Canada’s prime minister Justin Trudeau has banned foreign buyers from buying homes in the country for two years in an effort to cool off its red-hot housing market.
Canadian home prices have risen by more than 50% in the last couple of years, with the average home valued at around $693,000 in U.S. dollars at the end of February. That’s more than nine-times the average household income. The ban on foreign buyers suggested by Trudeau’s administration is designed to prevent real estate prices from rising any further.
The ban exempts foreign students, however, as well as foreign workers and foreign citizens that have permanent residency in Canada, Bloomberg reported.
Whether or not the ban would help remains to be seen though. Ben Myers, president of Toronto-based Bullpen Research & Consulting, told the BBC that foreigners made up just 1% of all home purchases in Canada in 2020.
Simeon Papailas, founder of REC Canada, agreed that the impact of the ban would be small. He said the problem is due to a fundamental lack of supply. “I don’t think prices are going to fall as a result, though I do think it takes away at least some of the competition in what is the most competitive market in Canadian housing history,” he said.
Myers said the rapidly-rising housing costs in Canada are a reflection of the country’s fast-growing population and a shortage of houses. The latter is partly due to restrictions on development, rather than competition from foreign buyers.
Canada’s housing market isn’t alone in seeing prices rise. The gap between incomes and home prices has been evident elsewhere in the world, including the U.S. However, analysts say Canada’s gap is one of the biggest.
Aside from barring foreign investments in housing, Trudeau’s administration has also proposed devoting billions of dollars to new construction, plus new programs such as tax-free savings accounts for first-time buyers.
Canada’s proposed ban has a precedent. In 2018, New Zealand implemented a similar ban on foreign purchases within its residential housing market. One year later, data showed that the number of homes sold in the country fell to its lowest level in five years. But while the ban did ensure a decline in foreign purchases, it did little to improve housing affordability.