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Real estate industry braces for foreign buyer ban

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Ottawa’s two-year foreign buyer ban applies to corporations and individuals who are not citizens or permanent residents of Canada and includes direct and indirect purchases of homes in the country.Graeme Roy/The Canadian Press

With financial markets roiling and house prices tumbling, investors in countries around the globe appear to have a diminished zeal for buying real estate outside of their own borders.

Even so, Canadian real estate mavens are brushing up on the temporary foreign buyers’ ban, which is set to come into effect on Jan. 1.

John Zinati, lawyer with Zinati Kay Barristers and Solicitors, warns that fines of up to $10,000 may be coming to any industry player working with a foreign buyer.

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“We’re going to be the ones subject to the fine,” says Mr. Zinati, including lawyers in that cohort – along with agents, brokers and developers.

Parliament passed the Prohibition on the Purchase of Residential Property by Non-Canadians Act earlier this year after the Trudeau government unveiled the plan in the 2022 federal budget.

The two-year ban applies to foreign corporations and individuals who are not citizens or permanent residents of Canada and includes direct and indirect purchases.

Mr. Zinati says many details are still unclear but the information provided so far suggests that people who knowingly assist in a contravention of the law may be subject to monetary penalties on conviction.

“For every transaction after January 1, we’re going to be asking for proof” of Canadian citizenship or permanent resident status,” Mr. Zinati says of his firm.

The rules allow some exemptions, Mr. Zinati adds. Refugees, students and an individual purchasing with a spouse or common-law partner who is not subject to the ban may be eligible, for example.

Buildings with more than three units are not covered by the ban.

One aspect Mr. Zinati is keenly watching for is more information on how the rules will be enforced and whether the final regulations will be less stringent than the government’s original stance appeared to be.

“On the face of it, we could be subject to a fine, which is pretty aggressive,” he says.

Mr. Zinati points out that the Federation of Ontario Law Associations has raised concerns with the legislation. Some lawyers also believe the law may be challenged on the grounds that property rights fall under provincial government jurisdiction.

Interestingly, a sales agreement signed in violation of the law won’t be invalid, explains Mr. Zinati. The seller and the buyer would still be required to stick to the contract.

After that, the federal government would have the task of asking a court in the province where the property is located to order the property sold. The foreign buyer would not be allowed to profit from that sale.

Mr. Zinati says the process of enforcement would be so onerous, he wonders if the act will mostly serve as a deterrent.

“They may be relying on people in the industry to be afraid to do deals with foreign buyers.”

Mr. Zinati adds that the regulations will not apply to agreements signed in the remaining weeks of 2022, even if the deal closes in 2023.

Mr. Zinati says purchases by foreign buyers who have no ties to this country are rare. Looking at his own firm, lawyers are aware of the occasions when they need to remit Ontario’s foreign buyers’ tax on behalf of a buyer.

“That is not a very common instance.”

Mr. Zinati also believes the new ban will have little impact because the market has fallen since the spring when the budget was announced.

“This came about when the market was hot,” he says. “We have the not uncommon phenomenon – trying to calm a market that by all accounts is calming on its own.”

Mr. Zinati adds that the Ontario government recently raised the province’s foreign buyers’ tax to 25 per cent from 20 per cent.

Clients have been calling to ask him why the tax is being raised if purchases by foreign buyers are banned. The two levels of government are not working in tandem, he points out.

The City of Toronto also plans to implement a vacant homes tax. The annual tax will be levied on unoccupied homes beginning in 2023.

All residential property owners will be required to submit a declaration of their property’s occupancy status for the previous year.

For its part, the Canadian Real Estate Association (CREA) says the experience in British Columbia, which introduced a foreign buyers’ tax in 2016 and a speculation and vacancy tax in 2018, suggests that such measures have a small and temporary effect on real estate markets, housing availability and affordability.

The effects are largely isolated to large, metropolitan markets, with no statistically significant impact in smaller communities, according to CREA.

CREA made several recommendations, including a suggestion that the ban include an exemption for buyers from the United States and Mexico in order to avoid a reciprocal response from Canada’s trading partners.

The association is also watching for clarifications and definitions in the regulations when they are released. The legislation may be complicated, CREA cautions, so it is advising members to consult a lawyer for guidance and advice.

Simson Chu, real estate agent with Chestnut Park Real Estate Ltd., has not seen any signs of a rush to buy from overseas investors before the ban comes into effect on Jan. 1.

Mr. Chu adds that the ban is aimed at buyers who have no connection to Canada, and very few buyers land in that category.

Mr. Chu keeps an eye on the global real estate market, and he sees the slowdown permeating many economies as buyers wait for deals and further declines in prices.

At Capital Economics, chief global economist Jennifer McKeow, is forecasting widespread recessions next year, including shallow dips for Canada and the United States.

The economist notes that several countries are facing headwinds from tighter money policy and a move by banks to tighten their lending criteria.

“One consequence of this is that housing activity, which has already weakened, is set to deteriorate further and we anticipate declines in house prices across several major advanced economies,” Ms. McKeown says in a note to clients.

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The Realtors' Big Defeat – The New York Times

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A settlement in the real estate industry is a case study of a central flaw in free-market economic theory.

Free-market economic theory suggests that the American real estate market should not have been able to exist as it has for decades.

Americans have long paid unusually high commissions to real estate agents. The typical commission in the U.S. has been almost 6 percent, compared with 4.5 percent in Germany, 2.5 percent in Australia and 1.3 percent in Britain. As a recent headline in The Wall Street Journal put it, “Almost no one pays a 6 percent real-estate commission — except Americans.”

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If housing operated as an efficient economic market should, competition would have solved this problem. Some real estate brokers, recognizing the chance to win business by charging lower commissions, would have done so. Other brokers would have had to reduce their own commissions or lose customers. Eventually, commissions would have settled in a reasonable place, high enough for agents to make a profit but in line with the rest of the world.

That didn’t happen. Instead, an average home sale in the U.S. has cost between $5,000 and $15,000 more than it would have without the inflated commissions. This money has been akin to a tax, collected by real estate agents instead of the government.

The situation finally seems to be ending, though. On Friday, the National Association of Realtors, the industry group that has enforced the rules that led to the 6 percent commission, agreed to change its behavior as part of an agreement to settle several lawsuits.

The settlement is important in its own right. Americans now spend about $100 billion a year on commissions. That number will probably decline by between $20 billion and $50 billion, Steve Brobeck, the former head of the Consumer Federation of America, told my colleague Debra Kamin.

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Allied REIT buys out Westbank on two building projects, the Home of the Week and more top real estate stories – The Globe and Mail

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Home of the Week, 80 John St., Upper Penthouse 1, TorontoJohn Lee/John Lee/Soare Productions

Here are The Globe and Mail’s top housing and real estate stories this week and one home worth a look.

Take The Globe’s business and investing news quiz

Canadians’ wealth is bolstered by stock rally amid housing slump, Statscan says

In the fourth quarter, households saw their net worth rise by $290-billion, or 1.8 per cent, to roughly $16.4-trillion, Statistics Canada said in a report Wednesday. But many homeowners have yet to face the full brunt of higher interest rates until they renew their mortgages, writes Matt Lundy. Others have variable-rate mortgages with fixed payments, which means that as rates have increased, more of their bill is going toward the interest portion rather than paying down the principal. The looming renewals, among other factors, led Canadians to stay cautious about taking on new debt — financial liabilities only rose by 3.4 per cent in 2023.

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Allied REIT takes control of two towers co-developed with Westbank

Allied Properties REIT AP-UN-T is buying out its partner, Westbank Corp., on two office skyscrapers as the Vancouver-based real estate developer faces rising costs and legal claims at projects in Toronto and Seattle, writes Rachelle Younglai and Shane Dingman. The deal, which is expected to close in early April, will significantly cut the amount of debt Westbank owes Allied — giving them an infusion of cash in the process. In November, The Globe and Mail reported that Westbank faced legal claims for $25-million in unpaid work at the Mirvish Village development in Toronto.

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Advertised rents for purpose-built rentals were up 14.4 per cent nationwide in February, compared with the same month in 2023. An apartment rental building in Toronto’s Beach neighbourhood on Mar 11.Fred Lum/The Globe and Mail

Why rent inflation is much higher for rental apartments than for condos

In Canada’s overheated rental market, tenants are increasingly gravitating toward purpose-built rentals, experts say – demand that is driving up rent for these units much faster than for condos, writes Erica Alini. Advertised rents for purpose-built rentals, also called rental apartments, were up 14.4 per cent nationwide in February, compared with last year— rents for condos, on the other hand, grew by just 5 per cent in the same timeframe. A severe supply shortage, affordable prices and the allure of rent control in older buildings is driving up the prices in purpose-built rentals.

Renters have harder time accumulating wealth than homeowners, RBC report says

According to the report, homeowners have seen their net worth grow from nine times household disposable income to 13 times since 2010, while for renters, net wealth grew from three to 3.5 times over the same period. The gap has widened even though renters’ incomes have risen at the same pace as homeowners. Meanwhile, homeowners are also accumulating home equity with their housing payments. The tightening of renters’ incomes will make it even harder to save up for a down payment, economists say.

Home of the week: Festival Tower penthouse with an interior designer touch

  • Home of the Week, 80 John St., Upper Penthouse 1, TorontoJohn Lee/John Lee/Soare Productions

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80 John St., Upper Penthouse 1, Toronto

The 46th-floor penthouse sits right above the TIFF Lightbox theatre, which is home to the Toronto International Film Festival. When you first enter the two-bedroom-plus-den condo, you’re greeted by 11-foot-tall ceilings leading you into the living room. The previous owners had white-lacquered book cases installed on the wall separating the living area from the kitchen — which frames the spacious room — and the primary bedroom has its own hotel-style bathroom attached. The 180-degree view from the penthouse features a panoramic view of the city’s downtown. and stretches across Lake Ontario.

What do you think is the asking price for the property?

a. $2,999,000

b. $3,875,000

c. $4,195,000

d. $4,500,000

c. The asking price is $4,195,000.

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At Real Estate's Biggest Conference, Property Crisis Denial Shifts to Acceptance – Bloomberg

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Welcome to The Brink. I’m Jack Sidders, a reporter usually based in London but this week I’ve been in Cannes where about 20,000 real estate professionals gathered for the annual Mipim conference. We also have news on German giant Bayer, crypto exchange FTX and Swedish debt collector Intrum. Follow this link to subscribe. Send us feedback and tips at debtnews@bloomberg.net or DM on X to @JackSidders.

Mipim is supposed to be a time for developers to show off their grand visions for projects of the future, with cities built in miniature hoping to lure pools of capital that will turn them into full scale realities.

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