Why the Canadian Government’s Ban on Foreign Home Buying is all Wrong
In mid-February of 2023, home prices remained far beyond the average Canadian households’ budget constraints. Although home prices have decreased over 12% since November of 2021, the Canadian buyers are still feeling the pain of the housing crisis. Beginning in 2021, the Minister of Housing and the Minister of Finance have proposed their intent to prohibit non-Canadians from purchasing homes in Canada. Finally, in 2022, the Prohibition on the Purchase of Residential Property by Non-Canadians Act received royal assent and was implemented on New Year’s Day. The scope of this policy will not only have distributional impacts on a wide range of key stakeholders, but it will also have a stark economic impact on Canada’s current housing market.
The Prohibition on the Purchase of Residential Property by Non-Canadians Act includes a legislative framework consisting of three main components. First, the Government of Canada prohibits non-Canadians or permanent residents from purchasing a residential property in Canada. Second, there are established penalties for non-Canadians who purchase residential property. Lastly, within the regulations of this act, the government may define specific exceptions for whom this act is applicable. In other words, certain groups, despite being non-Canadian, may be exempt from this act. The objective of these regulations is to attenuate current affordability issues amongst Canadians.
Although there are exemptions to whom this act may apply to, these exemptions are conditionally based. For example, international students are exempt from the regulations so long as they have been physically present in Canada for at least 244 days in each of the five calendar years preceding the year in which the purchase was made. In addition to international students, temporary residents may be exempt from the act if they have worked in Canada on a full-time basis for at least three of the four years prior to the purchase of residential property. Thus, the act signals a strong commitment by the Canadian government to prohibit non-Canadians with weak ties to Canada from purchasing residential property in the country, unless there are exceptional circumstances.
After the implementation of the act, foreign nationals trying to settle into Canada are not only delayed in the process, but now must obtain temporary accommodations during their first few years in the country if they seek to purchase a home.Even though some temporary residents may have an exempt status, this is conditionally based. Consequently, the act could make Canada a less desirable destination for resettlement, especially amongst high-skilled foreign workers. As a result Canada’s current labour shortage issues may be exacerbated.
On the surface, the act signals a strong framework of regulations that will decrease the demand for housing, which will reduce the overall price level of residential properties. It is clear that the federal government is seeking a demand-oriented solution to curbing home prices in the country. However, is this really the most efficient approach to tackling the nation’s housing issue? And even if it is, are the regulations put in place designed to achieve the outcome that the government believes it can yield?
Professor of Economics at McGill University, Dr Moshe Lander, suggests that the Canadian government’s attempt to curb affordability will completely fall short. The ban on foreign nationals purchasing residential units housing will at first “comfort” Canadians in the short-run by reducing the demand for homes. In addition, the ban will temporarily reduce the upward price pressure in the market. However, Dr Lander argues that the conditions stipulated by the federal government have loopholes that can be exploited. Foreign nationals will find ways around the regulations put in place and will continue to buy homes. In turn, the demand curve for housing will return to its original position. In fact, Dr Lander states that the demand curve will shift to the right and will continue to do so. The right-ward shift of the demand curve will outweigh the rightward strip of the supply curve. Shifting the supply curve to right or increasing the supply of housing should be the focus of policy to decrease prices rather than the ineffective solution of tagretting the demand curve of housing, As housing is a municipal issue, Dr Lander avers that local zoning restrictions are an impediment to increasing the quantity of housing available on the market. For example, the city of Montreal’s zoning restrictions that aim to preserve the historic identity of the city decrease the amount of supply that is available for purchase. As there are homes less available, prices will rise. Therefore, solving local issues that are supply-oriented will curb affordability issues for all Canadians (Lander, 2023).