Foreign buyers have been a hot topic for a few years now – many people have assumed these mystical foreign entities are responsible for the price insanity we have experienced in Ontario. In reality, these foreign buyers are very hard to track (Statistics Canada had to set aside $500,000 just to figure out a way to accurately monitor these transactions), but most reputable research indicates they represent a very small portion of the market in southern Ontario. According to recent statistics from the Toronto Real Estate Board, foreign buyers account for 4.9% of the marketplace, a number so low that it should not have any major affect on a market the size of southern Ontario.
Think about New York City: If the foreign buyer rate there accounted for 4.9% of all transactions, would anyone bat an eye? Would that make a real, measurable difference in a market so large and expensive? I think not. (However, I do believe foreign buyers profiting off our real estate markets should pay their fair share of taxes into our system.)
The consequences
The real impact in Southern Ontario from the recently announced foreign buyer tax will be felt in the luxury market, where most foreign investors are parking their money. These people are happy to find a nice, safe place for their wealth to sit long-term, away from their own unstable countries, governments and financial systems. Expect the luxury market to recover after an eight to 12-month period as emotions subside and real fundamentals kick back into play.
No doubt the announcement of the foreign buyer tax had an immediate impact on the local GTA market. Most people who get their information from the evening news were on pins and needles, waiting for the sky to fall on their heads, and those who have been waiting for a real estate doomsday felt vindicated. Many others were spooked into listing their homes or decided to hold off on buying, causing a spike in inventory and fewer actual transactions. But prices are still higher overall, which the media hasn’t reported on much.
This ‘new’ market is still finding its legs, so it’s possible the decline in overall sales in the luxury market will be skewed to show an overall price decline. Don’t let the headlines fool you, though. In fact, when it comes to real estate, it’s best to stop taking advice from the TV and newspaper altogether.
The opportunities
Based on what I can see and feel, investors are having the time of their lives scoring good properties and having all this inventory to play with. The marketplace, although still technically a seller’s market, feels much more balanced, and multiple-offer situations have dropped significantly. Rest assured, top-quality properties are still selling very quickly – and for top dollar. Don’t be fooled into thinking this is some US-style housing crash. This is just an adjustment to a new normal. The same strong investor fundamentals and formulas still apply.
Real estate investors targeting cash-flowing properties will also have to contend with the expanded rent control guidelines put into place by the Fair Housing Plan. When governments intervene into local markets and try to control prices and value, history has shown moves like this almost always end in utter failure. Some larger landlords are aware of this and have been strategically selling or attempting to sell assets in order to hedge their risk against price/rent controls.
The Ontario government made these changes in an attempt to create more rental options, quench the insatiable demand and stabilize rising rent prices. We have definitely seen more inventory come onto the market, which has created more balance. Investors have been happy to hunt again without the threat of the profit killing bidding wars we have become accustomed to. However, rent prices have not stabilized, and the move has caused a further rift in the already fragile relationship between landlords and tenants.
Larger investors liquidating their assets can actually lower the actual volume of units available in the GTA, as many buyers of these properties will redevelop the land into condos or other, more profitable developments. If the number of units decreases, I believe average rents will only keep increasing, possibly at an even faster pace than before.
Recent changes to financing rules have made it more difficult to get approved for a mortgage. Because of this, more and more people are turning to renting in order to secure a stable roof over their heads in a desirable location. The luxury rental market has also seen a huge increase because foreign nationals are fearful of purchasing and paying any kind of foreign investor tax. Renting is now a much easier transition into the GTA for them.
In times of uncertainty, it’s important to remember one of the key tenets of a sophisticated investor: We are resourceful and well-informed, which allows us to profit in any market scenario. Up market, down market, sideways market – for us, it doesn’t matter.
Paul D’Abruzzo is a real estate investment advisor, industry-leading Realtor, speaker and private performance coach. He and his team specialize in the acquisition, purchase and sale of investment-grade property in southern Ontario. Get free, instant access to real estate deals in southern Ontario before the general public and learn how to analyze them quickly and easily, just like the pros do, at investmentpropertyanalyzertool.com
As part of its response to Canada’s ongoing housing challenges, the federal government has added another 12 new properties to the Canada Public Land Bank,...
As part of its response to Canada’s ongoing housing challenges, the federal government has added another 12 new properties to the Canada Public Land Bank,...
