As more and more people try to come up with a way to solve the problem of Canada’s housing bubble, here again comes a case arguing against foreign investing. However, this one may be a little more sound than those we’ve heard in the past. Foreign investors, when not actually investing in properties but just the rights to buy them, could hurt the Canadian economy very much, and only cause that bubble to grow.
The problem is not when foreign investors take on a Toronto or Ottawa mortgage, rent the unit out, and then watch their money grow as the home appreciates in value (hopefully,) and they continue to make profit off of rent. This is what most people think of as the “typical” foreign investor situation, and it’s definitely the one that’s the most ideal. However, there’s a whole other practice going on, and it could be blowing up our bubble at a much faster rate than the rising prices on Vancouver or Calgary mortgages – just two areas where bubble concern is the greatest.
Foreign investors often buy condominium units, or 20 to 50 of them at a time, over single-family homes. Often this is done while the condo is still being built and in order to secure those units, the investor will put down a 5% down payment to gain the right to buy once the units are complete (or complete enough to the point to sell them.) While this “assignment” is usually only meant for the investor, some investors flip that assignment for a higher price than which they bought it once the price of the unit goes up.
The problem with this practice is the profit the investor is making – and then taking it out of Canada. While investors are free to make money here and then take it elsewhere, that money must be taxed so that our country can also make a tiny profit for allowing them to invest here. However, when rights to buy are bought and sold, the Canada Revenue Agency never hears about it, and there are never any T-5 slips issued or submitted showing that tax is due. That money, which could be hundreds of thousands of dollars, simply walks out of our country and hurts our economy by doing so.
This is undoubtedly one of the biggest problems with foreign investors. And while not all developers and foreign investors are contributing to the problem, many are and it could be enough to seriously hurt us here at home.
There’s been a lot of talk of foreign investing lately; and not that long ago we wrote a post promoting foreign investment and outlining how it can help our economy a great deal. But there’s no doubt that this kind of foreign investment needs to be stopped, to stem the bleeding that’s happening in many of our housing markets and to keep the bubble from bursting too fast and too soon.
