Canada’s home prices poised to decline … though not because of the ban on foreign homebuyers, analysts say

Ottawa has implemented a two-year ban on non-domiciled foreigners buying homes
But it is rising borrowing costs that will drive prices down, according to analysts

International Property

Cheryl Arcibal

Published: 10:00am, 8 Jan 2023

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Home prices in Canada – a destination favoured by Hongkongers – are likely to decline this year, according to analysts, as Ottawa implements a two-year ban on most foreigners buying homes.

Though the proscription was introduced with the aim of subduing a red hot housing market, it is unlikely to be the main factor bringing pressure to bear on house prices.

Instead, it is the sharp rise in interest rates that will dampen demand, according to analysts.

For a period of two years from January 1, buyers not domiciled in Canada are no longer allowed to buy homes there. New immigrants and refugees, however, are exempted from the restriction.

The move is certain to come as bad news for offshore investors, including some Hongkongers, who have no ties with Canada.

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However, a rising number of Hong Kong residents are emigrating to the North American country or are seeking education there, meaning they will still be able to buy homes.

“Canada is a top destination for Hong Kong buyers, along with the United Kingdom, but most buyers of Canadian property actually have citizenship or are already permanent residents,” said Kashif Ansari, co-founder and group CEO of Juwai IQI, which operates a portal with US$4 trillion of property listings. “Only a small number of Hong Kong buyers are genuinely offshore foreign buyers.”

Data on homes acquired by foreigners in Canada is scant, but they are estimated to account for 3 per cent of all home transactions, according to Kevin Sing, president of DFH Real Estate, part of Leading Real Estate Companies of the World.

“Today, most foreign buyers in the major cities are purchasing for their own use. They are happy to wait to receive permanent residency to purchase,” Ansari said. “The ban applies only to offshore foreign buyers, so it won’t impact anyone moving to Canada to take a job, study or migrate.

“It also does not apply in vacation destinations that are outside of the major metro areas. So, you can probably still buy your ski lodge in Whistler.”

Hongkongers are among the biggest foreign groups buying homes in Canada. In 2021, for example, more than 22,500 Hongkongers received Canadian permanent residency work or study permits, a rise of 256 per cent from 2019. About a third of them received open work permits created in the wake of a sweeping security law imposed by Beijing that is widely perceived to have curtailed Hong Kong’s guaranteed freedoms.

The ban on foreign homebuying had sought to tame home prices that peaked in February last year.

But even without the ban, analysts believe home prices are poised to cool further this year owing to the sharp rise in mortgage rates. The Bank of Canada raised interest rates to 4.25 per cent as of December from 0.25 per cent in March.

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Forecasts for the decline in house prices – including both luxury and mass residential – range from Knight Frank’s 2 per cent to the Royal Bank of Canada’s 14 per cent.

Sotheby’s International Realty Canada anticipates that 2023 will see housing prices recede from past historic highs because of the pressures of rising mortgage rates and consumer uncertainty.

“Demand-side policies and taxes, including bans and taxes on foreign buyers will have little impact on housing prices,” said Don Kottick, president and CEO of the luxury property agency.

The combination of demand for homes during the pandemic and loose monetary policy drove the surge in overall home prices, which peaked at an average of C$816,316 (US$602,000) in February 2022. That was an increase of 58 per cent from December 2019, according to an index compiled by the Canadian Real Estate Association.

In November, home prices slipped 1.4 per cent, “continuing the trend that began back in the spring”, the latest data from the group that represents more than 155,000 property agents showed. Since the peak, home prices have declined by 11.5 per cent, it added.

“There are a number of systemic issues in the Canadian housing sector that are creating pressure on prices but I haven’t seen any data that suggests banning foreign homebuyers will drive down prices,” said Sing.

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“Interest rate increases have already moved prices down in the re-sale market but the limited supply in a significant number of Canadian metro areas will limit that price decrease as interest rates moderate.

“We may see some dramatic price decreases at the luxury end as the foreign buyer has more impact in this sector, [but] a two-year temporary ban, in the wider market sector where the number of transactions is relatively small, isn’t a driving force.”

The ban could even discourage developers from pursuing more housing projects, thereby pushing property prices up, he said.

“The new law could stop or slow down construction of major residential projects because of the uncertainty for a developer’s business case. Therefore, the ban could have an effect opposite to the stated purpose because supply is further choked leading to higher prices,” Sing said.

In the long run, Canada’s home prices are still likely to increase as demand continues to outstrip supply. Ottawa is seeking to welcome 465,000 new permanent residents in 2023, 485,000 in 2024 and 500,000 in 2025.

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