Is the Canadian real estate market in trouble?

When you bear in mind that Canadian property prices have increased year on year for the last 17 years, give or take some short-term interruptions, it is difficult not to become concerned about a potential sharp correction. This is a subject which has been covered time and time again yet property prices continue to rise. However, when the authorities introduced a 15% tax on foreign real estate buyers there were hopes that the buoyant market would be subdued, but not too much!

Prospective buyers looking elsewhere

Prior to the introduction of the foreign real estate tax the market across the likes of Toronto and Vancouver was dominated by foreign investors – many Chinese investors. They were ploughing millions upon millions of dollars into the market pushing prices way beyond the affordability of the locals. While not all property markets across Canada have been hit by the upward spike in foreign investment it has certainly hit the major markets. So, what is happening now the 15% tax charge has been introduced?

By any stretch of imagination a 15% surcharge on foreign real estate buyers is significant to say the least. It is the fact that the Canadian authorities have now shown their disregard for overseas investors which is perhaps more concerning. If markets continue to rise then overseas investors will be blamed again and again because they are easy targets and vote winners. However, figures do show that a large percentage of Canadian newbuilds depend on foreign investment.

Looking elsewhere

There is intense speculation at the moment that around 50% of prospective foreign investors are now looking out with Canada after the government introduced the 15% tax. The fact is there are many markets around the world which offer good value, although Canada has made many people rich, where the tax system for overseas investors is nowhere near as onerous. At the end of the day, perhaps some of these critics need to sit down and consider which groups of investors have pushed Canadian property prices to all-time highs? Where would the new build market be without Chinese investors? What does the future hold for the condo market with reduced overseas interest?

In light of the worldwide economic collapse in 2008/9 governments around the world did whatever they could to attract new investment especially to real estate markets. Overseas investors offered welcome support to real estate prices at a time when markets were in freefall. Fast forward about 10 years and we now see governments around the world looking to penalise overseas investors – the same investors who have supported domestic property markets for some time.

Warren Buffett

It was also interesting to see that Warren Buffett has presented a C$2.4 billion rescue package to troubled sub-prime specialist Home Capital Group. This is a Canadian finance company which has certainly hit hard times and was recently forced to agree a fine with the authorities for “wrongdoing”. As you might have guessed, prior to the rescue package a number of former directors left the company and have been barred from the industry. However, Warren Buffett certainly believes in the company and seemingly the Canadian real estate sector going forward.

Has Warren Buffett joined the party too late? Is there really more upside when you bear in mind the detachment of real estate prices from local population incomes? Warren Buffett rarely gets it wrong but there are many who are questioning his views in this particular instance.

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