It’s not about foreign investors…

What just happened in Toronto wasn’t a tax on foreign investment but a strong and proactive measure in ensuring Toronto buyers aren’t over leveraged and can handle inevitable economic stresses. While the media is talking about the pending Foreign Investment tax, what the Feds actually did was set new standards when qualifying high ratio mortgages (mortgages requiring mortgage insurance).

Here are the changes

  1. All high ratio borrowers will have to qualify based on a 4.65% benchmark rather than the much lower market rate.
  2. A capital gains tax imposed on non-residents sellers of primary residences on the increase in value of the property.

What this means

It substantially reduces the size of the loan a buyer with a small downpayment would qualify for. For example, folks with a $100K income and $40K cash down would currently qualify for a $665,435 house at at 2.17% mortgage. Under the new rules, that same Buyer will have to qualify using the 4.64% rate which now affords them a $505,762 essentially pricing anyone out of a freehold product in Toronto proper. Get ready for 1 plus den condos to boom.

A tax was levied on foreign buyers of Metro Vancouver real estate to the tune of 15% which has immediately killed certain part of the real estate market. There is no doubt that some folks are taking advantage of the system and using our tax exemption to get their money out of China or other countries (but let’s be real, this is a tax on China as they’re our main foreign buyer) but there are also some foreign nationals that are here for school and other legit buyers that are going to be financially ruined by the decision in Vancouver. I’m glad the decision made today is a strong preventative measure to protect highly leveraged Buyers and a closing of a loophole that allows a tax on anyone selling property if they’re not a Canadian resident.

Ottawa will close a tax loophole that allows non-residents to buy homes and later claim a tax exemption on the sales, a government source said Sunday. The government plans to make sure the principal-residence exemption is only available to individuals who reside in Canada in the year the home is purchased. – The Globe & Mail

Yes, it’s true: Toronto real estate prices have skyrocketed over the past decade but is it due to foreign buyers flooding our market with their money? Certainly not in the resale freehold market and not even in the resale condo market. However, if I was a condo developer in Toronto I’d be a little concerned. A 2015 CMHC report showed 3.5% of all Toronto Condos were non-resident owned BUT we suspect that number is much higher as CMHC has admitted to have limited access to builder data.

This new tax on the sale of non-resident owned properties could force some foreign investment out of Canada (or maybe into other Canadian markets) but considering this is a tax on the sale and not a huge cash levy on the purchase, I don’t think this will have any impact on the real estate market at all. Other than to make it safer and stronger.

So what will the market look like after today?

There will be fewer Buyers in the market that are barely qualifying for mortgages and it will force folks that qualified for larger sums to step down on the property ladder a notch or two. What this will do, in my opinion (and I’m usually right) is drive even more folks from Freehold (houses) into the condo market further fueling the fire in that booming sector. We may see a dip in activity in the smaller, end user occupied condos as those folks are usually the most leveraged with smaller down payments.

 

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