Big Idea: Do anti-speculation measures targeting real estate actually work?

Over the past five years, Canadian policy-makers at all three levels of government have become enamoured with a set of measures ostensibly designed to take some of the energy out of the real estate market, that bucking bronco of an industry whose gyrations affect, well, everything. The list, in fact, has grown in both heft and ambition: foreign buyer taxes (Ontario and B.C.), vacant home taxes (Vancouver and Toronto), stricter capital gains tax rules targeting flippers (national) and, finally, a two-year moratorium on most foreign buyer acquisitions, which came into effect last fall with the passage of the vaguely dog-whistley Prohibition on the Purchase of Residential Property by Non-Canadians Act.

You don’t need a political science degree or a stint in government to understand the impulse. Our escape-velocity real estate prices—the consequence of a constellation of factors from financialization to underinvestment in social housing to the unwillingness of municipal councils to up-zone residential neighbourhoods—have made Canada’s housing sector one of the least affordable in the world. While the Bank of Canada’s interest rate hikes in late 2022 and early 2023 have pushed prices down somewhat, the implacable reality is that most real estate remains well beyond the reach of the average family. What’s more, it will take years for housing construction drives, such as the one promised by the Ford government in Ontario, to bring supply more in line with demand.

Nada Hayek/The Globe and Mail

So, what’s a politician to do? Well, how about a bit of misdirection? Blame speculators, especially if they’re from, well, elsewhere. As it happens, governments from, well, elsewhere have been doing the same thing. London, Hong Kong, Auckland and Paris have all imposed taxes on foreign buyers, and U.S. jurisdictions are following suit—a dynamic that could catch up with Canadian snowbirds, who buy up a lot of vacation property in Florida.

But do anti-speculation policies aimed at foreign buyers actually work?

With some caveats, most analysts say they have little impact and may, in fact, cause local real estate markets to become even more brittle. In a note published in late February, CIBC chief economist Benjamin Tal was scathing in his verdict on the foreign buyers’ moratorium. “The damage is real,” he wrote, noting that foreigners account for only 2.2% of Ontario’s housing stock. “Many commercial real estate deals have been cancelled or are on hold despite the fact that they have nothing to do with residential housing. Developers that are partly foreign-owned or rely on foreign equity cannot proceed with purpose-built developments that, in our view, are the most effective tool to tackle Canada’s housing affordability crisis.” (In its latest budget, the feds amended the act to ensure foreigners can buy and develop commercial real estate.)

A University of Virginia study, published in the Iowa Journal of Law in 2021, picked up a similar thread, arguing that the source of resilience of a real estate market is the same as that of an investment portfolio: diversification and asset allocation. “Outside investors make holding local real estate less risky by introducing new and uncorrelated risks to the demand for that real estate,” wrote Andrew Hayashi and Richard Hynes. “When foreign investors purchase U.S. real estate to diversify their portfolios, they simultaneously bring the benefits of diversification to local homeowners by reducing the risk of a collapse in housing demand when the homeowners want to sell.”

Others have also questioned the logic. “I think it’s very misguided,” says Andrey Pavlov, a professor of finance at Simon Fraser University’s Beedie School of Business. “They’re really like a Band-Aid solution to a heart attack. They don’t solve the immediate problem that’s in front of us, which is insufficient supply. On the contrary, they actually reduce supply going forward because every time you interfere in the market through some sort of ‘clever’ solution, that increases the risk to market participants.”

Economist Thomas Davidoff, who holds the Stanley Hamilton Professorship in Real Estate Finance and heads the University of British Columbia’s Centre for Urban Economics and Real Estate, offers an empirical perspective gleaned from the province’s own experiences with such policies. B.C.’s foreign buyer tax had some impact, he found, but mainly at the very top of the market. “There was not much success in really improving affordability,” he says.

When Diana Mok, an associate professor at Western University who studies urban real estate economics, looked at Ontario’s foreign buyer tax, she found it affected only 350 transactions across the Greater Golden Horseshoe in the second quarter of 2020. What’s more, when she worked backward from the total amount collected, she discovered that the average home caught by this levy, which is 25% of the purchase price, sold for almost exactly the average home price in the region. “The picture that’s painted,” she says, “is, number one, the number of foreign buyers is not big, and number two, their purchases are not in any particularly high segment of the market. They are just like any average Canadian buying and selling in the housing market.”

It’s important to acknowledge that some of the anti-speculation measures of the past few years weren’t just sops to political pressure. B.C., for example, endured a money laundering crisis in the 2010s that flooded casinos, luxury car dealerships and residential neighbourhoods with crime proceeds from drugs, human trafficking and tax evasion. An expert panel reported in 2018 that more than $7 billion in dirty money had found its way into real estate, causing prices overall to rise about 5%. Comfortable and expensive Lower Mainland houses were torn down to make way for mansions that sat conspicuously empty—signals that prompted the B.C. government to enact a foreign buyer tax and then a vacancy tax.

Vancouver’s vacancy tax—which has been emulated in a growing number of cities, including, as of February 2023, Toronto—appears to have produced a response from owners sitting on empty dwellings that could otherwise be rented out. The tax is hefty enough—1% of assessed value in Toronto—that it won’t be seen as just a slap on the wrist.

The City of Vancouver’s latest empty homes tax report, released last fall, found that the number of vacant homes covered by the bylaw (there are some exemptions) fell 36% between 2017 and 2021, with about 9,000 new condo units added to the long-term rental pool between 2018 and 2021. The tax, in turn, generated more than $115 million for the city, which it says it uses to invest in grants to affordable rental housing providers and land that can be banked for housing development.

Davidoff, who advised Vancouver on its vacant homes levy, points out that tax dollars are fungible, so earmarking funds is more of a political gesture than an administrative one. But, he adds: “We live in a political world, and having popular support for a policy is important.”

Pavlov, for his part, says the vacancy tax is not a long-term solution. “This is just a one-time increase in rental supply that did absolutely nothing for the rental market, in that the vacancy rate did not move at all,” he says, adding that one of the perverse outcomes of the tax is that, by expanding the number of available units, it slightly dampened demand for new home construction. While Pavlov acknowledges that those extra and now occupied rentals are “not nothing,” he says the most meaningful policy solution will come from adding a lot of supply, especially in low-rise neighbourhoods that have been off limits to intensification for generations.

So, does the business of imposing anti-speculation policies come down to picking your poison—political pressure to tamp down on bidding wars on the one hand, and an assortment of measures, some of which may backfire, on the other?

Davidoff offers policy-makers a few rules of thumb: One, taxes are always better than bans (at least the government gets something out of it); and two, if the solution is to be a tax, focus on use of the property and not nationality of the owner. “Who has a more adverse effect on affordability in Vancouver,” he asks rhetorically, “a guy from Brazil who rents his place out to a local, or a guy from Toronto who uses the place as a pied à terre?”

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