Among the many price declines recorded in the Western real estate markets in the past six months, those in Canada are particularly notable. Price declines of approximately 18% were recorded in the housing market from the summer to the end of last year, and in former “hot” cities such as Toronto and Vancouver the reports are of sharp declines More.
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The reason for this is not only the current astronomical interest rates on mortgages, which led to a rapid drying up of the real estate market and price drops in many countries from Sweden to New Zealand. The Canadian dynamic was contributed by an unusual law that the Canadian Parliament adopted last year, and which came into effect on January 1 of this year, which effectively prohibits Foreign investors must purchase residential real estate in the country.
The law was adopted following a tremendous wave of price increases that swept through Canada in recent years, and which, according to politicians, was due, among other things, to foreign investments by residents from the United States, Asia (Canada’s west coast is relatively close to East Asia) and other places. Special attention was given to funds and companies that purchased a portfolio of thousands of apartments.
There were years when Israel also thought about what to do with the foreign buyers – residents abroad. In Israel these are usually Jews who bought apartments here for holidays and vacations or just in case.
In some cities they even imposed a double property tax on “ghost apartments”. However, in the second quarter of 2022, purchases by non-residents amounted to 519 apartments – only 1.7% of the total number of apartments purchased during that quarter. This is according to the report of the Chief Economist at the Treasury from last November.
The report shows that the number of these transactions is 42% greater compared to the corresponding quarter a year earlier, and the main reason for the increase is “sales that contractors usually conduct for non-residents during Passover”, especially since in the previous two years it was not possible to hold sales fairs of this type for non-residents due to restrictions the corona virus
Safed / Photo: Shutterstock
However, there is a noticeable downward trend in the amount of purchases by foreigners in Israeli real estate that has been ongoing since 2015, in light of the tightening of standards in the field of money laundering. “In a historical comparison, a sharp decrease in purchases by foreign residents can be observed after the outbreak of the global crisis and in particular after the increase in the purchase tax in June 2015,” the report states.
The report shows that the city that is a pilgrimage center for those investors is Jerusalem – where 56% of all investments by foreign residents in Israeli real estate were recorded. The review shows that “the average price of a new apartment purchased by foreign residents in Jerusalem in the second quarter was NIS 6.4 million, 51% higher than the average price of a new apartment purchased by Israelis in the city.”
The next cities in line are Tel Aviv and Netanya, known as “cities where foreign residents usually buy apartments”, as described in the report. However, cities such as Kiryat Malachi surprisingly appeared on the map of purchases – and specifically the Kermi Handiv neighborhood where non-residents purchased one-fifth of the new apartments – and Safed, where in the Mitzpe Ha-Hayim neighborhood, 18 new apartments were sold to non-residents.
Luzi Matuf, a RE/Max Advances franchisee in Kiryat Malachi who sold apartments in the Kermi Handiv neighborhood, says that “an entire tower in the neighborhood was sold to the Americans.”
Metouf also notes that since 2015-2016, some of the marketing in the neighborhood also addresses French audiences. According to him, “Today, anyone who walks down the street will hear a lot of French, and the purchases are not only for investment but also for residential purposes. The same with the Americans who produce communities here.” He describes the neighborhood as “Little Netanya.”
In Safed the story is similar. The new Mitzpe HaHaimim neighborhood, which has not yet been fully established, overlooks the Sea of Galilee. Rina Avitan of Rimex VIEW Safed: “In Safed, you constantly see foreign investors who are looking for vacation apartments for weekends and who are not interested in being in a city. The demand comes from Europe and the United States.”
Yasir and Akad
The issue of the high cost of housing, as in Israel, has become one of the hot topics on the agenda, and such is the center of great public outrage over the inability of families and individuals to provide for themselves an apartment. Mortgage repayments in big cities crossed the two-thirds line of disposable income, and the issue threatened the continued rule of Prime Minister Justin Trudeau.
Justin Trudeau, Prime Minister of Canada / Photo: Shutterstock, Gints Ivuskans
Trudeau was the one who also led the current policy, and who blamed the foreign investors and the capital that flowed out of the country for a significant contribution to the price increases. “The desirability of Canadian homes attracts real estate dealers, wealthy corporations and foreign investors,” his party declared before the law was approved last June, “this leads to a serious problem of vacant and unoccupied homes, rampant speculation and skyrocketing prices. Houses are for people, not investors.”
The turning point: the interest rate hikes in the world
The Canadian change of direction stands out against the background of the fact that many countries have opened their real estate markets to investment, and against the background of the price increases that have characterized most advanced countries in the last decade, and even more so since the corona epidemic.
In recent months, the trend of apartment prices has reversed, following the interest rate increases of many central banks that cause a jump in mortgage costs. But the issue regarding the possibility of purchasing local real estate by foreign capital – and the inability of local residents to buy apartments – arouses controversy in many countries.
“Even though Vancouver is a multicultural center, there is still a feeling here of ‘Yes, Asians, foreigners and immigrants are coming here, buying apartments, eliminating the inventory and raising the prices,'” says a real estate broker to The New York Times, which reported on the phenomenon “But most real estate buyers in Vancouver are not speculators, but immigrants looking for a place to live.”
A financial fine and a sales obligation for those who are caught
Canadian legislation belatedly joined the bandwagon of restrictions on foreign investors. Several provinces in Canada have already sharply increased the tax on speculation (selling before a certain period of time has passed since the purchase), or imposed a special tax on non-Canadian buyers. According to data from the province of British Columbia, whose largest city is Vancouver, while in 2016 one out of every 10 apartments was purchased by a foreign investor, this year the rate has already dropped sharply to one out of 100.
Canada has announced that it will allow its citizens living abroad, those who have recently moved to the country and received residency, as well as diplomats, to purchase residential real estate, but the rest will face the ban, the first of its kind in the country. If caught, they are expected to be fined and required to sell the property.
However, the restriction is planned to last only about two years, as of now, which raises concerns about “captured demand” that will erupt after this period. Reports from Hong Kong, where many are trying to immigrate to Canada, indicate that the flow of applicants does not really stop.
Denmark: commit to living in the country and paying taxes
One of the countries that can serve as an example of managing a ban on foreign investment in real estate in the long term is Denmark. The Scandinavian country significantly limits the purchase of real estate for foreign investors. In fact, it has closed the possibility of purchasing summer houses (a category of houses where you can live for a few months of the year and which are often located close to the shore of the Baltic or North Sea) to anyone who is not a Danish citizen. The Danes were afraid of rich Germans “attacking” the idyllic houses (in the summer months).
But the restrictions are not only on summer houses. In order to purchase a house in Denmark, even EU residents have to commit to living in the country and making it their main place of residence, as well as paying income tax and other taxes that reach 60% in the country.
In any case, they have to apply to the authorities, which complicates the procedures. Non-EU residents face much more severe restrictions. An Israeli, for example, cannot purchase Danish real estate directly, although the opposite option is possible.
These restrictions helped keep real estate prices in Denmark within reasonable limits, and private house prices, for example, are lower than in Germany, across the border. The price per square meter to buy in Denmark is 3,436 euros (according to Deloitte’s 2021 report data), compared to 4,600 euros in Germany. The strict restrictions on foreign investments are considered part of the Danish recipe for success, alongside many solutions for young couples or individuals such as cooperative apartment associations, generous mortgages and more.
Next up: the Balearic Islands
In recent weeks it has been reported that more countries and regions are interested in restricting foreign investors. The Balearic Islands (an autonomous community in Spain that includes the islands of Mallorca, Menorca, Ibiza and more) are urging the government in Madrid to allow the local authorities to prevent the purchase of real estate by non-residents of the islands.
The claims are that rich people from all over Europe are “taking over” the magical villages overlooking the Mediterranean Sea and wooded bays, and that the feet of the locals are being “squeezed out” by the astronomical price increases.
In addition, the authorities claim that the phenomenon creates “ghost villages” where the rich only come to visit during vacations, and disrupts daily life in old communities. The island is especially popular with residents of Germany and Northern Europe, as well as many Britons.
The Vice President of the Community of the Balearic Islands even referred directly to the North American example. “We need to imitate what they did in Canada,” he said. He urged the Spanish government to work with the EU authorities to allow such a regulation.
The president of the community agreed with him and told the media: “European citizens and others can afford to purchase real estate here at prices that are impossible for the residents of the islands.” In the village of Dia in the northwest of the island, a short walk from the impressive bays on the Mediterranean, the price per square meter is 6,091 Euro. This is the highest price per square meter in all of Spain (average €2,616), but it is not far from the average price per square meter in the UK as a whole (€4,905).
The British “Guardian” pointed out that there are other precedents for closing the borders to foreign investors: some villages in the Austrian Alps do not allow the purchase of houses for foreigners, the island of Oland in Finland where there are restrictions on foreigners similar to Denmark and Croatia, where EU citizens must live for 10 years in a row if they want to buy land.