THS Canada's ban on foreign ownership of residential housing

In 2022, Canada implemented a five-year ban on "foreign ownership" of housing to address the housing crisis. The ban prohibits foreign companies and non-Canadian individuals from purchasing residential properties. Exceptions include permanent residents, refugees, and some temporary workers

NAUDC 2024 | ROUND 5 | ROOM 202

OO | DLO
82
Tejas Subramaniam

Economics
Youtube Link (Timestampped): HERE

Two points in the speech: first, to make the housing crisis significantly worse, worsening the problems of homelessness, struggling to afford housing in areas of high economic opportunity, and second, they cause financial instability, raise the risk of financial meltdown, and cause a credit crunch in the housing market. Arguments from Liz(LO), XK(DPM) did not engage.

First, on housing accessibility. Their primary first mechanism on housing accessibility is foreign buyers are rich and outcompete in the market for demand. This drives housing prices up because they have tons of capital. There are a couple of problems with this argument. First, this argument is entirely contingent on Liz's argument that you construct new homes being false. Why? Because if you are demanding new homes and the demand is met by new construction of units rather than buying existing units, then supply has met the demand and prices don't go up nearly as much.
Rehashing LO’s constructive material

So the question is: is this demand met through the supply of new homes? There are many good reasons to think this is how the demand will be met, even over five-year time frames, noting increases in efficiency in building homes.

Claim
The first reason is they have tons of capital.
Analysis
What that means is they want to use this capital to do, as Rahul (PM) concedes, creating mega projects, things like massive skyscrapers and huge real estate investments that Rahul says don't currently exist in Canada.
Uses PM’s characterisation (foreign property owners with alot of capital buy up houses) to flip their case by explaining how this capital is used to develop new homes

Impact
As a consequence, you are buying new homes, constructing new apartments that are large, constructing skyscrapers, rather than buying existing homes in the housing market. That means you're not actually competing for demand, you're creating new homes in the market, therefore you're not meaningfully increasing the price substantially.

Claim                                                                                                                                                         The second reason is new property substantially benefits them.                                                     Why the construction of new units is more likely rather than existing units being bought up? 

This is because the construction of new property allows you significantly more choice and flexibility. You want to be able to pick, for example, the location where you want to make a real estate investment so you know it's going to appreciate. You want to ensure you're not the last one left in a housing bubble, which would leave you with property that crashes in value. All of this means you have much more choice if you can buy from a developer, buy units in advance. That's how most speculation works. Speculation works before construction begins, so you buy units in advance from a developer. All of this means new homes are being constructed that matches a lot of the increase in demand, so prices don't go up as much.

Refutation on Renters trickling down to lower income markets
The other mechanism they have for prices increasing, however, is this forces essentially middle-income and upper middle-income homeowners into the low-income markets, causing them to be gentrified and raising home prices. I want to make one other point, by the way, which is not all foreign buyers are doing this as a form of investment. 

Many foreign buyers are doing this like massive vacation homes in Toronto, temporary housing with plans to move in in the future. Why does this matter? Because the alternative is they do things like buy homes on Airbnb or rent homes, meaning you're shifting demand from the ownership market to the rental market. That's much worse, because even if you're making housing less affordable in terms of ownership, you're making it even less affordable in terms of renting. Rental markets, on their side of the house, by using tools like Airbnb, by buying rental units, since low-income people are more likely to rent, they potentially make this problem worse.
-Foreign buyers would now have to rent houses instead of buying new ones which shifts demand from ownership to rental markets
-May only be applicable to a small number of foreign individuals who only buy for sole purpose of using it as vacation homes 

Now let me explain why the problem they named of basically like you're coming into this market, you're pushing middle-income homeowners into lower-income markets, and therefore driving up prices, isn't a problem as they describe. I'm going to take the stance this actually reduces economic segregation. That is, if you're moving middle-income and upper middle-income Canadian homeowners to homes in low-income areas, they are bringing capital with them, they are buying stuff in local communities, they are creating jobs through that mechanism.
Wealthier people moving into poorer neighbourhoods create jobs

The question is: why does this outweigh the potential increases in rent and cost of living that this creates? A number of reasons why. First, because you literally have a job. Many of these people have zero jobs. If you're earning zero wages, if you're struggling under unemployment, then no amount of changes in cost of living affect you. You cannot afford $1,000 rent or $2,000 rent. Second, we acknowledge unfortunately in some cases people will be displaced to communities that are even poorer, however they will have a job to go to, meaning they're making tons of income in a higher cost of living neighborhood and spending that income in a lower cost of living neighborhood. But third, obviously they are an important niche in the market. Even if your neighborhood becomes heavily gentrified or something like that, if you're working for businesses in that neighborhood, for example, there is a niche and therefore an incentive to set up businesses that sell at lower prices to do things like cater to you.

So what we do on our side of the house is we reduce economic segregation. (No thank you.) That puts upper middle-income and rich homeowners out of these neighborhoods. This is devastating. Why? Because the housing crisis is best solved by giving people income that they can spend on rent. We give people an injection of income. This is critical to solve the housing crisis. But I want to go further and talk about the supply of rental properties, because I actually think you're overwhelmingly likely to use this new capital to put these homes into rental markets.

Their claim is basically if you're a foreign homeowner, you're substantially less likely to use rental units because you lack connections locally that are much bigger logistical barriers. However, you have strong incentives to put up to rent any units that you buy anyway. What are these incentives? The first is there are strong incentives to make logistical costs relatively cheap because the Canadian government, as well as Canadian private sector, wants the entry of these people into the rental market. They have tons of capital with them, so someone like a middleman who is gaining money off giving you connections, for example, wants to lower prices in order to attract you. This means the logistical hurdles are not as large as you describe.

However, there are two factors that are unique to them. One, Canadian homeowners are more involved in the housing market. What that means is when they are engaging in speculation, they are often selling homes quicker rather than slower because they want to make immediate profits and then move that capital to a more productive place. This is especially important in the context of speculation, because the whole problem with an asset bubble is the value collapses in the end in the long term. (No thank you.) No homeowner wants to be the one holding on to a home when the value of the home crashes.
-Because speculative demand, rather than intrinsic worth, fuels the inflated prices, the bubble eventually but inevitably pops

Asset Bubble:An asset bubble occurs when the price of an asset, such as stocks, bonds, real estate, or commodities, rises rapidly without the underlying fundamentals to justify the price spike. The inevitable collapse wipes out the net worth of investors and causes exposed businesses to fail, potentially beginning a cascade of debt deflation and financial panic that can spread to other parts of the economy. This can result in a period of higher unemployment and lower production that characterizes a recession.

As a consequence, domestic homeowners, who are substantially more well integrated into the Canadian housing market, are more likely to be buying and selling homes very quickly. If you have to do it quickly, that means you have to sell homes to someone else and evict people quickly. That is a disincentive for you to rent out your homes. In contrast, foreign investors gain tons of passive income by being able to rent out properties that they buy. So if their investment goes sour, they have insulation. If you're making a risky investment in the Canadian housing market, you have the insulation of rent that people are paying you. Therefore, you're likely to use these new units to throw it into the market. This is critical because it drives rent down.
Why foreign buyers are more likely to rent out homes rather than domestic owners 

This is the housing crisis they describe. The housing crisis is built by a shortfall of supply, which they make worse. But second, they also impair alternative regulations. They say, oh, Canada is very good politically. No, they're not. Vancouver's high housing costs are often driven by opposition to things like zoning laws, support for things like zoning laws by property developers who want to keep housing values high and therefore put limits on private market construction. The political will to abolish these laws requires giving property developers some concessions. So we have alternative fixes for the housing crisis as well.

This is critical because it means on our side of the house, we are substantially more likely to get tons of housing development. They say when people grow up, we get housing developed anyway because there's a constant increase in demand for housing. Yeah, but even if you increase supply that way, people are then living in those homes, and if they're living in those homes, they're not renting them out, so that's not a meaningful marginal increase of supply. We are able to meaningfully increase supply.

Then on speculation. XK (DPM) just repeats Rahul's(PM) arguments without engaging Liz's preemption. Liz explicitly says speculation happens anyway. Sure, maybe we get a bit more speculation, however the speculation is substantially less risky because you have more information about the market. Things like foreign currency risk means transactions are much less rapidly traded, and rapid trading is what drives housing prices above what the market expects them to be, causing financial crash more likely in their world.