Foreign Buyers and Home-Price Growth: 15% nonresident foreign buyer tax enacted in Toronto and Vancouver

Major cities have been the entry gateway for immigrants to both the U.S. and Canada.  Today, about 13 percent of the U.S. population and 21 percent of the Canadian population is foreign born.  In Miami, New York, Los Angeles, and San Francisco, more than one-third of the population is foreign born. Immigrants to Canada have concentrated in the Toronto metro area, with the Vancouver metro second, and these two areas account for one-half of all immigrants in Canada. (Figure 1)

While immigrants add to economic growth and housing demand, there has been growing concern over the role played by nonresident foreign buyers.  These buyers are often high-wealth and may add to speculative pressures, especially for expensive homes.  Further, these buyers may effectively restrict supply if they leave their homes vacant.  These effects will be greater in areas where nonresident buyers account for a larger portion of sales.  While the share of home sales to foreign buyers will vary by locale, the National Association of Realtors reports that the overall share of existing homes sold to nonresident foreign buyers in the U.S. has remained relatively small since 2010, averaging about 2.2 percent of sales.[1]

Two Canadian metros have sought to minimize the effect that nonresident foreign buyers have by implementing a 15 percent tax on sales to these buyers.  This was enacted after steep price increases in the Toronto and Vancouver markets.  The new tax on sales was effective April 21 in Toronto and has been in place in Vancouver since August 2016.[2]

After imposing the nonresident foreign buyer tax in Vancouver, home-price growth slowed from a torrid 26 percent annual rise in August 2016 to 8 percent in June 2017.  As a benchmark, two neighboring cities that do not have a foreign buyer tax, Victoria and Seattle, have seen home-price growth remain robust since August 2016, suggesting the tax may have had its intended effect. (Figure 2) In contrast, two months after enacting the tax in the Toronto area, price growth has yet to slow, perhaps because of the far larger size of the Toronto market.

In summary, nonresident foreign buyers appear to have a larger effect on prices for expensive homes and a bigger effect in smaller markets than in larger markets.  Affordability is affected further if homes are kept vacant.

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