Feds target property flippers, more supply in $10.1B housing plan

The federal government is taking sharper aim at real estate investors and property flippers in a bid to help halt the country’s long-standing – and worsening – housing affordability problem.

In the federal budget, government officials laid out what is, essentially, a three-pillar strategy to deal with Canada’s housing crisis by limiting real estate investment, helping first-time homebuyers, and allocating more funds to accelerate the construction of more homes.

The government anticipates that the plan will have a cumulative expense of $10.1 million by fiscal year 2026-27.

“In some respects, from a federal perspective, this is a federal budget that tries to tackle the problem [of affordability], and maybe more so than we’ve seen in the past,” said Pedro Antunes, chief economist with the Conference Board of Canada, by phone.

NOTICE TO INVESTORS

Some of these harsh measures include a ban on real estate investments.

The feds plan to ban foreign firms and individuals, who are not Canadian citizens, from buying investment properties for a period of two years. However, exemptions will be made for international students and refugees. The measure was first reported by CTV News Tuesday night, and is a follow-up to a pledge made during last year’s election campaign.

There’s little concrete data about the prevalence of foreign money in Canada’s housing market and the impact it has on supply and prices, but the feds said it would monitor the situation and is leaving the door open to strengthening the ban’s enforcement if warranted.

This follows recent actions by Nova Scotia and Ontario to curb foreign investment into their real estate markets.

“We will do everything we can to make the market fairer for Canadians. We will not allow foreign buyers to park their money in Canada by purchasing homes. We will make sure that houses are being used as homes, rather than as commodities to be traded,” Finance Minister and Deputy Prime Minister Chrystia Freeland said in the budget Thursday.

“But on housing, I would like to offer one caution: There is no silver bullet which will immediately, once and forever, make every Canadian a homeowner in the neighbourhood where they want to live.”

Property flippers have also made it onto the federal government’s radar. The federal government is introducing rules to fully tax profits from homes that are sold within 12 month of purchase. Capital gains will be treated as business income. Homeowners who experience major life events like the birth of a baby, divorce, death, or a new career will be exempt from the rule.

Assignment sales – which involve homes being resold before they’re constructed or occupied – are also on the table, with the government looking to charge GST/HST on all assignment sales effective May 7 of this year.

Lastly, some changes could be in store for Bay Street’s real estate investment trusts.

The feds are planning a review of housing as an asset class to determine how major rental apartment corporations impact the market – building on a promise in the Liberal Party’s fall election campaign.

The budget indicates the review will take into account how “large corporate players” are taxed, though it said more details on the review would be released later this year.

HOMEBUYER HELP

Canadians are continuing to be priced out by skyrocketing property prices, especially for younger buyers. The Canadian Real Estate Association released the latest data on its home price index. Record 3.5% increaseMonthly basis in February. As an example of just how expensive some of the country’s hottest markets have become, RBC Economics estimated in a report in late March that owning a detached home in Vancouver would have eaten up almost the entirety of a median pre-tax household’s income in the fourth quarter.

Starting next year, the federal government will offer a tax-free First Home Savings Account to help first-time homebuyers save up to $40,000. The account combines elements of an RRSP, a TFSA, and allows you to make contributions that are tax-deductible from your income. Withdrawals, including any investment gains are also non-taxable.

According to the government, this new account will cost the government $725 million between 2023-24 and 2026-27.

The budget also proposes a doubling of the First-Time Home Buyers’ Tax Credit to allow for a maximum $1,500 credit, and would be retroactive to the start of this year, at an overall cost of $675 million over the next five fiscal years.

Antunes says that despite these measures, rising interest rate will likely be a setback to these homebuyers.

“In the last few weeks, we’ve seen central banks stepping up in terms of tightening monetary policy so shorter-term rates, like the one- to three-year rates and five-year rates, have come up steeply, and I think that’s going to be a challenge that outweighs a lot of the measures that they’re trying to do to ease affordability pressures,” he said.

“Rising rates will lower demand in some respects and hopefully take some price pressure off, and I do think those are the market forces we’ll see from rising rates that could have more impact than some of these measures, but that’s not to say these measures aren’t worthwhile.”

The government is also looking to end blind bidding – a practice where prospective homebuyers don’t have visibility into competing bids – which housing critics have said can lead to buyers overpaying for a property. 

MUCH-NEEDED SUPPLY

The lack of supply was identified by the feds as the main issue affecting affordability. It estimates Canada will need 3.5 million new homes by 2031 to address the gap between the country’s growing population and the current housing stock.

For a number of years, real estate industry players have been calling for more supply rather than suppressing homebuyer demands. This has been despite a high level of sales activity.

The government’s biggest initiative to address the shortage of supply is the creation of the Housing Accelerator Fund. It will make $4Billion available to cities and towns in five years to fund approvals, financing, and delivery for new homes. According to the feds, the fund will create 100,000 new housing units in that time frame.

Despite the increase in home construction in recent decades, including record-breaking housing starts in 2021 and 2021, government officials are aiming to double the current rate over the next ten years. However, they said that all levels of government will need to work together.

Antunes stated that this could be easier said than done in an economic environment where both labour and material are scarce.

“Housing is a privately-delivered good,” he said.

“Here’s the challenge: even as we spoke to developers last year, we knew they were having challenges in completing their home starts. The supply constraints, both in terms labor and in terms materials, are another challenge. How do you increase supply in a market that is already hot? It’s going to be a challenge.”