Are foreign investments leading to volatility in domestic housing markets?

Foreign investments have an impact on the high prices in Canadian real estate. However, data and statistics on foreign ownership in Canada are not easy to find, making it difficult to ascertain the exact impact. The president of the Canada Mortgage and Housing Corporation said in a speech that despite having insufficient data on the foreign stake in Canadian real estate market, overseas buyers’ money was likely leading to high prices of Canadian houses.

However, now the question remains, what will happen once the overseas buyers decide not to buy anymore?

There is no legal requirement for buyers to divulge their ownership status. Hence, there is no actual physical evidence to support this claim as much of the information is anecdotal.

Many foreign investors prefer to hide their ownership details, and it would be not easy to ascertain the actual percentage of overseas buyers versus Canadian owners of houses.

In the domestic market, most of the trading is actually people selling one house and buying another, and occasionally youngsters entering the market buying their first home. Foreign investors, however, bring in new money from overseas and lead to price increases in the market.

There is nothing wrong with foreign investors taking a stake in the Canadian real estate sector. However, the nature of the investment is what appears concerning. Foreign investments are more mobile and subject to capital flight. Capital flight occurs when assets or money rapidly flow out of a country, due to an event of economic consequence. This could increase the volatility in domestic housing markets.

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Even if the actual percentage of foreign investors is small, the ‘marginal effect’ can be significant. The magnitude of the marginal effect would depend not just on the overseas money but also on Canada’s present economic climate.

If housing prices increase further, overseas buyers may not be interested any longer, and this would lead to a decrease in prices and a volatile real estate market. The only people who would end up bearing the brunt of this would be the Canadian homeowners.