House flipping tax could curb speculative foreign money, CIBC says

Canada may consider a tax on foreign investors flipping Canadian homes for a quick profit, Benjamin Tal says, but overall the economist at CIBC says there's no evidence that type of activity is a big problem in Canadian real estate.

In a report Friday, Tal delved into a topic that is currently a major focus of policymakers: the impact of foreign investment on Canadian home prices.

There is a perception in some quarters that a major cause of high house prices in Canadian cities such as Toronto and Vancouver is foreign investors. Specifically, it has been alleged that foreign money is flooding into real estate in those two places, and pushing prices out of reach for those who actually live there.

Unfortunately, hard data on foreign money is hard to come by, as Canada does not yet reliably track such information — although recent steps from B.C. to track residency info of buyers is a step in that direction.

Canada's national housing agency, the CMHC, says it is trying to collect more information on the topic, and Statistics Canada was earmarked half a million dollars in the recent federal budget to beef up its data collection on the housing market.

In the report, Tal draws a distinct line between foreign money where the buyer has an actual foothold in Canada, and speculative investments where the buyer has no incentive other than a financial interest.

The first is the more common type of foreign investment, Tal said after speaking with a group of real estate brokers who deal exclusively with foreign buyers. And moreover — it's nothing to worry about.

"A satellite family situation is probably more common than perceived," Tal says. " That's a case in which the money comes from outside the country, but family members — mostly wives, children or students — reside in Canada."

"Flipping is not the main motivation here," he says.

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The demographic group that is most frequently accused of flooding the market are Chinese foreign buyers, who are at the very least having an impact on local markets, according to anecdotal evidence.

Tal says it's apparent there is an influx of money leaving China at the moment, and a large part of it is coming to Canada. "There is a clear sense of urgency among many Chinese residents to send money out of the country, given the risk of a large scale devaluation of the yuan," he says, adding that the relative cheapness of the loonie making Canada look even more attractive as a place to invest for a Chinese buyer.

But Tal says the issue of speculative foreign investment may be overblown. "We don't know how big it is, but we know it's not constructive," he says.

No matter how much there is, Tal says such activity it could be greatly limited by implementing a new tax on so-called "flippers" which is when a property is bought and sold again in rapid succession to make a quick profit.

As long as a property is owned as a primary residence for at least one year, Canadian tax-filers pay no income tax on any gains they have made. There are of course myriad other costs that accumulate when buying and selling a home — realtor fees and land transfer taxes, to name but two — but in a market where properties are increasing in value by double-digits seemingly endlessly, the motivation to ride the wave higher can be great, but destructive to the market in the long run.

While he declines to specify how high of a tax might be appropriate, he makes it clear that more research on the topic is needed.

"Applying a flipping tax on foreign investors might be a step in the right direction," he says. "It won't solve the problem, but it might be an effective way to remove the most problematic element of foreign investment in Canadian real estate."