Canada's foreign buyer ban putting housing developments on hold

The federal government's foreign buyer ban aimed at making housing more affordable for Canadians is creating uncertainty for real estate developers, forcing some to put projects on hold.

Prime Minister Justin Trudeau's Liberal government legislation that bans non-Canadians as well as corporations controlled by non-Canadians from purchasing residential property for two years went into effect on Jan. 1. The legislation, known as the Prohibition on the Purchase of Residential Property by Non-Canadians Act, was part of a broad range of policies first announced last April aimed at improving housing affordability for Canadians.

But real estate experts say the broad scope of the regulations within the legislation has created unintended consequences that could impact a range of residential and commercial real estate transactions and make it more difficult to get new housing supply online.

"The legislation has instead affected the production of thousands and thousands and thousands of units… Even commercial projects have ground to a halt and cannot proceed," Kevin Lee, the chief executive officer of the Canadian Home Builders' Association (CHBA), said in an interview with Yahoo Finance Canada.

"I don't think the intent was to affect the construction development industry in this way, but the nature of the legislation is such that it has. We're trying to get it changed as quickly as possible."

The regulations within the Act include three definitions that Dentons partners Clark Kassian and Esme Cragg say have greatly expanded the original scope of the Act.

Under the Act, residential property is not limited to homes, townhomes and condominiums, but also includes any land that does not contain any habitable dwelling that is zoned for residential or mixed use and is within a census metropolitan area. That means commercial real estate transactions could be impacted by the legislation. CIBC deputy chief economist Benjamin Tal noted in a report last week that "the entire area of downtown Toronto falls under that category."

Purchases are also defined in a way that could prohibit the acquisitions of a lease, mortgage or any other interest in a residential property. The definition of non-Canadians under the Act includes corporations with more than 3 per cent foreign ownership.

"The way that the legislation was written, it has the potential to adversely affect commercial real estate transactions, as well as foreign investment into Canada," Kassian said in an interview with Yahoo Finance Canada. For example, the Act could theoretically prohibit a Canadian subsidiary of a U.S. energy company from acquiring farm land to construct a new refinery if the land is located within an official census metropolitan area, Kassian and Cragg noted in a report about the legislation.

"All three of those definitions are broader than what their ordinary meaning would be taken to be," Kassian said.

"It's created uncertainty in the industry right now."

Many real estate deals have been put on hold as a result of the uncertainty. Breaching the Act is considered a criminal offence, and those that violate it can be fined up to $10,000.

"The damage is real," Tal wrote in a note to clients last week.

"Many commercial real estate deals have been cancelled or are on hold despite the fact that they have nothing to do with residential housing. Developers that are partly foreign owned or rely on foreign equity cannot proceed with purpose-built developments that, in our view, are the most effective tool to tackle Canada's housing affordability crisis."

Lee says the legislation makes the government's goal of improving housing affordability more difficult and hampers developers' ability to increase supply at a time when it is most needed. He notes that it's particularly difficult for condo and purpose-built rental projects, which require significant capital for construction.

"Whether or not you have a portion of your company that is foreign ownership should be irrelevant when you're building new homes for purchase or rent by people living in this country."

Lee adds that the CHBA has been in discussions with the government since the legislation's regulations were released in December. The group is pushing for Ottawa to create an exemption from the Act for any organization or entity that is involved in the development of new housing supply.

Kassian and Cragg say clarification on the types of properties impacted by the Act would help alleviate most concerns related to the legislation.

"I do think the government is working to try and rectify this, but it can't come a moment too soon for the industry to be able to meet the government's goals. We can't double housing starts if we can't get the land to build it on because of these regulations," Lee said.

"With every week and month that passes, we lose important time on moving ahead to meet the goal of getting more housing supply online."

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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