OPINION: Why Canada should embrace foreign investment in the housing market

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Topics related to housing affordability prevail in political campaigns, media headlines, and social conversations. This is a manifestation of a long-term challenge facing Canadians: for over two decades, housing costs have been consuming a progressively larger percentage of household incomes (HHI). 

According to RBC, in 2000, home ownership costs accounted for 36.6 per cent of median Canadian HHI; this figure rose to 41 per cent in 2016, and by the Fall of 2022, it was at more than 60 per cent. The average unit price of housing in Canada increased more than 100 per cent in the last decade, from $365,700 to over $760,000. The Canadian Mortgage and Housing Corporation (CMHC), indicates that the national rental vacancy rate at the end of 2022 was 1.9 per cent, its lowest point since 2001. 

 

Population growth continues to outpace housing supply

Government has not been passive in the face of these challenges, approving various laws and regulations aimed at controlling the price of housing. These include, for example, British Columbia’s 20 per cent foreign buyer tax (first introduced in 2016) and the federal government’s 2023 nationwide foreign buyer ban. Yet, after years of successive governmental interventions, housing has become neither more affordable nor more abundant.

 

A recent article highlighted the correlation between Canada’s continued population growth and rising housing prices. In June of this year, our population surpassed 40 million and is estimated to reach 50 million by 2043. 

A study by Coldwell Banker Richard Ellis found that over the last 60 years, population growth consistently outpaced the growth in the housing stock. Looking ahead, CMHC estimates that, in order to support affordability, Canada will require 22 million housing units by 2030. However, at the current rate, the housing stock is only estimated to grow to 19 million units by that time — a shortfall of some 3.45 million units nationally. 

 

“In the context of this chronic undersupply of homes, banning — or heavily taxing — foreign buyers can actually exacerbate the underlying housing shortage.”

 

In the context of this chronic undersupply of homes, banning — or heavily taxing — foreign buyers can actually exacerbate the underlying housing shortage. Hold on a minute, some will say: shouldn’t precluding foreign investment leave more units available for local buyers? With respect to the supply of multi-unit “for sale” residential property (condos and townhomes), the answers are found in how projects are financed.

 

Generally, in order to obtain construction financing for condo and townhome projects, developers must achieve a volume of pre-sales commensurate with the quantum of the construction loan required. Regulations that artificially reduce the size of the potential pre-sale and investment market can make it more difficult for projects to achieve financing, therefore constraining the rate of housing delivery. 

Such a constraint poses implications not only for homeownership but also for the rental market: of the total rental housing stock, condos (as distinct from purpose-built rental buildings) constitute 19 per cent, nationally. In other words, lessening the supply of condos worsens the shortage of rental accommodation. This relates to the waterfront of “unintended consequences” of housing policy contemplated by CIBC Economist Benjamin Tal, as cogently described in a REM piece from earlier this year.    

 

“… the only way to meaningfully address housing affordability.”

 

The urgent policy priority for government should be aligning the business imperatives of housing developers with a regulatory framework that promotes increased volume and velocity in the supply of housing (as an aside, the recent removal of GST on rental buildings is a step in the right direction). This alignment — and not new taxes or restrictions — is the only way to meaningfully address housing affordability. 

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