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New Housing Policies to Cool Canadian Real Estate Market - Ban Foreigners, Flippers, Bind Bidding

I have lots of news to share with you today.

Average home prices actually dropped in March compared to February.

Then the Ontario government suddenly increased the foreign buyer tax from 15% to 20%.

Shortly after, the federal government proposed a complete ban on foreign buyers for the next 2 years.

And then, the Central Bank will be raising the interest rate from 0.5% to 1.0%.

Housing affordability has been such a hot topic over the past 2 years.

Now the government is basically saying “Cool it down!”.

Shall we be expecting a crash?

Let me go over all the changes with you in detail.

Then I’m going to give you my take on the market and my personal investment directions for the rest of this year.

#1 The March Market Report

Remember I told you last month that the market was slowing down based on the number of offers we saw on offer presentation night.

So it didn’t come as a surprise that the number of sales dropped 30% compared to March 2021.

That being said, it was still the third best March on record.

It was just not as crazy as before.

And finally, average prices started to come down a little bit.

Detached home prices dropped around 5.5% to just under $1.7 Million.

Townhouses dropped around 3% to $1.09 Million.

Condos, on the other hand, still saw a slight 1% price increase to $809,000.

What about the absorption rate that we talked about 2 weeks ago?

That’s the number of active listings divided by the number of sales.

And we got 0.93.

Remember we’ve only seen this ratio hover around 1.00 twice in the past 20 years.

In 2017 and since 2021.

So that means the market condition is still very tight at the moment.

#2 The Ontario Foreign Buyer Tax

Back in 2017, housing prices jumped a whopping 30% within a year.

In an attempt to cool the housing market, the Ontario government announced a 15% Foreign Buyer Tax, the NRST.

It did crash the market but we all saw how temporary the effect was.

Anyhow, the government decided to use the same tactic again.

The Foreign Buyer Tax was increased from 15% to 20% effective March 30, 2022.

And it would be applied to residential properties anywhere in the province of Ontario instead of just the Greater Golden Horseshoe Region.

If you become a permanent resident within 4 years from the date of your purchase, you should be eligible for a rebate of the 20% tax.

I’ll put a link to the government’s website in the description below so you can check the details for your own situation.

Now the most popular question…

What if you signed your purchase agreement before March 30, 2022?

You’re NOT affected by this change and you would just be paying 15% if you’re still a foreigner when you close your property.

If you are a Canadian non-resident living overseas at the moment, you’re NOT a foreigner.

This has not changed in the context of the Foreign Buyer Tax.

#3 The $10 Billion Housing Budget

In the latest federal budget, the government proposed to spend $10 Billion until 2027 to make housing more affordable.

It goes in 2 directions. One is to increase supply and the other one is to curb demand.

A significant portion of the funding will go towards the supply side, for an ambitious plan to build a lot of housing, and fast.

Canada now builds about 200,000 new homes a year.

The government wants to double that, to 400,000 new homes a year.

It involves building more affordable homes and speeding up the municipal approval process so commercial developers can start building faster.

On the demand side, the government is proposing a two-year ban on foreign buyers for residential properties.

Once it passes, it will override the 20% Ontario Foreign Buyer Tax and foreign buyers will be completely banned for 2 years.

The government is probably doing this in response to the noisy marketplace blaming foreigners for high prices.

In reality though, the latest report from Statistics Canada shows that only 3.4% of all residential properties in Toronto and 4.8% in Vancouver are owned by foreigners.

Besides foreigners, the government is also looking to penalize property flippers.

Normally, when you sell your investment property and you gain a profit, it’s considered a capital gain and only 50% of your profit is taxable.

Going forward, if you buy and sell your property within 12 months, you would be considered a flipper and your profit will be considered as business income, meaning 100% of your profit is taxable.

What’s a popular vehicle that flippers use to make money?

That’s right, assignment sales.

Starting from as early as May 7, the government may charge HST on all assignment sales.

If you have been following me, I have always told you to avoid selling your property by assignment because you have to pay a lot of taxes, capital gain tax plus 13% HST on both the profit and deposits paid to the developer.

If you haven’t watched “2 Killer Tax Implications on Assignments” before, make sure you catch it at the link below afterwards.

So you had to pay HST selling your assignment before, what exactly is the government changing now?

There was one special situation before.

If you purchased a pre-construction property with the intention that you’re going to live in the unit, then later on you have to sell the property by assignment because your plans changed, then you may be exempted from paying HST.

Now the government is saying, I don’t care what your intention is, I’m charging HST on all assignment sales.

So if you’re selling your investment property by assignment, there’s essentially no change for you.

And if you’re a buyer of an assignment, then of course you won’t need to worry about these taxes.

There’s one more thing that the government is banning: blind bidding.

Currently, when there are multiple offers on the same property, you won’t know the offer price from other parties and so someone may put in an unnecessarily high price if they really want to win.

So the government believes that blind bidding contributes to high prices and they’re putting forward a plan to ban it.

To quickly summarize, on the supply side, the government will try to build a lot more housing units fast.

On the demand side, ban foreigners, penalize flippers, ban blind bidding.

Another thing worth mentioning is that the government is creating a Tax-Free First Home Savings Account program to help first time buyers.

Unlike RRSP and TFSA, both come with some form of tax restrictions, this new program will be completely tax free.

First time home buyers can contribute up to $8,000 per year to the account, for a maximum lifetime limit of $40,000.

This will offer some kind of help to first time buyers, but at the same time, may increase their desire to own a home, creating more demands to purchase.

#4 Interest Rate Hikes

Coming Wednesday, the Bank of Canada is going to announce another rate hike.

It’s very likely that the target overnight rate will increase from 0.5% to 1%.

And this won’t be the end of it.

The interest rate forecasts from major banks generally range from 1.25% to 2% by the end of 2022.

So mortgage rates will be going up as well and that means the monthly carrying cost of your property will increase.

But if it’s your investment property, you will be compensated with more rents because rents are expected to continue to increase with inflation and office reopenings.

Here comes the million dollar question.

With so many policy changes, which way is the market going to go?

If you want the market to crash, these changes may sound like good news to you.

If you own properties, these changes may sound like bad news to you.

Here’s my take.

With so many upcoming changes, doesn’t matter good or bad, they will definitely have an impact on the market, especially a psychological impact.

New changes create uncertainties.

And uncertainties create fear.

There will be a lot of fear in the marketplace.

It’s natural for an average person to step to the sideline, just wait and see what happens.

So I would expect the market to become quieter for the next few months.

Whether prices will stay flat or dip for a little bit, it’s really hard to say.

It would be impossible to catch the lowest point, which could also be now.

I can only say that for the longer term, next few years down the road, the trend will still be up based on the data analysis we did a couple weeks ago.

If you haven’t watched “Home Price Predictions for Toronto with Extensive Data Analysis”, make sure you catch it at the link below afterwards.

Besides, construction costs are not coming down. Immigration is not stopping.

For upcoming pre-construction projects in the next few months, you will continue to see very high prices. There’s no hope for developers to lower prices.

If you’re looking for good deals, you may be able to find some in the resale market because individual sellers are much more emotional than developers.

So if you’re ready to get a mortgage, the resale market is a great place to be.

I’m monitoring it every single day because I plan to pick up something as well.

A market with uncertainties and fears is not suitable for everyone to invest in.

Here’s the thing.

It doesn’t matter what the data says, if you are the type of person who always worries about this and that, don’t invest in the current market because there are too many things you would worry about.

If you are a big picture type of person, you know when people fear, opportunities come.

It’s just like 2 years ago, when we were at the start of the pandemic.

If you share the same mindset as me, schedule a call at the link below and let’s chat.

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