Foreign speculation in Canada’s biggest cities is artificially increasing prices in the housing market, according to some experts.
In a recent example, a foreign student from China bought a small bungalow in Toronto for $1-million. This outrageous price and the new owner have some worried that Canadians may be loosing the real estate market to foreign ownership. Already the market in Toronto is overheating with the average selling price of real estate in the city recently hitting $503,998
There’s growing concern among experts that foreign money is unnaturally driving up the price of homes in Canada. This drive may be making it impossible for many Canadians to afford to buy property. Especially when interest rates start to rise.
Some say the rules of foreign ownership are too lax. Right now, foreigners can purchase property in Canada without being a permanent residence. This means they can stay here for less than six months at a time with no questions asked by the government and own property here for the long term.
Lawrence Kobescak, with Ontario Mortgage Superstore wants Ottawa to get involved. “The Canadian government needs to take steps to reduce foreign ownership in residential properties.” He points out that although we need foreign dollars to help Canada’s economy, the over saturated real estate market with outside investors is not all good for Canada “Foreign investment is great, until its not,” he says
Canada’s good reputation and resilience during the recent economic crisis may be to blame. Investors from Hong Kong, Britain, and the U.S find Canada’s real estate market attractive because it looks much more stable compared to the rest of the world. Unlike our cousins to the south, our housing market has not been negatively affected by the global recession.
Recently, Bank of Montreal chief economist Sherry Cooper said Canada should learn the lessons made in places like Spain, where foreign speculation drove up prices to extraordinary levels.
“For nearly a decade starting in 1999, house prices exploded in Spain as both domestic buyers, and more notably, foreign buyers poured money into residential real estate,” Cooper says. She adds, “real estate agents have tales about foreign investors scooping up literally dozens of condo units at one time.” While Toronto’s condo boom still pales in comparison to what’s happened in Spain or the U.S., Cooper says, lessons must be learned from those experiences.
And it’s not only Canadians that are worried.
Housing bubble predictor Ben Jones states speculation in Canadian cities such as Vancouver and Toronto is “wildly” out of control. The Arizona based accountant has a good track record predicting bubbles. In 2004 he launched “The Housing Bubble Blog,” where he clearly indicated that the U.S housing market was overpriced and heading for a meltdown.
The reasons for the U.S housing market crash was from domestic speculation and homeowners taking on to much risk, but foreign speculation could create a similar bubble in Canada according to Jones.
He remains particularly concerned about Toronto and Vancouver’s condo market. In a recent blog he wrote. The fevered pace of building in Toronto, Vancouver and Montreal is fuelling fears that the condo market is dangerously close to overheating.
He adds, Canada’s Finance Minister Jim Flaherty doesn’t have a good idea on the amount of foreign money in the Canadian housing market. Flaherty recently said ”It’s mainly anecdotal, so I don’t have a statistical grasp of it, no,’ he said, adding that he hears about lots of people in emerging economies paying cash for condos in Toronto and Vancouver.
With bank mortgage rates being so low and the foreign equity markets not performing well, the Canadian housing market is offering a safe and attractive return. Unfortunately we are reaching a point where we could suffer long-term economic damage if we do not change the policy.
Kobescak says the solution lies in Ottawa “Policy changes such as restricting the number of non owner occupied foreign owned properties to one, could help stem a collapse in the Canadian housing market.”
Here is a list the average home prices in Canada’s biggest cities sold in March 2012.