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Foreign Investor Tax And Regulations PLEASE!

Hey guys, Carl Langschmidt here, President of Condos.ca. We’ve been hearing from every direction that Toronto condo prices are going crazy and something needs to be done.

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From Condos.ca PSF Index

A recent report from the Ryerson City Building Institute released data showing the drastic, demand-side impact of foreign speculation on Toronto real estate and the need for government action. On the other side of the issue, Brad Lamb, a well-known condo developer and broker, published his opinion on why a foreign investor tax might just be the worst thing possible for Ontario. Brad Lamb states that foreign investors “represent a significant percentage of buyers in the purchase of new development condos sold from floor plans.” Without them, new developments would suffer and Toronto’s supply problems would worsen. With all this going on, I felt there were a few things worth considering before jumping to conclusions.

 

#1 – LESSONS FROM VANCOUVER

 

It’s no secret that foreign ownership has impacted the Vancouver real estate market. Last summer, I spent some time scouting downtown Vancouver for an office location for Condos.ca and as I walked from Coal Harbour and Gastown to Yaletown and Kitsilano, the city truly felt like a ghost town compared to Toronto. It was clear to me that Vancouver was being used as a “land bank” for wealthy foreign investors who didn’t live there. If we can learn anything from Vancouver it’s that zero checks and balances benefit only the very few who exploit the market, typically real estate developers and agents who sell to foreign investors.

 

#2 – HOW MUCH FOREIGN INVESTMENT DO WE NEED?

 

There is a lot of discrepancy surrounding the actual number of foreign buyers impacting Canadian real estate. Last year, the Canada Mortgage and Housing Corporation (CMHC) estimated foreign buyers comprised only 2.3% of sales in Toronto (laughable to anyone who works in the Toronto condo market). Our talks with sales reps in the trenches indicate it is much higher; some reported as high as 70% foreign ownership at developments like CityPlace.

The Ryerson report indicates that “the long continuous wave of foreign capital, in combination with the recent spike in foreign buying, has created powerful expectational dynamics.” The rising prices, largely foreign buyer driven, are causing domestic buyers to jump into the market as well, which further increases prices and the problem.

On the other side, Brad Lamb believes that without these foreign investors many projects would not be built, it would kill the condo market and potentially create a Canada-wide recession. Personally, I feel this is just fear mongering. But in one dimension Brad is right. Without these foreign investors, some of these projects may not go ahead. Putting pressure on developers, however, may force them to cater to Canadians looking for a home instead of investors seeking to park, launder, or diversify their asset portfolio.

I am not blaming developers for the problem. After all, there have been no regulations, and they have simply sold their inventory to the highest bidder. Interestingly, between 2009 and 2016 pre-construction condos in Toronto cost more per sqft than newly built resale condos. It’s not that local buyers and investors did not exist to support the growth of these new developments, but rather they have steered clear because they struggled to justify the price discrepancy at the time. It’s only now that we have this “supply crisis,” in part accelerated by Vancouver’s 15% foreign buyer tax shifting interest over to Toronto, that we finally need to address the imbalance. It is precisely our lack of regulations that has got us here today. The Condos.ca PSF INDEX reports Toronto condo prices are up 20.45% in the last sixty days alone.

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From Condos.ca PSF Index

This increase is way beyond what the demand from immigration and population growth would predict, but it is not beyond what unregulated greedy investors have done in other financial markets.

So back to the question of how much foreign investment do we need. The stats show:

a) each year approx. 100K new immigrants arrive in Toronto looking to make this city their home, and

b) each year our entire Toronto condo development industry adds approx. 20K new condo units to the marketplace.

With local demand like this, I will agree with the Ryerson report that foreign real estate speculation is a big cause of this crisis. While Brad accurately recognized that the foreign investor market was relatively contained to homes over $4 Million and pre-construction condos, this is no longer the case. Pre-construction inventory levels have dropped significantly, causing investor demand to spill over into all areas of the resale market. This leaves local buyers competing for homes against wealthy investors looking to stash their cash in our economy because they have little or no faith in theirs.

 

#3 REGULATIONS AND TAXES DO WORK

 

Both economists and regular joes can be loosely divided into two camps. Those who think markets should be mostly unregulated and lightly taxed and those who think that markets should be mostly regulated, especially when the public is at risk. One side feels that wealth, competition, and the proliferation of ideas need freedom to grow and natural market forces will govern them. The other side points to history and says, “nuh uh.”

The inconvenient truth for the ‘market freedom’ crowd is that across history periods of lax regulation correspond with speculative bubbles and collapse. The 1910-20s famously saw skyrocketing equity prices caused by speculation, with no regulation to rein it in. That speculation ended very badly. As we are seeing with the current explosion in house prices, the impact of speculation is pushing many middle and working class families beyond their means, leaving them vulnerable to sudden price corrections or even collapse.

Another inconvenient truth is that government regulation hurts the profits of speculators and big-money interests, but doesn’t damage real growth. History has shown this time and time again, and I believe this to be true of the Toronto market.

Finally, the trouble with the champions of unregulated, ‘free market’ systems is that they don’t truly want systems to be free. They have monopolies or lucrative positions and invoke the Free Market Jesus when something threatens their profit. It’s possibly why the CMHC underreports foreign buyers. It’s certainly why Goldman Sachs throws billions of lobbyist dollars at eroding regulation in the financial industry when the great recession is still fresh, and it’s probably why Brad Lamb and other developers may not agree with a foreign buyer tax.

In economics, moral hazard occurs when a person takes risks because another bears the cost of those risks. We see speculative risk-taking happening in our industry, and we don’t want families bearing that cost.

  • Great article!
    For the past few months I’ve seen a steady increase in foreign interest in the Toronto market.
    I’ve done a few transactions and know the units will be vacant.
    I say. “tax this type of purchase” and allow the locals to continue hoping to have a chance at owning a home in this great city of ours!!

  • Michel Segeren

    Bring in regulations. It will help. But what we really need is interest rates (and hence mortgage rates) to rise by a few percentage points. That will take care of the entire housing bubble.

    • Steve C.

      That is exactly the wrong thing to do. This speculative bubble is aided and abetted by deliberate flouting of lending principles by the banks. See my comment above.

      • I agree with Steve C. It is ridiculous that foreign investors can buy properties in Canada at the same rates we have for citizens buying primary residences.

  • Steve C.

    Maybe all the lawmakers have to do is rein in the banks who are blindly ignoring the speculative bubble in order to boost their mortgage income. Maybe they should leave the normal buyer alone.
    < “Most notably, lenders currently underwrite mortgages for residential investment properties as if they are owner occupied homes, resulting in a loophole that allows buyers to finance money-losing investment properties largely with debt; *these loopholes should be closed by tightening lending practices*.
    < “If public policy makers want to prevent damage to our housing market, they need to act now.”<
    http://www.huffingtonpost.ca/2017/03/23/real-estate-toronto-bubble_n_15547080.html
    [also posted on Facebook]

  • Motmaitre

    Sorry Carl, but you- and all the other members of the anti-foreign investor crowd- are dead wrong. The problem is you have been deceived by politicians playing the oldest trick in the political playbook- blaming foreigners for their own ineptitude.

    First, who in the world is against direct foreign investment into their own economy? Those who don’t understand economics, that’s who. Many countries in the world would kill to have Canada’s level of foreign direct investment (FDI). If a wealthy foreigner offered you $10m to invest in Condos.ca would you refuse it? DFI brings funds and capital into the economy, adds to aggregate demand, boosts Canada’s capital stock and makes Canada and Canadians wealthier. It’s economics 101: more investment is good, less investment is bad, and more taxes kill investment.

    So if the problem is not foreign investors, what is it? Simple- the ONE thing you completely failed to mention in your entire article: supply constraints. In a free market with rising prices, suppliers increase output to take advantage of the high profits. This increase in supply brings prices back down to equilibrium. The problem in the Vancouver & GTA housing markets is that supply is NOT increasing with population and demand. Why? You guessed it- political red tape, bureaucratic planners and slow licensing.

    Developers are ready and willing to build faster to met demand. But they can’t build faster because provincial and regional bureaucrats are stingy with their licenses, over-planning and micromanaging development plans, and ensuring that new builds fall short of population growth. THESE are the real villains.

    Of course, since the beginning of time in every country, politicians have blamed foreigners and immigrants for their own policy failures. And gullible citizens, motivated by xenophobia, have believed them. Next time you analyse this market ask yourself- or better still a developer- a simple question: why is supply of new hosing not keeping pace with demand. The answer will tell you who we should REALLY be blaming for runaway home prices.

    • This response is a perfect example of a “free Market Jesus” believer, Nothing you say to him, no amount of evidence will change his mind. He clearly has not even read the evidence to support what Carl has said. (Ryerson University Report)

  • Aaron Szeto

    https://betterdwelling.com/city/toronto/toronto-real-estate-doesnt-speculation-problem-overbuilding-40/ This… Condos.ca keeps thinking there are 100k people coming in Toronto every year. I’d still like to see evidence that can prove that it’s true.

  • nkyriazi

    Carl: Two things that were not mentioned in your blog nor by the commenters:
    1) Your comment: Last summer, I spent some time scouting downtown Vancouver for an office location for Condos.ca and as I walked from Coal Harbour and Gastown to Yaletown and Kitsilano, the city truly felt like a ghost town compared to Toronto. It was clear to me that Vancouver was being used as a “land bank” for wealthy foreign investors who didn’t live there.

    I agree with this statement but I encourage you to look further down the road. The same thing is happening in Switzerland with the complaint that vacant condos do not support local businesses resulting in ghost towns and local businesses unable to remain open. This is undoubtedly true but what will happen is that the areas will become less attractive without the commercial factor resulting in lower property values. The free market is self-regulating. There may be casualties but at least everything remains free and voluntary. There will be unintended consequences with government intervention also and they will probably be worse.

    2) Your comment: The 1910-20s famously saw skyrocketing equity prices caused by speculation, with no regulation to rein it in. That speculation ended very badly. As we are seeing with the current explosion in house prices, the impact of speculation is pushing many middle and working class families beyond their means, leaving them vulnerable to sudden price corrections or even collapse.

    I agree with this comment also; however, you ignore the cause of the speculation and resulting housing bubble – the central banks flooding the country with money printed out of thin air and offered at low interest rates. That is the cause of the high prices. The US Federal Reserve and all central banks are the cause of booms and busts. In a free market without central bank manipulation of the currency supply, booms and busts cannot occur because the needs and wants of the population do not change rapidly. The perverse artificial incentives of the central banks are what rock the boat.

    In summary, the economy is just the transactions between businesses and consumers: what people want and what they are willing to pay. This does not change rapidly except in situations occurring after natural disasters or when the central banks distort the market. In order to have a fair, safe, and stable economy, we need to eliminate natural disasters and central banks.