Banning foreigners from buying real estate tends to be popular policy.
In a recent public opinion survey conducted in British Columbia, 77% of respondents said they approve of the provincial foreign buyer tax increasing from 15 to 20%, and 75% said they agree with the federal government's temporary ban on foreign buyers. This is consistent with what I'd expect. But for obvious reasons, the development industry doesn't like these policies.
Foreign-buyer bans are a demand-side measure. Meaning, they are intended to ease home prices by reducing demand. The development industry doesn't like this because low demand is bad when you're trying to build things. A better scenario is something involving high demand and high supply, which is why supply-side measures tend to be more popular with industry. Even though there's always the risk of overbuilding.
But it's pretty hard to argue that more supply will help to lower home prices and then not argue the same with reduced demand via the banning of certain buyers. Both levers should, in theory, have an impact, even if the former is suboptimal for builders. That said, there remains the important question of whether there's enough foreign demand for a foreign-buyer ban to actually have an impact or whether it's just political theater.
Anecdotally, I can tell you that we have not typically seen a lot of foreign buyers in our pre-construction condominium projects. The deposit structure we use is different for non-Canadians and it tends to be a very very small percentage of buyers. But for resales in markets like Vancouver, the numbers do seem to be higher, at least based on some historical data.
According to this recent research paper, once BC started tracking the nationality of buyers in June 2016, they discovered that in the 5-week period that immediately followed, about $885 million was spent by foreigners in the Greater Vancouver Area and that they represented about 10% of all sales. It was also discovered that of these foreign buyers, about 90% of them were from China.
This data was so impactful to policy makers that it is allegedly what led to BC's foreign buyer tax in August 2016. And since then, there's further data to suggest that it has worked to temper home prices. Here's a chart from the same research paper:
As a developer and proponent of open markets, I don't love this policy. It's a form of protectionism that discourages or flat-out blocks this kind of foreign investment from entering the country. I also worry that it can be a crutch or excuse not to expand the overall housing supply of a market. But this is seemingly not how many or most voters feel. And I can certainly appreciate why that would be the case.
Cover photo by Alejandro Luengo on Unsplash
Real estate development is a risky endeavor and so a big part of this business is managing those risks. There's planning risk, market risk, construction risk, bad-drawing risk, and the list goes on. But it's also important to keep in mind that the risks you worry about the most will invariably change throughout the course of each real estate cycle.
For example, early on my career, we worried a lot less about construction cost escalations. We'd plug in a 2-3% annual increase into the pro forma and then move on the next line item. Of course, during the pandemic, this is almost all we worried about. What's our exposure? Do we have enough of an allowance? How are our subcontractor contracts drafted?
This particular panic has subsided since then, but now there's new panic: closing risk. We've spoken about this before, but given the number of condominium completions expected this year, I think it's going to remain top of mind for at least another 18 months (in the Greater Toronto and Hamilton Area).
The simple point I'd like to make today is that it's important to worry about risks, but it's equally important to worry about the risks that don't seem like risks at all today, which is admittedly trickier. Because you just never know. It's hard, for instance, to predict exactly when your largest trading partner might suddenly start an arbitrary trade war.
But it can happen, as we've learned.
Cover photo by Tiomothy Swope on Unsplash
The turning point for the Toronto housing market, including pre-construction condominiums, was, I would say, in the spring/summer of 2022. This is when the market turned and sentiment changed dramatically. What that means is that we are about to enter year three of this downturn. Time flies when you're grinding away. How long it lasts is anyone's guess, but new sales and completions are a good place to look.
Last year, the GTHA saw approximately 29,800 condominium homes complete according to Urbanation. This is slightly above Zonda's estimate of 27,228. Whatever the exact number, it was a high number of completions. And this year, the forecast is for something similar. But given how precipitously new home sales have fallen off, it's only a matter of time before completions do the same.
Here's what Zonda Urban is currently forecasting:
Banning foreigners from buying real estate tends to be popular policy.
In a recent public opinion survey conducted in British Columbia, 77% of respondents said they approve of the provincial foreign buyer tax increasing from 15 to 20%, and 75% said they agree with the federal government's temporary ban on foreign buyers. This is consistent with what I'd expect. But for obvious reasons, the development industry doesn't like these policies.
Foreign-buyer bans are a demand-side measure. Meaning, they are intended to ease home prices by reducing demand. The development industry doesn't like this because low demand is bad when you're trying to build things. A better scenario is something involving high demand and high supply, which is why supply-side measures tend to be more popular with industry. Even though there's always the risk of overbuilding.
But it's pretty hard to argue that more supply will help to lower home prices and then not argue the same with reduced demand via the banning of certain buyers. Both levers should, in theory, have an impact, even if the former is suboptimal for builders. That said, there remains the important question of whether there's enough foreign demand for a foreign-buyer ban to actually have an impact or whether it's just political theater.
Anecdotally, I can tell you that we have not typically seen a lot of foreign buyers in our pre-construction condominium projects. The deposit structure we use is different for non-Canadians and it tends to be a very very small percentage of buyers. But for resales in markets like Vancouver, the numbers do seem to be higher, at least based on some historical data.
According to this recent research paper, once BC started tracking the nationality of buyers in June 2016, they discovered that in the 5-week period that immediately followed, about $885 million was spent by foreigners in the Greater Vancouver Area and that they represented about 10% of all sales. It was also discovered that of these foreign buyers, about 90% of them were from China.
This data was so impactful to policy makers that it is allegedly what led to BC's foreign buyer tax in August 2016. And since then, there's further data to suggest that it has worked to temper home prices. Here's a chart from the same research paper:
As a developer and proponent of open markets, I don't love this policy. It's a form of protectionism that discourages or flat-out blocks this kind of foreign investment from entering the country. I also worry that it can be a crutch or excuse not to expand the overall housing supply of a market. But this is seemingly not how many or most voters feel. And I can certainly appreciate why that would be the case.
Cover photo by Alejandro Luengo on Unsplash
Real estate development is a risky endeavor and so a big part of this business is managing those risks. There's planning risk, market risk, construction risk, bad-drawing risk, and the list goes on. But it's also important to keep in mind that the risks you worry about the most will invariably change throughout the course of each real estate cycle.
For example, early on my career, we worried a lot less about construction cost escalations. We'd plug in a 2-3% annual increase into the pro forma and then move on the next line item. Of course, during the pandemic, this is almost all we worried about. What's our exposure? Do we have enough of an allowance? How are our subcontractor contracts drafted?
This particular panic has subsided since then, but now there's new panic: closing risk. We've spoken about this before, but given the number of condominium completions expected this year, I think it's going to remain top of mind for at least another 18 months (in the Greater Toronto and Hamilton Area).
The simple point I'd like to make today is that it's important to worry about risks, but it's equally important to worry about the risks that don't seem like risks at all today, which is admittedly trickier. Because you just never know. It's hard, for instance, to predict exactly when your largest trading partner might suddenly start an arbitrary trade war.
But it can happen, as we've learned.
Cover photo by Tiomothy Swope on Unsplash
The turning point for the Toronto housing market, including pre-construction condominiums, was, I would say, in the spring/summer of 2022. This is when the market turned and sentiment changed dramatically. What that means is that we are about to enter year three of this downturn. Time flies when you're grinding away. How long it lasts is anyone's guess, but new sales and completions are a good place to look.
Last year, the GTHA saw approximately 29,800 condominium homes complete according to Urbanation. This is slightly above Zonda's estimate of 27,228. Whatever the exact number, it was a high number of completions. And this year, the forecast is for something similar. But given how precipitously new home sales have fallen off, it's only a matter of time before completions do the same.
Here's what Zonda Urban is currently forecasting:
They are expecting 2027-2028 to be fairly normal. The above figures would be just under the 10-year average. But then completions fall off a cliff starting in 2029 and go down to basically nothing in 2030 — 411 condominium homes could be a single project!
My sense is that this cliff is going to occur earlier. 2027 will be five years since the market turned. That's enough time for many, if not most, pre-sales to get through construction. It's also important to point out the obvious fact that some large percentage of the above completions need to be categorized as new rental housing. So this looming housing shortage will impact both buyers and renters.
Cover photo by Patrick Tomasso on Unsplash
They are expecting 2027-2028 to be fairly normal. The above figures would be just under the 10-year average. But then completions fall off a cliff starting in 2029 and go down to basically nothing in 2030 — 411 condominium homes could be a single project!
My sense is that this cliff is going to occur earlier. 2027 will be five years since the market turned. That's enough time for many, if not most, pre-sales to get through construction. It's also important to point out the obvious fact that some large percentage of the above completions need to be categorized as new rental housing. So this looming housing shortage will impact both buyers and renters.
Cover photo by Patrick Tomasso on Unsplash
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