Foreign investment is a small piece of the housing market puzzle across the world, but Justin Trudeau's ban in the Canadian market ignores the deeper issues at play, writes Rory Hallam.

The price of housing has continued to skyrocket against the growth of income across wealthy cities. Canada, the UK, Australia and Ireland – among other countries – have seen dramatic rises in the value of homes and the cost of rent. Politicians are quick to blame foreign investors for cornering markets and driving up costs. However, they represent only a small part of a housing system, which in its current state, is highly exploitable.

In the weeks leading up to Canada's snap election, the Prime Minister and Liberal candidate Justin Trudeau pledged to ban foreign investment on housing for two years. Given Trudeau's falling position in the polls, it raises the question whether it is an effective way to tackle soaring house prices, or simply a way to make the most of a major issue facing Canadians?

The Canadian Conservative party has similarly promised to ban foreign investors living outside Canada – clearly this issue is pressing to voters. Housing will often take up the majority of a family's income. Young people are in a position where they cannot afford to live in their own communities. Key workers are being pushed further and further out of city centres. It is unprecedented and understated how much housing affects the lives of most ordinary people – drastic changes are necessary and urgent.

The issue is that foreign investors are not the sole problem and banning them is not the silver bullet to the deeper structural issues at play. It's true that foreign investors aren't completely blameless for rising house prices, as non-residents are eager to buy property in prime locations, leaving less space, cornering markets and raising prices. The fact is that they only make up a segment of investments and at the same time are responsible for a lot of private developments. A report from Savills shows that only seven per cent of housing transactions in London are from foreign investment.

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The causes are a simple economic inevitability exacerbated by governments that allow those at the top of the market to take advantage of those below them – which includes, but is by no means limited to, foreign investment. From a classic economic standpoint, it seems that this is simply a case of the supply of land decreasing as the demand increases. Inflated house prices in cities are a predictable result of high paying jobs attracting an increasing number of people to areas with a limited amount of space.

Cities like Vancouver, Toronto and London can't expand outward, but their populations increase at a greater rate each year- London's by 130,000 from 2019-20 – so their land values experience significant rises as their economies grow because more people want to move there. Traditional working class areas of South and East London have seen massive house price hikes of up to 429 per cent in Boroughs such as Newham, Hackney, Lewisham and Southwark since 1999.

Where governments fail is they allow those at the top to take advantage of the rapidly changing situation. Developers and investors can buy up property in prime areas, and given the high demand, they are only incentivised to sell luxury accommodation over affordable housing. These properties are promptly flipped, where profits are either reinvested or stockpiled. Alternatively, properties will often remain empty as it is an asset that will only increase in value. Foreign investors contribute to this, but banning their involvement only tackles a portion of the system.

Trudeau isn't the first politician to target foreign buyers in a bid to tackle the housing crisis. In 2016 Vancouver introduced a Foreign Buyer's Tax of 15 per cent, which turned foreign investors to other cities – dropping total investments from 13 per cent to 3-4 per cent – but still, house prices continue to precipitously increase. These policies are being adopted internationally. Singapore and Hong Kong increased stamp duty taxes by 15 per cent for foreign buyers, but failed to stop surging house prices because these investors are not the root of the problem.

The issues with the housing market don't start with foreign investment; as a result, the solutions shouldn't start there. Politicians need to be proactive in helping those at the bottom of the housing market by getting more affordable housing built, taxing empty property and improving transparency in the market. Attempts to punish particular players are a waste of time when it is the game as a whole that needs to be fixed.

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