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B.C.’s decision to impose an extra tax on Vancouver-area home purchases by international buyers surprised many.DARRYL DYCK/The Globe and Mail

British Columbia's new tax on foreigners' home purchases may cool more than just the white-hot Vancouver housing market. The chill could extend to the Canadian dollar.

In a research report last week after the B.C. government announced a 15-per-cent transaction tax on purchases of real estate in Greater Vancouver by people who are not citizens or permanent residents, economist and foreign-exchange strategist Charles St-Arnaud of Nomura Securities in London made a case that the inflows of foreign money into Canada's housing "are likely sufficiently significant to influence the value of the Canadian dollar." (Mr. St-Arnaud was an economist at both the Bank of Canada and the federal finance department before joining Nomura in 2010.)

The logic is pretty straightforward. When foreigners buy residential real estate in Vancouver (and elsewhere in Canada), they purchase Canadian currency to do so. That demand for Canadian dollars has become substantial, as the booming markets in Metro Vancouver and the Greater Toronto Area have become magnets for foreign investors. And like anything else, rising demand for the currency pushes up its value.

It is hard to say just how much foreign money has been flowing into Canada's real-estate market – indeed, this has become a crucial question for policy makers trying to tackle the increasingly concerning market excesses in Vancouver and Toronto, and the available data have barely scratched the surface. But Mr. St-Arnaud has extrapolated from some numbers recently collected by the B.C. government to try to come up with a rough estimate.

B.C.'s Ministry of Finance reported last week that between June 10, when it launched its collection of data on foreign purchases, and July 14, foreigners spend $1.02-billion on B.C. residential real estate, including $885-million in Greater Vancouver alone, representing about 10 per cent of the city's sales. Assuming this was fairly representative of current demand, Vancouver and its surrounding areas attract something approaching $1-billion a month in foreign investment.

We do not have comparable information for the GTA market, but the Toronto Real Estate Board reported $9.66-billion in home resales in June. Sales of new homes totalled roughly another $2.7-billion, based on data from the Building Industry and Land Development Association. Even if you assume foreigners are not as enamoured with Toronto as they are with Vancouver, you could comfortably estimate that Toronto would account for between $500-million and $1-billion a month of foreign housing investment.

Toss in the rest of the country, which certainly attracts some foreign buying despite having generally much less exciting conditions than the Vancouver and Toronto markets, and "maybe total flows into Canadian real estate is $2-billion [a month], and maybe even slightly higher," Mr. St-Arnaud said via e-mail.

To put it in perspective, net inflows of foreign investment in Canadian securities (stocks, bonds and the like), which certainly have a significant effect on the currency, have averaged about $15-billion a month this year. Inflows from the export of energy products – always a big deal for currency traders, who grossly oversimplify the Canadian dollar as a petro-currency and thus reflexively link its value closely with the price of oil – have been about $5-billion a month. The foreign inflows in the housing market might not be big enough to be driving the currency's gains this year (up 12 per cent against the U.S. dollar since mid-January), but in a year when Canada's overall exports have generally struggled (down 3.4 per cent year over year), they are big enough to be providing meaningful support.

So if B.C.'s new tax puts the intended serious dent in foreign demand, that could certainly put the Canadian dollar under pressure – at a time when the currency is already facing another downturn in oil prices. So far, the loonie has weathered oil's recent skid admirably, thanks in part to the country's relative attractiveness as an investment haven (economic and financial stability, proximity to U.S. growth, interest rates that still look unlikely to decline.) But add in shrinking foreign inflows in the housing sector, and that resilience could give way to a new downturn in the currency.

For some, especially in the export sector, that might be for the best, providing a renewed competitive shot in the arm. Still, it might not happen. As Mr. St-Arnaud points out, the new home-buying tax affects only one attractive Canadian real-estate market (albeit a big one); foreign investors could merely move their attention to Toronto, or Victoria, where hot markets remain unfettered by such a tax.

Still, given the level of concern expressed by all levels of government as well as the Bank of Canada at the housing-market frenzies on the B.C. coast and in Ontario's Golden Horseshoe, it is hard to imagine that such a shift would last for long without further measures being imposed to cool foreign investors' enthusiasm. Which might pave the way for the soft landing in housing for which policy makers have long prayed.

Just don't be surprised if the ultimate fallout includes a somewhat lower-altitude currency, too.