Canada’s ban on foreign purchases of residential property is creating barriers to construction of new rental housing, another unintended consequence stemming from a law that was supposed to help Canadians buy more homes by barring foreign competition.
The ban, which is set to last for two years, has already led to the cancellation of hundreds of commercial property deals because the law’s definition of residential property includes land that is zoned for residential or mixed use. As well, the rules specify that no more than 3 per cent of any money going to a residential purchase can come from a foreign source. But developers and real estate experts say the new rules are hampering development of rental apartments, which the federal government has said is critical to help deal with the shortage of affordable housing.
Foreign investors are still allowed to buy apartment buildings – anything with more than three units. They are also permitted to buy real estate for commercial purposes that was zoned fully or partly for residential use, as long as it is in an area with a population of less than 10,000.
But the law prohibits foreigners from investing in land zoned for residential in regions with larger populations such as Toronto and Vancouver, even if the plan is to create rental-only apartments. The ban also makes it hard for developers to start acquiring individual homes for land assemblies, since those homes fall under the category of banned types of purchases.
Developers often get financing for projects from a collection of sources. Now, every one of those sources has to be checked to see what percentage is owned by any non-residents to ensure that more than 97 per cent of the money is defined as Canadian.
It is also creating a chilling effect on commercial real estate deals and development. The rules to the Prohibition on the Purchase of Residential Property by Non-Canadians Act were released late December, less than two weeks before the law went into effect. Lobby groups have been trying to get clarification from the policy makers who helped craft the law, including the federal ministries of Finance and Housing, as well as at the Canada Mortgage and Housing Corp.
The federal ban is part of a wave of efforts by countries around the world, along with various Canadian provinces and cities, to deal with skyrocketing housing costs. Several countries in recent years, most notably New Zealand in 2018, have introduced bans on purchases of homes by non-citizen buyers.
The non-Canadian buyer ban is also affecting foreigners moving to the country for work because they do not yet have permanent residency status and therefore are not allowed to acquire a home. Employers are alerting foreign workers about the perils of finding housing.
