Market Insight for January 31

Two years ago, the federal government implemented a ban on foreign ownership, preventing non-Canadians from purchasing residential property across the country. Originally framed as a short-term measure to help “cool down” an overheated housing market, the policy was set to last just two years.

However, instead of expiring as scheduled this year, the ban was quietly extended last February until January 1, 2027. The announcement received minimal media coverage and little national debate, allowing a policy with significant implications for the housing market to go largely unnoticed.

When the restriction was first introduced, many dismissed it as having little impact. However, its effects have been far from negligible. Rather than alleviating Canada’s housing affordability crisis, the policy has unintentionally worsened the issue by limiting new housing supply and discouraging much-needed investment in the sector.

Even before the foreign buyer ban took effect, Canada’s housing market was already slowing down significantly. Higher interest rates had dampened demand, and construction projects began stalling. The ban only accelerated this trend, particularly in the condo sector, where activity has dropped sharply.

Contrary to popular belief, foreign buyers were not seeking immediate cash flow or quick profits. Many were willing to accept negative cap rates in exchange for long-term capital appreciation and the relative stability of Canadian real estate.

Critics of foreign investment often argue that these buyers were driving up housing prices and making homes unattainable for Canadians. While this argument is emotionally compelling, the actual data presents a more complex picture. Foreign buyers accounted for only a small portion of the market, but their role in pre-construction condo sales was disproportionately large. To secure financing and commence construction, most condo projects require at least 70 to 80 percent of units to be pre-sold.

With foreign capital absent, numerous projects have been delayed or abandoned. Domestic investors, who are grappling with potential increases in capital gains taxes, stricter financing conditions, and weaker short-term returns, have not stepped in to fill the gap. This creates a compounding issue: fewer developments lead to fewer available homes, further driving up prices.

By extending the ban to 2027, Canada has sent a clear message to global investors that they are unwelcome. In the world of international investment, four years is a significant period, and these investors will redirect their capital to more accommodating and less regulated markets. Regaining their trust and attracting them back to Canada will not be an easy task.

Even if the ban is lifted in 2027, the damage will be long-lasting. Established relationships between pre-construction brokerages and foreign investors have been disrupted. Businesses dependent on this investment stream are struggling or closing down. And the housing supply gap – a central driver of affordability challenges, continues to widen.