charge an annual one-per-cent tax, modelling it on a similar measure already in place in British Columbia.
“In every decision we make as your government, we will always put this country and its people first,” Trudeau declared in his victory speech.
But the Liberals are heading back to Ottawa 13 members of parliament short of majority status in the 338-seat House of Commons. To pass legislation, a Liberal minority government will need to cobble together support from other parties.
A possible (and perhaps even likely) partner for the Liberals is the NDP, which secured 24 seats in the election and whose platform also promised to fight real-estate speculation. Instead of an annual tax on foreign homeowners, the New Democrats and leader Jagmeet Singh pledged a 15-per-cent foreign buyer’s tax on the sale of homes to non-Canadians or people who are not permanent residents.
Singh in his concession speech said he had spoken to Trudeau and “let him know that we’ll be working hard on making sure we deliver the priorities that Canadians have.”
He later added, “We want to help Canadians be able to get a home that they can afford.”
Neither the Liberal nor NDP proposal may be enough to slam the brakes on a Canadian housing market that has continued to gain momentum. Home sales increased 15.5 per cent in September from a year earlier, the Canadian Real Estate Association reported earlier this month.
“The vacancy tax will create a nuisance for mobile homeowners and will generate a modest revenue source for the government, but it is unlikely to have broader economic impacts,” noted Rebekah Young, director of fiscal and provincial economics at the Bank of Nova Scotia. “Otherwise, the leading party has so far resisted broader measures pitched by other parties that would further fuel price escalation. An NDP alliance would put welcomed pressure on accelerating supply side solutions but its broad-based foreign buyer’s tax proposal warrants caution.”
The Liberals’ proposed vacancy tax received a cool reception from industry when it was announced in September. Now, however, the ambitions of the Liberals and NDP to do something about housing speculation, as well as their likely alliance, increases the probability of some kind of tax.
Time may still be limited to implement a new tax. Analysts from Citi noted Tuesday that recent Canadian minority governments have fallen within an average of two years, sending voters back to the polls well ahead of the usual four-year run of a majority government.
Trudeau also vowed to expand the first-time homebuyer incentive, a shared-equity mortgage with the government, to try to help would-be owners in hotter real estate markets such as the Greater Toronto and Vancouver areas.
A Bank of Canada survey of senior loan officers released Tuesday found lower interest rates had prompted greater demand for mortgages in the third quarter. That demand, the survey found, is expected to ratchet up further in the fourth quarter, in part because of the government’s first-time homebuyer incentive.
The Liberal platform’s proposals “are only likely to add further fuel” to housing prices at a time when the market has already been picking up steam, according to Toronto-Dominion Bank senior economist Brian DePratto.
“The federal government is by and large limited to demand-related measures,” he said in a note. “Some parts of the Liberal platform, such as a one-per-cent annual foreign buyer vacancy/speculation tax (echoing B.C.’s measures on this front), may help to moderate demand, but others appear set to stoke it.”
Does this whole thing sound familiar? Isn’t this exactly what got us in the situation we are? Is this not addressing the consequences and in no way dealing with root cause?
For years the financial institutions and all levels of government closed their eyes on enforcing the rules resulting in thousands of unqualified purchasers entering the market and raised home prices to a level behind anyone’s imagination. Many used their homes as a piggybank to purchase a second one, finance their lifestyle and or simply borrow against their property to carry it.
According to the stats, foreign buyers make up no more than 5% of the market and the 15% foreign buyer tax as well as other measures such as stress test, vacancy tax resulted to as much as 30% drop in property values in some markets. One might ask, aren’t the foreign buyers who make up 5% of the market better off now? How about the other 95%?
Let’s not rush to a headline making decision that may well be another shock to already damaged market and deal with the root cause.