“CHINA IS BUYING CANADA” – NOTES FROM A GIGANTIC REAL ESTATE BUBBLE
Many of you will be intimately familiar with the massive real estate bubble still in the process of inflating in certain parts of Canada, particularly Vancouver.
The insanity of it all recently received a great deal of public attention when the following home was listed for $2.4 million earlier this year (it has since sold).
If you’ve been following this story, you’ll also be aware that the primary driver behind the bubble is foreign investment, particularly Chinese. Of course, this isn’t a phenomenon unique to Canada, and as I noted in last year’s post, Welcome to Arcadia – The California Suburb Where Wealthy Chinese Criminals are Building Mansions to Stash Cash:
The city, population 57,600, projects that about 150 older homes—53 percent more than normal—will be torn down this year and replaced with mansions. The deals happen fast and are rarely listed publicly. Often, the first indication that a megahouse is coming next door is when the lawn turns brown. That means the neighbor has stopped watering and green construction netting is about to go up.
The city’s Asian population grew from 4 percent in 1980 to 59 percent in 2010.
Smith says many of the newest buyers in Arcadia don’t speak English. “They’ve just come here,” he says. “They’re on that EB—what’s it called?” He means the EB-5 visas that the U.S. grants to foreigners who plow at least $500,000 into American development projects. Congress created the program in 1990 to spur investment, and demand for the visas has grown recently. This year, for the first time, the government gave away the annual allocation of 10,000 visas before the year was over, with Chinese nationals snapping up 85 percent. Brokers in the area say it’s the most common way buyers are coming to town. “Once they obtain residency, they want to bring their family over and get the United States education,” says real estate agent Ricky Seow. “They can start a new life in California.”
To the people who actually live in these communities, the results of the flood of cash can be downright devastating. With that in mind, Maclean’s Magazine has just published a fascinating article titled, China is buying Canada: Inside the New Real Estate Frenzy. Here are a few excerpts:
Its impact on Vancouver’s gravity-defying boom is the best known—and most hotly debated—example, as eye-popping price gains leave behind such quaint indicators as average household income, or regional economic activity. “We’re bringing in people who just want to park their money here,” says Justin Fung, a software engineer and second-generation Chinese-Canadian who counts himself among those frustrated by Vancouver’s surreal housing market. “They’re driving up housing prices and simply treat this city as a resort.”
Yet the amphetamine rush of Chinese cash has been felt far beyond the disappearing pastures of the Fraser Valley—especially in the last couple of years. Fully 10 per cent of new condominiums being built in central Toronto are now going to foreign buyers, according to a survey released in April by the Canada Mortgage and Housing Corporation (CMHC); veterans of the city’s rough-and-tumble real estate market believe the vast majority are mainland Chinese. On Juwai.com, an online listing service where Chinese buyers can look for international real estate, inquiries about specific properties in Ontario rose 143 per cent in 2015, with the total value of those homes hitting $11.2 billion. Quebec saw its numbers more than triple, while Alberta’s numbers rose 70 per cent.
Meanwhile, Chinese developers have made buys in locations that have left analysts scratching their heads, including Nova Scotia’s remote Eastern Shore and an abandoned mining town in the B.C. Interior. The stated reasons for such purchases don’t entirely compute (neither seems the likely site, as owners and local officials suggest, for a full-service, self-contained vacation community).
Yet even the crudest measurements suggest a breathtaking upsurge in interest that would rate Canada’s big cities on par with London and New York in the eyes of Chinese buyers. National Bank of Canada economist Peter Routledge has “hypothesized” that Chinese buyers last year shelled out nearly $12 billion on real estate in Vancouver, accounting for 33 per cent of the city’s sales. For Toronto, he pegged the number at $8.4 billion, representing 14 per cent of sales.
At least part of the message is beyond dispute: the cash flowing out of China into assets around the world has hit tsunami proportions, driven by fears of a slowing economy and a declining currency.Estimates peg the amount Chinese investors and companies moved out of the country last year at nearly $1 trillion, up more than sevenfold from 2014. Much of that money is being spent by Chinese companies looking to snap up Western assets, such as ChemChina’s US$43-billion bid to take over Swiss seed company Syngenta, or to pay down U.S. dollar-denominated debts. But a sizable portion was directed into overseas real estate.
While experts try to determine how much money is flowing out of China, there’s no question a good deal of it has come to rest in leafy Vancouver neighborhoods, sparking anxiety and deep divides in the community. So decoupled have local house prices become from economic fundamentals that it now requires a mind-boggling 109 per cent of the average household’s disposable income to service the costs—like mortgage payments and insurance—needed to own the average home in the city, according to research by the Royal Bank of Canada. There’s no sign things are about to slow down. A recent report by real estate firm Re/Max found prices surged by 24 per cent in the city during the first quarter compared to the same time last year, and pegged the average price of a single family home at $2 million. The real estate firm noted the emergence of a vicious cycle, as intense competition for houses caused would-be sellers to hold off on listing their homes (for fear they won’t be able to afford a new one) thereby limiting the available inventory and driving prices even further into the stratosphere.
The frenzy has taken a visible toll on one of the world’s “most livable cities,” resulting in hollowed-out neighborhoods, absentee investors, and vacant, decrepit homes as huge numbers of investment properties simply sit unoccupied. What statisticians have been slow to chart has been ruefully documented in popular blogs like Vancouver Vanishes and Beautiful Empty Homes of Vancouver, which tracks empty, multi-million-dollar character and heritage houses.
Frustration has hit a boil, and it’s been on full display at a series of “emergency” housing town halls, headlined by the front bench of the Opposition NDP. Hundreds have turned out to sit in church basements to voice their concerns, and their anger. At one held last week at St. Paul’s Church in Vancouver’s Mount Pleasant neighborhood, a new advocacy group with a darkly intimidating acronym HALT—Housing Action for Local Taxpayers—turned up with picket signs.
Among the day’s speakers was David Eby. The Vancouver MLA, a lawyer touted as a future NDP leader, is among those priced out of the local market. Eby and his wife, a nurse currently in medical school, recently sold their 530-sq.-ft., one-bedroom condo in Kitsilano, which was too cramped for the two of them and their 19-month-old toddler. “A two-bedroom condo in my constituency starts at $600,000—a non-starter for us,” he says. So they’re renting a $2,700-a-month two-bedroom condo at UBC. It is, to put it mildly, a sobering thought: the man many believe could one day lead B.C. might soon be priced out of the province’s foremost city.
Last November, the 38-year-old lawyer and former head of the B.C. Civil Liberties Association helped Andy Yan, acting director of SFU’s City Program, with his headline-grabbing study on home buying in Eby’s West Side riding. In addition to the incendiary data involving Chinese names, the study revealed that 36 per cent of owners on homes worth an average of $3.05 million listed their occupations as housewives or students with little or no income. Fully 18 per cent of the 172 homes purchased were not mortgaged by banks. That means on Vancouver’s West Side alone over a six-month period last year, roughly $100 million in cash came pouring into Canada, almost all of it from China. Yet the homeowners would in all likelihood pay little or no income tax.The total value of all homes sold in the study period topped a half-billion dollars.
Predictably, when Yan’s study was published, a chorus of voices, including former developer Bob Ransford, jumped to criticize Yan: “The danger is intolerance, racism, singling out certain groups of people saying they’re to blame for this,” said Ransford. But such labels have failed to muffle the debate, particularly as more and more Chinese-Canadian voices have begun calling out white developers and academics for making the claim. Fung, the software engineer, says he’s among those “deeply pissed off” by what he considers a slur: “The only people claiming racism are white Anglo-Saxon males—that’s it. These are the same guys trying to label Andy Yan—whose grandparents paid the head tax—a racist? It’s absurd.”
David Duff, a professor at the University of British Columbia’s Peter A. Allard School of Law, calls such schemes “bizarre” since they do nothing to prevent wealthy newcomers from dodging Canadian income taxes, providing they spend less than 183 days per year in the country and maintain a residence and business overseas. “Others wonder why these folks get to be treated that way while the rest of us get taxed on our worldwide income,” says Duff, “And the consequence, as we’ve all seen, is the bidding up of house prices in Vancouver.” He’s seen it first-hand: Duff recently sold his own tony West Side home to an offshore buyer.
With Canadians already owing $1.65 on average for every dollar of disposable income they earn, there were ready signs that domestic buyers were tapped out. The sudden influx of Chinese money over the past couple of years was akin to throwing gasoline onto a slowly dying fire. Which is why no politician in their right mind is likely to take a hard stance against foreign buyers. Says Duff, the UBC law professor, “Nobody wants to shut it down, because it’s like a drug. We always need another fix.”
That seems like a good place to stop.
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