Canada’s luxury housing market has already been impacted by changes to immigration policy and could be in for rougher times as foreign investors are lured to the United States.
CIBC Deputy chief economist Benjamin Tal said now that the federal budget released Tuesday has closed a loophole offering a shortcut to wealthy investors, he thinks it could have an even greater impact on housing markets in Vancouver and, to a lesser extent, Toronto.
“They basically had stopped the program,” said Mr. Tal, about the Immigrant Investor Program which fast-tracked permanent residency for people who could come up with $800,000. The money ultimately served as a interest-free loan to the government that was paid back to the immigrant in five years.
A story in the South China Morning Post found there are 45,000 wealthy Chinese immigrants, with a combined worth of least $12.9-billion, waiting to get into Canada under the program.
The number of applicants is six times higher than the number for similar programs run by the U.S., Britain and Australia, the newspaper said. “There is also little evidence that immigrant investors as a class are maintaining ties to Canada or making a positive economic contribution to the country,” the government said, adding immigrant investors pay significantly lower taxes over a lifetime than other categories of economic immigrants.
Ottawa also announced it has eliminated the so-called immigration trust, which had allowed wealthy immigrants to shelter their investment income from taxation for their first five years of residency here. There is no evidence that all of this was directly aimed at the housing market but there have been endless anecdotal tales of these investors driving up home prices — an overheated housing market being something Finance Minister Jim Flaherty has been trying to combat for years with restrictive lending measures.
There are no laws on foreign ownership of residential real estate and, when asked, Mr. Flaherty has said he has no plans to put any in place. Mr. Tal says his own research shows there has been a “significant softening” in activity in high end home sales in Vancouver, Canada’s most expensive city. “It definitely has impacted the high end of the market. It is not that activity is going down, it is simply not rising,” said Mr. Tal, adding the rumour had been the dollar amount was going to be increased to $2-million as opposed to eliminated.
The move comes as the U.S. is lowering its threshold, he notes. However, a survey from Re/Max of 16 Canadian markets found sales of what it called “upper end homes” higher in 75% of markets.
Vancouver, where a luxury home was classified as being worth $2-million and up, had a 36% increase in sales from 2012 to 2013.
Mr. Tal says the U.S. is going to start getting much of the benefit Canada was getting from these immigrants. “We were getting [those investors] but we killed it and in the U.S. the government wants to attract more investors.” He suggests Ottawa probably is not too concerned about the loss because of Mr. Flaherty’s position on the housing market and the low taxes these investors were paying. “[Ottawa] is not losing sleep over this. It was a relatively easy target for them,” said Mr. Tal Phil Soper, chief executive of Royal LePage, cautioned on the importance immigrants have played in the Canadian housing sector during this boom. “Our firm operates in many corners of the world. Nowhere in the developed world, including the United States, have I seen immigration play a more important role in supporting the housing market,” said Mr. Soper.
“While wealthy foreign investors get the headlines for snapping up expensive real estate in West Vancouver and on Toronto’s waterfront, the immigrant home buyer has made a positive impression across price points, and across the country.” He recounted a recent trip to Winnipeg where he talked to a man who had moved his family to the city from south Asia. “Quite aside from adapting to ice-age winter weather, his story was a positive one. I asked how he had decided on Winnipeg, not traditionally a favoured landing point for immigrants. He replied, ‘The Internet – it was obvious that this is where the jobs are.’ I’ve heard similar stories in Saskatoon and Kamloops and Sudbury.” He said Canada needs to make sure it keeps its door open for immigration. “Canadians deserve the credit for creating a welcoming culture that attracts many of the world’s strongest candidates for citizenship, and home ownership. It would be a tragedy to see that house come tumbling down.”