After sharing Carl’s post two weeks ago, in which he called for a foreign investor tax and new regulations, we got a great response from our readers sending in their thoughts on the issue. We also had some spirited comments on the blog, and the discussion remains heatedly divided. In fact, Real Estate Professional magazine recently polled their readers on the issue of a foreign investor tax, and the poll returned a near 50/50 split. This week, we wanted to talk about the effect of foreign investment on the Canadian economy, and how a foreign investor tax would be more like a fairness tax.
Foreign investor tax is fair for taxpayers
First, some jargon: economic externalities.
Also known as ‘spillover effects,’ economic externalities are the costs or consequences of economic activities incurred by a third-party. A common example of a negative externality is the pollution caused by the automotive industry.
When it comes to real estate, a huge portion of the value of a property falls under economic externalities, notably the urban infrastructure. It is the local taxpayer who contributes to the local economy, financing public transit, parks, hospitals, and schools that provide many condos with a high level of urban convenience and value.
When a foreign investor buys property in Canada, they pay a lump sum land transfer tax and on-going property taxes, some of which contributes to the maintenance of municipal infrastructure. But if the foreign investor who lives abroad turns the property into a rental unit or one day decides to sell the property after it appreciates in value, the income/profit of the investment is taken away from the local Canadian economy and contributes nothing towards covering the cost of externalities.
Is it fair that a resident taxpayer pays the same price for a new condo as a foreign investor who lives abroad, but the foreign investor gets to take their net income and capital gain back to their own economy, depriving the Canadian economy of the multiplier effects? We don’t think so.
Foreign investor helps the local economy (NOT)
Some more jargon: multiplier effects
For every $1 a Canadian landlord makes, he/she spends that $1 in the local economy, where the money flows from the coffee shop –> barista –> grocery store –> cashier –> etc. With each transaction, the investment is multiplied with a portion taxed to the government and the rest returned to the flow of the economy. The multiplier effect in a city like Toronto can be anywhere from 3-17 times.
If foreign landlords take profits and revenues out of our economy, we do not get the multiplier effects of the investment, and it does NOT boost growth like some think. Outbidding a Canadian homebuyer and renting the property back to another Canadian is not really the kind of “foreign investment” we need right now. Build a factory, fund a new start-up—great!—but investors who speculate and exploit our housing supply are clearly pushing up the cost of living and hurting Canadians in the end. A tax on this type of foreign investor is only fair for the people trying to work and live in a city like Toronto.
Still, we continue to hear the argument that a foreign buyer tax will hurt the pre-construction industry and worsen Toronto’s housing supply issue. It’s true that new developments depend on pre-construction investment to get off the ground—they require 70-80% presale before they can build—and lately a lot of these pre-con sales are going to foreign buyers. But the demand for pre-construction in Toronto is off the charts. A recent pre-construction opening at Wyatt Condos received over 2,000 offers for 400 units!
In Toronto, a tax on foreign sales may deter some foreign investors, but big-money speculators (and money launderers) will continue to buy in Canada, just as they did in Vancouver. Even now, Vancouver developers continue to cater to high-finance investors. Implementing a foreign buyer tax in Toronto would simply help to cover the cost of real estate externalities that Canadian residents have to pay.
The demand for housing in Toronto is strong enough to keep development going. Considering we have line-ups on pre-construction launches and bidding wars on almost every listing, there are plenty of Canadian buyers waiting in line to fill the void if foreign investors decide to stop buying condos in great cities like Toronto.