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
The Prohibition on the Purchase of Residential Property by Non-Canadians Act -- which came into effect in January of this year and bans foreigners from buying residential real estate in the country for two years -- is weird.
We can debate whether banning foreigners from buying residential real estate is really helpful for housing affordability and if it's the most impactful place to focus our attention (and we have talked about this many times before), but the part that is particularly odd is this feature here:
...the law’s definition of residential property includes land that is zoned for residential use or mixed use, which covers huge swaths of commercial land across the country. As well, an entity is deemed foreign if a non-Canadian owns a minimum of 3 per cent of the entity.
What this means is that the following scenario is now technically a problem (not actual legal advice!):
You own a commercial property with zero homes
You have long-term commercial leases in place that also generally preclude you from building new homes in the foreseeable future
The zoning of your property allows for residential uses (which you like having in your back pocket)
And your cousin from Italy owns 3% of the entity that owns the real estate
This is a scenario where residential homes do not exist and they are unlikely to exist any time soon. It seems clear cut, but I suppose one could argue that it's exceedingly onerous to try and figure out which sites are soft sites and could actually be developed with new residential. And so if you have the potential to build and then own residential, you should be regulated as if you might ultimately own some of it one day.
But even here, I don't know why we would want to restrict the supply side of the housing equation. If you're a developer in Canada where housing is known to be kind of expensive and you want to build more of it for Canadians, isn't that a good thing? And isn't it also a good thing if we can get some non-Canadians to help pay for these new homes?
Each year in March, Knight Frank publishes something called, The Wealth Report, which typically includes things like its Prime International Residential Index (PIRI) and a general overview of what ultra high-net-worth individuals (UHNWIs) are up to with their money.
(An UHNWI is typically defined as someone with a net worth greater than $30 million. And as of last year, there were nearly 400,000 of them around the world, with Hong Kong being the city with the most.)
In anticipation of this year's report, Knight Frank has just published the key findings of an "Attitudes Survey." This is them talking with and surveying private bankers, wealth advisors and family offices about some of the key themes for 2023.
Here are a few of my takeaways:
Globally, about 1/3 of UHNWI wealth is allocated to primary and secondary homes. This is expected. Generally the richer you become, the more your net worth gets diversified away from your primary residence. It is also worth noting that of this 1/3 allocation, more than a quarter is being held outside of their country of residence. This outside-of-country-of-residence percentage is highest for UHNWIs in the Middle East (41%).
The average UHNWI owns 4.2 homes around the world, with UHNWIs in Asia owning the most: an average of five homes. This is the kind of stat that might provide motivation for a foreign buyer ban, but I continue to believe that there are other bigger drivers impacting housing affordability/supply across our global cities.
About 15% of UHNWIs said that they want to purchase a residential property this year (2023). This is down from 21% last year. Inline with bullet point number one, the greatest appetite/stated intent is coming from the Middle East. (Related article: The new Gulf sovereign wealth fund boom)
Real estate was identified as the top investment opportunity. About 1/3 of UHNWIs want to invest in real estate -- either directly or indirectly -- in 2023. And the top asset classes are: healthcare, logistics/industrial, office, multi-family rental apartments, and hotels. It is interesting to see office in the top three. A positive sign that it is maybe being viewed as an oversold opportunity.
Finally, environmental sustainability is being increasingly considered by UHNWIs when it comes to investment properties: 57% are considering energy source(s), 33% are considering opportunities for refurbishment, and 30% are considering the materials used/the embodied carbon footprint inherent to the asset.
For the full findings, click here.