Why We Can Never Stop Foreign Investment In Real Estate

Remember that whole “fifteen-percent buyer’s tax” in Vancouver that was supposed to scare away foreign investors?

Remember when the government pounded their chest during photo-ops and talked about how they were going to stop real estate speculation?

And remember when I said that foreign investors are simply “too smart” and they’ll find a way around the taxes?

Here’s a story that you just have to read, and it’s my rebuttal to anybody who believes that our government is equipped to stop foreign investors from speculating on Canadian real estate…

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I missed a lot during those few weeks when I was in baby-purgatory.

I tried my best to keep up on the news, and I even kept a list of articles or online links that I would come back to once the dust settled.

Well, as I’ve been learning, the dust never really settles.

But I’m catching up on old news, and one of the stories I did not want to fall through the cracks was this one:

“B.C. Minister Says Province Will Act ‘Quickly’ To Close Tax Loopholes On Farmland”

This article first appeared in the Globe & Mail back on November 21st, but the fun part about this article was – it was in response to a full expose that Kathy Tomlinson (she of “changing real estate forever in Vancouver”) did on foreign investors buying farm land and building houses, hotels, and anything they damn well please.

Ah yes, our ever-reactive government.

Just once I would like to see a proactive measure enacted.

The 15% buyer’s tax was a purely reactive measure, after doing nothing for years while foreigners snapped up Canadian real estate for “you-know-whats and giggles” since the Loonie was like Monopoly money to them.

And it wasn’t until after Kathy Tomlinson’s investigative piece that the B.C. government finally addressed the issue.

Does anybody else notice how whenever Kathy Tomlinson writes a piece, the government jumps into action?

She should really just start writing about every topic out there, and maybe more will get done at our federal, provincial, and municipal levels.

Here’s the article:

“INVESTIGATION On B.C.’s Farmland, Mega-Mansions, And Speculators Reap The Rewards On Lucrative Tax Breaks”

I know it’s long, maybe 3,500 words – but come on, that’s like two of my blogs!

Read it in full.  It’ll be the best thing you’ve read in a long time.

If you want the Coles Notes, here is the most important excerpt:

Prices for suburban farm properties have soared in tandem with Vancouver’s residential real-estate market, but without the public outcry. The Globe analysis shows that foreign and local buyers paid an average of $3.7-million for each of the 122 parcels. They are property managers, realtors, developers and wealthy business people, including a tech entrepreneur and the owner of a car dealership.

Several are holding the land and leasing it out – for piecemeal farming – while, in some cases, applying to have it rezoned or taken out of B.C.’s Agricultural Land Reserve (ALR), where it is protected from development. Others are building luxury mansions, then either not farming or keeping it to a minimum.

Metro Vancouver now estimates fully half of its agricultural land – ostensibly protected as such – is not being farmed at all. Half of that has rich, high-yield soil cherished by those who work the land. Even though B.C.’s Lower Mainland is heavily populated, the mild climate, quality soil and abundant precipitation make it one of the best places to farm in Canada.

The 122 properties have historically been used for fruit, vegetable, grain and livestock farming. Most of the land is in the ALR, where land use is severely restricted and taxes kept deliberately low.

As a result, the tax advantages the new investors enjoy are astonishing. The Globe discovered significant discrepancies between market prices for properties and the assessments set by a provincial agency that determines how much tax owners pay.

So what is my point to this, other than, “this is unfortunate for farmers”?

I suppose I’m risking hyperbole here when I say this, but I really, truly believe that so long as foreign investors have their sights set on Canada as a virtual safety deposit-box for their net worth, they will continue to evade taxes by being creative.

When the 15% buyer’s tax was first implemented in Vancouver this past summer, I fielded a half-dozen calls from news outlets, all wanting to know what kind of effect this would have on the market.  I’ve said this before, so I apologize if it’s redundant, but I told every single interviewer, “These people didn’t get rich, by being stupid.  They’ll find a way around the tax.”

And it would seem, they have.

Online comment sections were filled with nonsense like, “These people are so rich, they won’t care about spending $450,000 in taxes on a $3,000,000 purchase!”

It was ridiculous.

The public so badly wants to believe that the ultra-wealthy are stupid, don’t understand the value of a dollar, or simply don’t care about their money.

But it’s ridiculous to think that any foreign investor looking to park money is going to pay a $450,000 penalty, right, option, fee, or tax on a $3,000,000 purchase.

So with this in mind, you might assume that the government has successfully chased away the foreign buyer.

And if media sentiment is any indication, the government deserves a medal.

“Does Vancouver’s Housing Funk Mean The Other Shoe Just Dropped?” was an article appearing in the Globe & Mail this week.

In the article, we learn that November house sales in Vancouver are down 37% from the same period last year.

Keep in mind, that’s sales, and not prices.  The media love to pass one off as the other, although I don’t believe that’s the intent in this article.

And then you have juicy quotes like this from David Madani from Capital Economics, who like most critics, pundits, experts, economists, and real estate philosophers, has been wrong in just about every prediction over the last few years: “In short, Vancouver’s housing bubble has burst, and we expect housing investment there to decline much further,” Mr. Madani said his report, titled “The other shoe just dropped.”

Damn, that’s a sexy quote!

“Bubble” and “Burst” together makes a great headline!

But if you want to look at the big picture, which nobody ever does, then you have to go back to the Kathy Tomlinson article about foreign buyers purchasing farmland and evading taxes, for two reasons:

1) The foreign buyers are showing us that they will find another way to park their money in Canada.
2) The foreign buyers continue to scoop up land.

Simply put, folks, the world is running out of land.

The population keeps growing.

In fact, the world’s population has grown by 78,000,000 so far this year, according to this very cool population clock that I watched as though I had never seen numbers tick away before, but I digress.

So while Canada has lots of available land in the Northwest Territories, people seem to gravitate toward the larger cities instead.

And while foreigners may not continue to prop up the residential resale market in Vancouver by purchasing multi-million-dollar homes and holding them empty, they are going to purchase land that is supposed to be used to grow food, or eventually one day to build homes for residents, but instead may be used for whatever that investor may want.

If 2016 will be remembered for anything, in my opinion, the debacle in Vancouver – with shadow-flipping, tax loopholes and lax oversight, foreign investment, government policies, and speculation on farmland, has to be near the very top of this list.

One final point I want to make: there is a difference between “foreign investment” and “foreign speculation.”

I was asked the other day, “What’s wrong with foreign investment in Canada’s real estate market?  Doesn’t every country want foreign investment?”

Yes, every country does want foreign investment.

But when big-money foreigners are buying family homes in large Canadian cities and keeping them empty, that’s not “investment” in a customary sense.

And when they evade capital gains taxes, or as the article above explains – seek to pay ten-cents on the dollar in taxes by purchasing a property with one intended use, and using it for another, then they really, truly cannot be considered “investors.”

I’d like to refer you to a 2012 article in Canadian Business:

“Is Canada Closed To Foreign Investment?” with the subtext: “Why Canada has to stop scaring way foreign investment.”

Here was an article encouraging foreign investment, which as I mentioned above, “…every country wants.”

But this article explains what types of foreign investment Canada should want, and should be open to

Or should have been open to, since this is a 4-year-old article, which is interesting to read in 2016.

6 Comments

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  1. Appraiser says:

    Newsflash to all concerned:

    You do not own the country of your birth. We were all born naked and penniless. You own what you earn and what you can pay for.

    Time to stop blaming “the other” for all that ails us.

    1. Julia says:

      Looks like someone’s been reading Ayn Rand again… We are certainly all born naked but many are hardly born penniless. To think that a kid from Rexdale has the same chance of success as a kid from Leaside and in turn to think that the kid from Leaside has the same opportunities as a kid of a Chinese billionaire is naive and simplistic. Sure life is about choices but you can’t discount the chances either.

  2. Ralph Cramdown says:

    This is a depressing view of the future, and I hope you’re not right. On the other hand, here’s some food for thought: Yes, many rich people are always trying to avoid taxes. And society has a depressing record of letting them get away with it. Read this bit about anonymous BVI trusts owning $10 million homes in Vancouver:
    http://www.edmontonjournal.com/business/real-estate/hidden+ownership+homes+prevalent+report+says/12502054/story.html

    There’s a few good reasons to do your banking and set up your anonymous trusts and holdcos in the BVI, but convenience isn’t one of them. Why should we allow entities from tax and anonymity havens to buy Canadian real estate?

    On the other hand, and this is the kicker… As rich people move more and more of their paper wealth offshore and out of the reach of the taxman, real estate becomes a larger and larger fraction of the total wealth that governments remain able to tax. You might be able to own it anonymously, but if you don’t pay the property taxes every year, buh-bye.

    Some more food for thought:
    http://www.nytimes.com/2016/11/30/magazine/how-to-hide-400-million.html

    I read an interesting comment a while ago to the effect that selling your home to a foreigner is a breach of the social contract, that there’s a bit of an unwritten rule that, when you’re done with your home, you’ll sell it to a citizen for what that citizen is able to pay. To express it in a reductio ad absurdum manner, if all Canadian real estate was owned by foreigners and all citizens were merely renters (and maybe business owners), would Canada still be a country in any meaningful sense of the word?

    1. Mike says:

      Tax avoidance and foreign ownership are but only a couple of reasons to hold your assets in an offshore trust.

      If you own a ten million dollar house you’d probably hold it in some kind of trust and probably offshore. It helps you bequeath it to your heirs it also serves as a strong deterrent to those who want to sue you for things such as driveway slips, car accidents or business issues.

      As for cutting off foreign investment, it’s easy for the Government to do, they have the tools but lack the desire. They just ban foreign purchases and require proof of beneficial ownership. That takes corporations out of the equations as history of funds must tie back to the corporate owner. As for trust, offshore and onshore, they would require a disclosure of information that would make holding the asset in the trust redundant.

      Don’t think for a second that the Government doesn’t hold the tools, try buying a property in Bermuda and then tell me that the Government doesn’t have the tools.

      1. Ralph Cramdown says:

        Hold a house in an offshore trust to avoid driveway slip lawsuits? They’d just sue the trust, which would have to attorn to the local jurisdiction. If they win, they register a claim against title and wait for it to be paid, while it compounds at the statutory interest rate. Rather like slip and fall lawsuits, the defense against auto collision lawsuits is not an offshore trust, but INSURANCE. You’re required to have it anyway, if you drive a car or mortgage your house. Rich people just have better policies.

  3. Eric says:

    So all hope is lost, and we’re slowly being displaced as foreigners buy us out of house and home. Really uplifting on a Friday!

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