For over a decade, the articles, commentary and analysis focusing on the Toronto and Vancouver housing markets have addressed high levels of mortgage debt, speculative investors, foreign buyers and the inevitable unfolding of the markets when interest rates inevitably rise. It has been hypothesized that the unraveling of these major housing markets will inflict pain on the entire Canadian economy.
Should we keep waiting another 10 years for this scenario to play out, or should we come up with new explanations for what is happening in the Toronto and Vancouver housing markets?
Perhaps the biggest problem is a comparison problem. When you go out shopping for anything, you compare the price of the item you want to the price you paid before, or you compare the price to a similar item whose price you know.
You check out a couple of different stores in the mall, perhaps you go online or head south of the border to an outlet store -- you'll get a pretty good idea if something is a deal or if it's overpriced.
The same applies to house prices. If you paid $400,000 for a condo downtown, does it makes sense to pay $500,000 for a bigger unit up the street, or $700,000 for a house in the suburbs? You might even contemplate moving out of the metro area altogether to a smaller city or town a couple of hours away, because you know the prices are 40 per cent lower.
This method of comparison was valid when Toronto and Vancouver were second-tier global cities. But that has changed. These markets have ascended to the ranks of world-class cities. One way to identify a global city is to review their price-to-rent and price-to-income ratios. The higher these ratios are, the greater the likelihood that the area is attracting foreign dollars and disrupting the relationship between these variables.
Rents are typically constrained by the incomes of local renters, while prices are not, as foreign capital snatches up homes to keep as vacation properties or to rent to relatives at a discounted price. In addition, desirable places like Toronto and Vancouver build brand new luxury properties, areas gentrify quickly and existing properties are renovated and resold at much higher prices.
Some owners of rental older properties do few improvements and see less rapid rental growth, but they envision simply selling their property for the next big condo project. Income numbers skew low as local residents sell to affluent local buyers with business (and not personal) income or foreign buyers that don't report their salaries in Canada.
All of these extreme factors become greater and more influential in global markets, rental rates and incomes appear lower than they should be, and prices skew higher.
I looked at data from Numbeo -- a website that collects cost-of-living data from cities across the planet -- to observe 10 major markets: Hong Kong, London, Moscow, New York, Paris, San Francisco, Sydney, Toronto, Tokyo and Vancouver. According to this analysis, Canada's two top markets just cracked the top 10 for price-to-rent, ranking eighth and ninth when measuring ownership apartment prices to one- and three-bedroom city centre rents.
It makes much more sense to compare Toronto and Vancouver to these global markets, rather than to Saskatoon, Sherbrooke, or Halifax -- or even the average Canadian price overall.
In fact, when you use Numbeo to compare the prices of downtown ownership apartments, the $692 per-square-foot (PSF) Toronto price and $770 PSF Vancouver price look like bargains in comparison to these prices: $2,419 PSF in New York, $3,167 PSF in London and $3,297 PSF in Hong Kong.
When you factor in the decline of the Canadian dollar, it suddenly appears as if Toronto and Vancouver have just gone on sale -- watch out for global bargain hunters.
So, maybe high price-to-rent and price-to-income ratios don't signal overvaluation, an overabundance of property speculation, or impending doom. Perhaps they actually signal the ascension of Toronto and Vancouver into the highest of global ranks.
This revelation won't make you feel any better if you're in an affordability crunch, but may give prospective homebuyers on the fence some comfort that these markets are viewed by international investors as global destinations with long-term value, so their home price won't crash.
With each successive ranking from a major publication that puts Toronto and Vancouver as top cities to live in the world, foreign investors compare the value of real estate in Canada's major markets to theirs, and see great value.
They see undervalued -- not overvalued -- markets, and conclude that Toronto and Vancouver housing prices are not high.
Do you agree?
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Foreigners who plan on spending less than six months a year in Canada can keep a home here without having to apply for residency. Those who buy a property and plan on living in it longer than that have to immigrate to the country and apply for permanent residency. If they rent out their property, they don't have to live here at all but do pay a 25 per cent withholding tax on rental income that, unlike for Canadian property owners, is usually taken off the monthly rent. Homebuyers from abroad are subject to all the same fees and taxes as Canadians when purchasing real estate -- although they can face higher property or land transfer taxes in some jurisdictions and are subject to different capital gains tax rules when they sell a property. If they take out a mortgage on their property, they have to do so at a Canadian bank and will usually be asked to put up a larger percentage of the purchase price as a down payment than permanent residents -- typically, 35 per cent versus the five or 10 per cent that is more common for Canadian residents. Most provinces treat foreign homebuyers the same as local residents. One exception is P.E.I., which imposes higher property taxes on anyone who is not a resident of the island -- not just foreigners -- and forbids them from owning more than five acres of land or 50 metres of waterfront without special permission from the Island Regulatory and Appeals Commission. -- CBC
Internationally, some of the most heated debate around foreign ownership of real estate in recent years has had to do not with urban or oceanfront properties but with farmland. The global land grab, as it's sometimes called, has seen governments and multinational agribusinesses from China, Saudi Arabia, India and elsewhere quietly buying up arable land across the African continent and in countries as far flung as Indonesia, Australia and Argentina. In Canada, several provinces have protections in place limiting the amount of agricultural land foreigners can buy. - Alberta limits non-residents to two plots of agricultural or recreational land not exceeding a total of 20 acres. - Saskatchewan restricts sale of agricultural land to foreigners to 10 acres. - Manitoba prevents non-residents from owning more than 40 acres of farmland and requires that they move to the province within two years of purchasing the land. - Quebec doesn't allow non-residents to purchase farmland at all without permission from the Commission de protection du territoire agricole du Québec. A non-resident is anyone who has lived in the province for less than 366 days within the 24 months preceding a real estate transaction. Canada's open-door policy is comparable to the approach to foreign property ownership in other countries, including the U.S., Germany, France and the U.K. There are some jurisdictions, however, that have taken steps to restrict foreign investment in real estate beyond simply imposing higher taxes on homebuyers from abroad. -- CBC
The country recently tightened its laws after a brief period of opening up real estate to foreigners during the economic crash. It reintroduced restrictions on ownership in 2010 after a surge in property prices made housing increasingly unaffordable, especially in major cities like Sydney and Melbourne. (In 2010, asurvey of housing markets in Australia, the U.S., Canada, the U.K., New Zealand and Ireland ranked Australia's housing market as the least affordable.) Today, the following restrictions apply to foreigners: - Foreigners -- regardless of whether they are temporary residents of Australia or live abroad -- are prohibited from buying existing housing stock (homes that have been previously owned or occupied for more than 12 months) for investment purposes -- i.e. as a rental or vacation property. - The exception to the above rule is if a foreigner buys existing housing stock that they plan to demolish and redevelop. The property must be redeveloped within two years, and the redevelopment must increase the number of housing units. The property cannot be rented out prior to the redevelopment. The new property can be rented out, sold or used by the owner. - Foreigners temporarily residing in Australia can apply to buy one piece of existing property to use as a residence provided they sell it when they leave Australia. This provision was meant to address complaints that Asian investors buying property for children studying in Australia were outbidding locals and holding onto property after their children left the country. These are some of the same complaints being raised currently in Canada. - If foreigners buy vacant land for residential development, they have to build on it within two years and are allowed to rent out, use or sell the built properties. - There is no limit to the amount of newly constructed real estate foreigners can own as long as the property has not been marketed exclusively to foreigners overseas. Such property can be used as an investment. -- CBC
Swiss real estate is some of the most coveted in the world, but the country also has some of the strictest rules when it comes to foreign ownership. - The government assigns annual quotas to the country's cantons limiting the number of houses or flats that can be sold to foreigners who do not reside in Switzerland. Each sale must still be authorized by the canton in which the property is located, and the cantons can set their own additional restrictions. Many limit foreign property sales to tourist regions, for example, or allow foreigners to purchase only property that is already foreign-owned. - Foreigners can buy only one property to be used as a holiday home or a secondary residence. They cannot purchase a property for the sole purpose of renting it out, although holiday homes can be rented out periodically on a short-term basis. - Property owners need special authorization if the surface area of their real estate exceeds 1,000 square metres. - In some cantons, foreigners are barred from selling their property for a certain number of years after purchasing it -- generally between five and 10 years. - If foreigners buy vacant land, they must build on it within a year. - Foreigners who live in Switzerland do not need to get prior authorization to purchase real estate that will serve as their main residence and can rent out the property or use it as a holiday home if they move to another part of the country. - One area that is exempt from restrictions on foreign ownership of property is the alpine ski resort town Andermatt, where luxury condominiums marketed to wealthy foreigners as vacation properties can sell for several million dollars. - Foreign nationals from EU members states and some other European countries who want to buy property do not require the same type of prior authorization as other foreigners. -- CBC
China imposed new restrictions on property sales in 2010 -- for locals as well as foreigners -- in order to curb rising prices and real estate speculation. It raised down payments, tightened mortgage rules, introduced property taxes in several jurisdictions where they did not exist and put in place new limits on ownership. - Foreigners can own only one residential property for their own use (permanent residents are restricted to two properties). - Foreigners must reside in the country for one year before they can buy property. - Foreign companies who buy commercial real estate must use it themselves. Recently, some cities have started easing or not enforcing the restrictions on their own in an attempt to boost the local revenue they get from property sales. -- CBC
Foreigners cannot, for al intents and purposes, buy land in Thailand and are generally restricted to purchasing condominiums, although they cannot own more than the equivalent of 49 per cent of the total floor area of all the units in a single condominium building. -- CBC
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