By Fergal McAlinden | 29 Sep 2022 | from mpamag.com
Proposals by the federal government to restrict foreign access to the Canadian housing market run the risk of complicating mortgage financing while not adequately addressing the affordability crisis facing buyers, the CEO of a national lending association has said.
Samantha Gale of the Canadian Association of Private Lenders (CAPL) told Canadian Mortgage Professional that the measures, which will come into effect at the beginning of 2023 and remain in place for two years, could have significant negative repercussions for lenders and borrowers alike.
“It depends on what the final regulations look like, but it may be challenging for mortgage lenders to ensure that investors do not run afoul of any of the final rules,” she said. “In addition, if borrowers breach the ownership prohibition, then the government can proceed to seek a court-ordered sale of the property.”
A consultation paper outlining what form the foreign buyers ban would take was recently published by Canada Mortgage and Housing Corporation (CMHC), the national housing agency.
Federal finance minister Chrystia Freeland has described the move as one that would prevent foreign investors from “parking their money in Canada” through real estate purchases, although there are exemptions included in the legislation for permanent and temporary residents.
Still, CAPL has criticized the formulation of the ban exemption for certain students, which requires that the student have filed a Canadian income tax return for at least five years prior to their date of purchase.
The fact that most post-secondary students are younger adults makes it “very unlikely” that they could avail of that exemption, Gale said, effectively rendering it a “meaningless” caveat.
CAPL also said the language in the consultation paper’s proposal to exclude recreational property from the ban was limiting and needed revision.
Under current proposals, property which is “not located within a Census Metropolitan Area or Census Agglomeration” would be excluded from the ban – with a CMA defined as having a total population of at least 100,000 (and more than 50,000 living in the core) and a CA having a core population of at least 10,000.
That’s problematic, according to CAPL, because many recreational communities such as Whistler have a population of more than 10,000, with that municipality “highly dependent on participation by American tourists who may wish to purchase property in the area.”
The consultation document also recommends that “control” of corporate entities, for instance by foreign owners, should be defined as ownership of shares or interest worth 3%, a criterion that CAPL described as “exceedingly low.”
It will be challenging to determine whether an individual meets the consultation’s definition of a “foreign person,” CAPL added, although Gale said the overall impact of the low threshold for shareholders being defined as foreign will only become clear some way down the line.
“I think it will impact some lenders, but most are not aware of the details of the proposed requirements,” she said. “Once they are introduced later this year, if the prohibition impacts lender recoveries against defaulting borrowers, lenders will have to examine the salient characteristics of their investors and shareholders to determine risks and take any necessary corrective action.”
Indeed, the precise nature of what the legislation will entail is still not entirely apparent, Gale added, especially as the consultation paper provides only discussion points and examples but no exact details of what’s in store. Still, mortgage professionals of all stripes will need to keep the new proposals top of mind, even if they won’t be tasked with enforcing them.
“The foreign property ownership ban exemptions are complicated, and whether or not a person satisfies an exemption is likely to be somewhat fluid as a person’s circumstances and relationships change over time,” she said.
“All professionals involved in the property acquisition process, which includes mortgage brokers, lenders, lawyers, and realtors, will not be saddled with a responsibility to police the new ban, but they will be charged with a duty to inform buyers, borrowers, and mortgage investors of the requirements.”