Reality About Foreign Buyers

Information circulating about the significance of foreign buyers on Toronto home prices has been released from many sources. There are strongly opposing viewpoints and some of them are wrong. In this post, I will focus specifically on the impact, or perceived impact of foreign buyers on Toronto real estate.

Toronto Home Prices

Toronto home prices have increased aggressively for years. Torontonians wanting to buy their first home are frustrated that prices have gone beyond their reach. The pressure is on as many would-be buyers are turning to the government for answers and solutions. Many believe that it is foreign buyers that lat are pushing up prices beyond what the average family can afford. In fact, as families look further and further to the outskirts of the GTA prices everywhere seem to be skyrocketing.

Tax Grab

The Ontario government is now looking at passing a Foreign Buyers Tax in reaction to pressure from Ontarians. Some believe that it is another move by Kathleen Wynne to extract more taxes because she has not explained how she would use that money to make housing more affordable for tax paying Ontarians. So, the assumption is that it is just another tax grab.

How Significant is Influence of Foreign Buyers?

The Real Estate Industry has been claiming that foreign buyers are only representing 5% of the buyer group. Then they go on to say that a foreign buyers tax is unnecessary and would hurt the real estate market. If in fact, foreign buyers are only 5% of all buyers, then a tax on them shouldn’t really affect the market. So, why are they so concerned.

To begin with, there is really no way of knowing how much of the overall market foreign buyers represent because there is no tracking or reporting in place. Even if the activity was being tracked, the individuals may not necessarily be accurately declaring their transaction. I will discuss this in greater detail in a bit.

What’s Happening During Bidding Wars

Having represented clients in several bidding wars over the last year, I was able to gauge who the other potential buyers were. By defining ‘Foreign Buyers’ as individuals or families with their head, who spend most of their time overseas or have a significant, if not all of their business activities overseas. Based on this definition, I can comfortably state, that in regards to the deals I was involved with, foreign buyers were a significant force. In some cases with at least 12 potential buyers they represented over 50% of the offers.

However, that’s not the most important thing. The real reason I saw some home selling for what seemed unjustifiable prices was something that most people would not expect. The foreign buyers were offering bids way beyond what was necessary to get the home.

For example, in one situation involving about a dozen offers. The winner offer was $100,000 (10%) over the next highest offer. I was told it was a foreign buyer who wanted to buy a home specifically in that neighbourhood because of the high percentage of Chinese living there and the strong reputation of the local school. I don’t know if the buyer realized how much more he was paying. I also don’t know how much and what kind of research the buyer’s realtor undertook and shared with the buyer.

This is just one example of how foreign buyers have, unintentionally, pushed up the prices, especially in some neighbourhoods.

Beating The Tax System

Now, back to not accurately declaring their real estate activity, let’s say, for example, a student wants to come from overseas to study at an university in Toronto. Having no money, his family friend could give him some or all of the money so the student can purchase a condo in his name and live in it for the three or four years. The friend could then have a legal side agreement where it is understood that the friend owns the condo, though it is in the student’s name. Since the student resides in it, when he sells it at a much higher price, he doesn’t pay any capital gains, and therefore, neither does his friend the real owner. The student would do this in exchange for not having paid rent, or paying reduced rent for that period.

This also leaves the door open for money laundering.

A better solution for the Ontario government would be to have a non-citizen buyers tax. In other words, if someone is here for 3 or 4 years as a student, they would still have to pay the foreign buyers tax. To work effectively, the Canadian government would have to do a better job at qualifying, screening and orienting new Canadians.

Rooming Houses

Many homes bought by foreign buyers are converted into student housing on a room-by-room basis. Foreign students don’t declare rent they pay as they’re not supposed to be working and therefore the landlords are collecting rent, which they may not be paying taxes on. There are homes in Toronto with as much as 8 or more rooming tenants. At $800 per room, 8 rooms would produce $6,400 every month. That gives the owners justification for paying much more for the house than say an average Torontonian working in an office and paying full income tax would be able to afford.

AirBNB

The rooming house scenario also applies to AirBNB rentals, which the CRA has already begun to target.

Conclusion

So you see, the whole point of percentage of buyers of Toronto homes that are foreign isn’t what we should be looking at, but rather the impact they have.

The bottom line is that average citizens are upset because they can not afford to buy a home to live in.  In order to earn enough to afford a mortgage at this prices, individuals would be falling into the 54% income tax bracket. Then they pay 13% HST (VAT) on what they spend, which is pretty much all of what they earn after mortgage payments. With a 67% tax and keeping only 33% they simply can’t afford to buy their first home.

On the other hand, they are seeing new Canadians, foreign students and foreign buyers buying homes and prospering. Many are scratching their head trying to figure out how they are doing it. I hope this post will help discover some explanations.

Please contribute your comments and knowledge on the subject.

Baldo Minaudo, M.B.A.

Real Estate Broker in Toronto

Dir: 416-564-0245