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The housing market is so inflated that the international community warns of a bubble ready to burst and locals fret that soaring prices have pushed the dream of home ownership forever out of reach.
Some weary house hunters have turned wary as reports circulate about an influx of wealthy foreign buyers, particularly from China, buying up the housing stock.
This isn’t Vancouver. Or Toronto. Or anywhere in Canada.
This is the scene in Sydney and cities across Australia where, similar to Canada, low interest rates have sparked a years-long rush into the market amid cries of overvaluation and deteriorating affordability.
Outrage from a public keenly aware of the allure of Australia’s stable economy for their Pacific Rim neighbours spurred the government to clamp down on foreign investment in the real estate market. In 2010, the Australians reinstated an old policy that largely restricts foreigners to investing in new developments only.
Data suggests those rules have helped channel foreign investment into new, large-scale developments, increasing Australia’s overall housing supply and potentially easing upward pressure on prices of existing homes. Or at least that’s the hope.
Still, the spectre of foreign competition figures into the national conversation about home affordability, even as statistics from the Real Estate Institute of Australia suggest the proportion of foreign investment in Australia’s overall housing stock is relatively small.
That’s the key difference between the similar housing markets of Australia and Canada — statistics.
Canada doesn’t collect the kind of data on foreign investment kept by Australia, the U.S., and a host of countries around the world.
And so, nervous market observers are left speculating about whether unprecedented levels of investment — foreign and otherwise — are driving up home prices in major cities, or if foreign buyers are playing scapegoat for a hot real estate market driven by other factors.In the absence of hard numbers, several Canadian studies have tried, with murky results, to quantify the impact of Chinese buyers on the housing market. The studies used methods ranging from a review of foreign-sounding last names to focusing on luxury home sales to a review of homes sold by a single agency.
“The fact of the matter is: We don’t directly measure it now, period. There are no direct measures of foreign investment in Canadian real estate,” said Vancouver urban planner Andy Yan.“That is a pretty important piece of the puzzle that we need to understand when dealing with housing issues across the country.”
Vancouver’s rise to become the second most expensive housing market in the world — the average detached home is now worth $1 million — cannot be explained by local incomes, which are well below the average of major Canadian city centres.
The math simply doesn’t add up to explain what is happening in the market.
Just over half of Vancouverites believe there is too much foreign ownership of real estate in the city, according to a 2012 poll. But in a statistical vacuum, no one knows for sure.Estimates for foreign-owned downtown condos in Vancouver and Toronto range from less than five per cent to a
whopping 50 per cent.
There’s no question that home ownership in cities such as Sydney, Vancouver and London has become a trend among affluent Chinese, sparked partly by policies in China that make owning a second home an extremely costly endeavour and prevent them from transferring large sums of yuan out of the country directly.
A recent study by Chinese real estate website Juwai concluded that Canada is the third-most attractive market for Chinese investors, after the U.S. and Australia.
“Canadian cities are like London or New York, a safe place to invest for the long term. Some people call Vancouver a 'hedge city,’” said Andrew Taylor, co-CEO of Juwai.com. He added that the level of investment from China could soon rise, as the country is set to loosen rules on the transfer of wealth outside its borders.
“As Chinese buyers spread across the country, you could call Canada as a whole a ‘hedge country."
Chinese investors spent $22 billion on American real estate in 2013, and $17.2 billion on Australian real estate. The U.S. National Association of Realtors recently released a report saying, like in Australia, China is the biggest source of foreign investment.
The first step toward any meaningful analysis, Vancouver’s Yan said, is to determine exactly what is meant by “foreign” investment and why it matters.
“Having global capital come into your real estate market can be a very good thing, but in another instance it can be a very bad thing. That’s why you have that kind of societal dialogue [to determine] at what point is it bad and what point is it good?”
On one hand, governments, realtors and developers welcome wealthy foreign investors, who provide a stable flow of money and competition that raises valuations. On the other hand, economists, city planners and community activists worry that such buyers are absentee owners with no roots in the community and so are most likely to pull out of the market quickly in the case of a downturn.
Critics are also troubled by the notion that foreign investors — by forcing up prices while acquiring property — prevent citizens from owning homes in a community where they could participate more broadly in the local economy.
Yan — whose great-grandfather arrived in the city about a century ago — is worried that empty condos bought by foreign investors and not rented out could create a “zombie city” with barren streets, disconnected neighbourhoods and resentful locals.
Politicians and others who have called for the tracking of foreign ownership data, along with researchers who compile makeshift data, have sparked criticism and accusations of xenophobia.
Such fear of foreigners is a dangerous side of an out-of-control housing market, warns Catherine Cashmore, a home buyers’ advocate in Melbourne.
At the peak of Australia’s crisis, the government went so far as to set up a hotline to stop foreigners from bidding on existing homes without official clearance. Resentful locals could call to report anyone they thought was a foreign national “bidding up” neighbourhood prices. The now-infamous program was sardonically dubbed 1-800-I-SAW-AN-ASIAN-AT-AN-AUCTION by one newspaper.
The hotline generated many calls but few results, as most of the “suspects” turned out to be Australian citizens and permanent residents, not foreign nationals, said Cashmore.
“You’ve got people who are always being outbid by someone else – it doesn’t matter if they’re from Florida or Lisbon or Japan or China – that naturally feels unfair,” she said.
The Australian example shows the complexities of determining what “foreign” really means.
Many Chinese-born buyers in Vancouver are likely immigrants who entered the country through a now-defunct government program that granted a visa to any migrant willing to front an $800,000 loan to the government. Others are buying homes for their children who emigrated for a Western education.
How do we distinguish those types of investors from speculators who leave units sitting empty? And should we? Are foreign buyers more of a problem than someone from Winnipeg who bought a residence and visits only during ski season?
In lieu of concrete information, Yan has tried to tackle the number of investor-owned condos in his city with imprecise, but creative, tools, including:
— Tabulating mailing addresses to which tax assessments are sent
— Studying homeowners’ grants
— Examining the level of hydro usage in various units.
His estimates suggest as much as 60 per cent of downtown Vancouver condos are not used by owners and 15 per cent are empty.
Another study by the Conference Board’s Robin Wiebe found a correlation between Chinese GDP and the average price of Vancouver homes, while there was no link between prices, and employment levels and interest rates, which are usually the prime indicators in local markets.
"The absence of this data makes us all get real creative,” said Wiebe. “All of us have to approach the thing from a different angle, not straight ahead like we should be able to."
In an attempt to “fill the data gap,” the Canadian Housing and Mortgage Corporation has made its first attempt at collecting data on investment in the residential real estate market. The study found that 17 per cent of condos in Toronto and Vancouver are investor owned. However, it did more to highlight the challenges in gathering the information than it did to enlighten Canadians on the market.
The government agency’s study was limited to investors only from the same metropolitan area — largely owing to the cost of undertaking such a survey. The CMHC first talked to other bodies that might have data, or at least a methodology in place, but came up empty.
“Most of the people that we have talked to so far have been just stumped by the problem,” CHMC’s Bob Dugan said.
“By no means (is the study) the finish line. If we want to give a complete portrayal of what’s going on in the investor market, we have to keep trying to dig and find ways to cover these other groups of investors.”
Dugan believes it is important to get a handle on how many investors are in the Canadian real estate market – especially the speculative kind, where the practice of “flipping” houses can lead to price corrections.
While the federal government flounders for ways to study the impact of investment, Vancouver’s mayor Gregor Robertson has promised to create an agency to take a stab at tracking investor-owned homes.
Filling in those gaps is well within the federal government’s control and would help market observers discern whether the housing market is being driven by a classic imbalance of supply and demand or by something new, said Richard Wozny, a real estate economist with Site Economics in Vancouver.
While foreign investment is certainly part of the equation, he says, it is a less relevant metric than the number of overall investors in residential real estate, a relatively new phenomenon that has fundamentally altered dynamics of that market.
Traditionally, real estate investment was limited to the wealthiest class of owners in the commercial sector (those who could afford whole buildings or malls and office spaces); but small-time investors are now buying individual units, a recent phenomenon sparked in part by the allure of high returns and low interest rates.
“Every form of real estate has become a vehicle for investment, and that is unusual,” Wozny said.
“These forms of real estate have become a place to store wealth. It’s functioning like a currency, rather than have the money in the bank.”
He believes an effective and efficient solution lies in updating Canada’s tax policy to account for such 21st century investment trends by taxing residential investors more in line with the much higher levels paid by investors in commercial real estate. Still, he notes, in order to invoke that policy, the government first needs to act on calculating the number of investors.
Cashmore also believes changes to the tax system would be more effective than Australia’s current broken FIRB, which is facing allegations of shoddy oversight, loopholes and corruption.
Booms and busts in the housing market are actually fairly easy to predict and occur in 18-year cycles, but the level of foreign investment is making the current cycle incredibly volatile, Cashmore said.
Without intervention, she added, the unprecedented levels of foreign investment could exacerbate a crash.
She argues for a radical shift in housing policy that would see income taxes reduced and property taxes increased; it would balance out for homeowners and make speculative investment in real estate less attractive.
Although few global markets are as similar as Canada’s and Australia’s at the moment, both countries could look to the plethora of other jurisdictions for some balance between Canada’s lax foreign investment policies and Australia’s restrictive ones.
Countries including the U.S., Denmark, France, Mexico, Japan, Turkey and Singapore have not only implemented methods to collect data on foreign investments but have also invoked tax policies to curtail the trend.
Eyeing the potential for an investment bubble in London driven by foreign investors, the U.K is implementing a capital gains tax for foreign investors selling homes beginning next year.
Hong Kong’s government has levied a 15 per cent tax for non-residents who buy property — in part to curb fears their market will be overrun by mainland Chinese speculation. Denmark forbids foreign buyers from purchasing waterfront property and the U.S. places heavy taxes on the sale of foreign-owned houses.
Meanwhile, Canada’s hands-off approach — whether out of politeness, lack of know-how or self-interest — puts it in the minority among industrialized countries by remaining in the data dark.
Sunny Freeman is the national business reporter for HuffPost Canada.