Short-term pain, long-term gain for Canadian property market?

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The Canadian property market has been in the news of late after a period of constant growth in prices despite the lukewarm worldwide economy. It was revealed, using official investment data from the Canadian authorities, that overseas investors are now looking towards the Canadian real estate market as their market of choice. Indeed the Chinese investment community has been specifically highlighted by the authorities as having an impact on prices.

Therefore it was no surprise to see the Canadian authorities bringing in an array of new regulations aimed at cooling the market. These include restrictions on overseas investment with the introduction of a residency exemption test. So, is this a case of short-term pain and long-term gain for the Canadian property market?

Hot money pours in

After the 2008 US mortgage crisis, which led to a worldwide economic slump, evidence suggests that the Canadian authorities handled the situation far better than others in the Western world. Many experts put Canada forward as the template for others to follow although it has to be said other countries were not as successful as their Canadian counterparts. So, in light of the open government, pro-investment policies and valued real estate in places such as Vancouver perhaps it was no surprise to see Canada quickly become a hotspot?

Prices going up and up

Aside from the fact that many potential first-time buyers were priced out of the market some time ago, prices in areas such as Vancouver have risen to levels which are unsustainable under traditional market conditions. The fact that many foreign investors have been targeting areas such as Vancouver had seen prices remain buoyant although there have been signs of weakness after the authorities introduced their new regulations. There is no doubt that something had to be done because prices in many of Canada’s more sought-after regions have moved to levels which are not only unsustainable but also way beyond traditional “crash warning points”.

Short-term pain, long-term gain

It is unhealthy for any real estate market not to succumb to bouts of profit-taking and consolidation at best. The ongoing clamour for Canadian real estate is now beyond the realms of all traditional value measurements with some experts suggesting money-laundering could be widespread. Official government statistics show that a substantial number of property sales are not registered with the Canadian authorities and therefore some investors may well be avoiding their tax liabilities. The new regulations ensure that all sales must be reported on Canadian tax returns even if there is no tax to pay.

There are high hopes that the new regulations, which also include a limit on loan to value mortgage ratios, will see off many of the more speculative investors who may be involved in tax avoidance or even money-laundering. We may well learn that this “hot money” was the final piece of the jigsaw which has seen property prices rise to unsustainable levels. If this is the case, and we should find out in the short to medium term, we could well see a slow deflation of the real estate market in Canada which would bring about some short-term pain but hopefully long-term gain?

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