Ami Reiss, Montreal executive, on consequences of Canada’s new prohibition

Canada’s new prohibition

“Laws are like sausages. It is best not to see them being made,” advises a classic political aphorism. One reason to avoid observing the latter was famously offered by Upton Sinclair in The Jungle, his 1906 exposé of American meat packing plants: “They use everything about the hog except the squeal.”

One example of the former could turn out to be The Prohibition on the Purchase of Residential Property by Non-Canadians Act, Canada’s federal ban on foreign purchases of residential property. The processing of the legislation happened palatably enough, but the practical result may be a case of indigestion in many of Canada’s real estate markets.

As Montreal real estate executive Ami Reiss explains, the two-year ban on foreign buyers was triggered, in part, by the huge price increases for homes that began during the early weeks of the pandemic. By 2022 prices had reached such a peak that the Canadian Real Estate Association was reporting the average sale price was $816,720 Canadian dollars, up 20.6 percent from the year before and 44 percent higher than before the outbreak of the pandemic.

“Since then, prices have declined in some markets, but affordability hasn’t improved,” says Reiss, whose Reiss Management stays on top of property trends in Montreal’s vibrant neighborhoods. “The reason for that is the Bank of Canada’s strategy of steadily hiking interest rates to slow inflation. Mortgage rates are high and heading higher.”

The ban does not apply to permanent residents, buyers legally working or studying in Canada or asylum-seekers, notes Reiss. All other non-citizens are barred from purchasing property.

The idea for a nationwide ban began at the provincial level — and, ironically, overseas. Political leaders in Ontario and British Columbia had already established an added tax of 20 percent for purchases by foreign buyers. Abroad, New Zealand introduced a comprehensive ban more than three years ago.

The main parties in Canada were on board with the idea of discouraging foreign purchases. The Liberals and Conservatives both promised a ban in the last campaign, and the New Democratic Party went further, proposing a B.C./Ontario-style 20 percent tax nationwide.

As popular as the ban was, its goals haven’t always aligned with the reality of real estate markets. A study by Baker Insights Group found that foreign purchases represented just 1 percent of all Canadian property sales in 2020.

Now the consequences of this restrictive approach are becoming clearer. As The Financial Post reported this month: “The words ‘residential property’ legally capture far more property types than lawmakers likely intended. While homes such as detached, semi-detached, row houses and condominiums fall under that category, so does land. Vacant or developed land that doesn’t house a habitable structure, is zoned for residential or mixed use, and located within a metropolitan area, is included under that definition.

“Corporations are considered non-Canadian under the Act if they have foreign ownership of at least three per cent. But though the Act excludes companies listed on a Canadian stock exchange from being affected, it fails to exclude real estate investment trusts (REITs) — important builders of residential property such as apartments.”

The result is a significant drag on real estate development, say some observers, even as Canada faces a long-term housing supply and affordability crisis.

Ami Reiss points out that the law not only bars developers that have a small percentage of foreign ownership, or who need foreign equity to stay in business, but also prevents foreigners from renting or taking out a mortgage on a residential building. In retrospect, it seems the text of the law was so broad that it really did include everything but the squeal.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.