In the past five years, the flow of money from mainland China into Canadian real estate has reached what many consider dangerous levels, contributing to a gold-rush atmosphere in the nation’s leading cities, while stirring anger among young, middle-class Canadians who feel shut out of their hometown markets.
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.
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.
Next to China’s own volatile real estate markets, property almost anywhere in the Western world can seem an island of financial sanity, says Matthew Moore, president of Juwai’s North American operations. “The year-on-year property increase in Shenzhen, one of China’s tier-one cities, was close to 60 per cent,” he observes. “This is about wealth preservation.”
Adding to that sense of urgency: even the most privileged Chinese mainlanders have for decades been shut out of buying property, which Moore describes as the “favourite asset class” of Chinese dating back to its pre-Revolution days.
In Vancouver, and increasingly Toronto, fear abounds that Chinese money has helped inflate a property balloon of Hindenburg proportions, driving house values out of reach for even well-off professionals, while raising the risk of a crash at the first sign of adverse conditions.
Yet the self-same conditions are adding handsomely to the net worth of millions of homeowners, and supporting a constellation of housing-related industries, from real estate sales to interior decoration. They could be considered the main engine of Canada’s stop-and-go economy, and for those along for the ride—builders, property lawyers, revenue-hungry local politicians—the question isn’t so much what Chinese buyers are doing to the Canadian property market. It’s what might happen without them.
The CMHC’s latest condo numbers tracking the ownership of condos were part of a concerted effort on the part of the Crown corporation to measure the phenomenon, based on its mandate to gather data on housing, and to foster market stability.
By breaking down the numbers according to the age of the building in question, it provided the first reliable indicator of accelerated foreign buying. In Vancouver, for instance, foreign ownership of condos built before 1990 stands at just two per cent. For structures completed since 2010, that number climbs to six per cent.
CMHC’s plan now is to produce a more comprehensive report by the fourth quarter of this year, says chief economist Bob Dugan, capturing not just condominiums but all forms of residential property. But that won’t be easy. Gathering the data requires co-operation on the part of everyone from provincial property registries to local realtors—not all of whom are eager to shed light on their lucrative sources of new-found income.
It might also require a better understanding of who constitutes a “foreign owner.” The CMHC’s current definition—an owner who does not reside in Canada—excludes all kinds of domestic arrangements under which foreigners purchase homes abroad, suggesting the recent condo numbers understate the influx of outside buyers. It’s common for foreign-based buyers to send their children and spouses here while remaining in their home country. Should such buyers be lumped in with overseas owners of income properties? Or with Chinese Canadians who spend part of the year outside the country?
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.
But the numbers seemed to support an earlier, more controversial, study of home sales in three of Vancouver’s most expensive neighbourhoods, showing that 66 per cent of houses sold during a six-month period starting in September 2014 went to Chinese people with non-anglicized names.
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
Most put foreign real estate at the top of their list. That’s partly due to its stability, says Jim Zhang, an RBC private banker in Toronto, whose client list includes many so-called “high-net worth” Chinese investors; it’s also born of instinctive suspicion toward their own government. “In Canada, everything in my bank account is mine, as long as I pay tax,” a client recently told him. “In China, even if the government’s name is not on my account, whenever they want my money, they’ll have my money.”
Fortunately for those millionaires, a thriving industry has formed to facilitate their wishes to move their money abroad—and they need not even board a plane. In mid-April, more than 40,000 people crammed into the Beijing International Property & Investment Expo, a four-day mixer of buyers eager to snag deals and sellers eager to snag deep-pocketed investors.
“Why not go straight to the source?” Prospective buyers talked to the Canadian exhibitors about making purchases in cash, and expressed the greatest interest in properties located around Vancouver and Toronto. The sellers fielded repeat questions about immigration and payments, particularly how to get money out of the country. (China limits foreign purchases of currency to $50,000 per year, and has been tightening controls to keep money from flowing elsewhere. This has left lingering questions about how so many mainland Chinese have been able to afford expensive houses abroad.)
There was another factor surely lurking in the minds of prospective buyers at the expo: Canada, with its weakened currency, is on sale. The yuan is fixed to the U.S. dollar, and as the loonie fell against the greenback over the last two years, it raised the buying power of Chinese real estate buyers. “If they’re thinking of buying property in Canada now,” says Zhang, the RBC banker, “they’re getting a 25 or 30 per cent discount.”
David Eby - a sobering thought: the man many believe could one day lead B.C. might soon be priced out of the province’s foremost city.
Ian Young - “What defines those people in terms of their behaviour here in Vancouver, and in terms of their impact on affordability, is not their ‘Chineseness,’ it’s their ‘millionaireness,’ ” he says.
Jason Fung - important for Chinese-Canadian voices to encourage a debate over the impact of foreign investment on the local market. “Chinese people have a tendency to be a little quiet, we tend to want to not create ripples—culturally it’s something we’re not comfortable with.”
One oft-cited culprit for the barrage of offshore money are government programs aimed at bringing wealthy foreigners to this country—namely Canada’s now-infamous Immigrant Investor Program
In recent years, it became increasingly common for investor-class immigrants to set their children up in Canada to study, while the family’s main breadwinner continued to work and pay income taxes elsewhere.
One federal study unearthed by Young showed that even after five years in Canada more than 60 per cent of investor-class immigrants reported no annual income earnings at all. And those who did reported earnings of just $21,000—less than that of refugees.
Another side, Eventually, Woo says, many wealthy Chinese who used the program to gain access to Canada seek to “align” their personal lives in Canada with their business interests overseas—if for no other reason than to minimize the stress of living apart from their families for six months of the year. As evidence, he points to the half-dozen Chinese firms, including Poly Culture Group, a division of a massive Chinese conglomerate, that he’s helped convince to set up shop in the Lower Mainland through a venture called HQ Vancouver.
The silent, happy majority in all this, of course, is the thousands of Canadian homeowners who have sold their homes for an enormous profit, and the millions more watching their home values climb into the stratosphere—more than 70 per cent of Canadian households own their own home, and many are watching their property values soar with an eye to their retirement. In Richmond Hill, Ont., a Toronto suburb favoured by many Chinese investors, standard four-bedroom homes are now typically priced around $1.3 million, and routinely sell for $300,000 over asking. For now, this is a distinctly uptown economic problem.
Others want in on the Chinese capital train - Last spring, politicians and economic development officials in Nova Scotia welcomed with fanfare the purchase of a series of properties by DongDu International Group, a Shanghai-based development company touting plans for two full-service vacation resorts catering to wealthy, young Chinese professionals. It was hoped the developments would bring much-needed economic activity to the stagnant region of Guysborough County, northeast of Halifax. An additional pair of properties DongDu bought in the capital were supposed to be the beachhead for a centre of excellence for the film industry. Since then - no further action.
It’s difficult to overstate just how important real estate has been for the Canadian economy in recent years. A report a few years ago by Altus Group, a Toronto-based property consulting firm, estimated that home renovations alone contributed as much as four per cent of Canada’s GDP in 2014, or about $64 billion. Add in new home construction, realtors, lawyers and other associated industries and the residential housing industry is responsible for as much as 20 per cent of Canada’s economy.
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.”
The multi-trillion-dollar question for Canada’s vulnerable housing market, and the economy that increasingly depends on it, is whether China’s interest in buying Canada is a simply a passing fancy or a stabilizing long-term play. It’s one of the concerns the CMHC hopes to address by charting the behaviour of foreign buyers over time. “If investors are primarily in the market to make a quick buck—to buy a unit, make a capital gain over six months to a year, flip the unit and get out—that can be problematic behaviour,” says Dugan, the chief economist. “We would want to be able to measure to what extent that’s going on.”
Those who have studied the Chinese appetite for buying foreign properties sketch a less dramatic picture, albeit one that’s still less than reassuring. A survey of 150 agents in China by Investorist, an Australian company that markets international properties online, found the vast majority of would-be Chinese purchasers, nearly 90 per cent, have a budget between $500,000 and $1 million—not unlike many Canadians who are seeking to buy a home in Vancouver or Toronto these days.
It all points to a group of foreign buyers that, while large and motivated, remain financially mortal, and can therefore be expected to panic alongside everyone else if Canada’s housing market begins to falter. And, as foreign money continues to flood both Toronto and Vancouver, there’s plenty of evidence of ultra-sketchy, speculative behavior that’s not limited to offshore buyers: bidding wars, properties purchased unseen and without conditions, so-called “shadow flipping” by realtors, the creation of shell corporations allowing buyers to avoid being named in transaction documents, accusations of money laundering, and unfair tax avoidance. The list goes on.
The risks for Canada don’t end there. While the turbulent Chinese economy has so far prompted China’s elite to move their money to locales perceived as safer, a full-blown crisis in the Middle Kingdom could well have the opposite effect. If offshore investors suddenly believe their livelihoods are at risk, they may have no choice but to quickly offload overseas houses and other assets in order to pay back creditors. In other words, instead of simply fretting about overzealous Canadians sparking a major housing crash, now we need to worry about a made-in-China crisis, too.
Can anything be done? In B.C., a group of economists is proposing a two per cent anti-speculation tax, which would penalize buyers who let homes sit empty. The idea is to generate a little revenue ($90 million is anticipated in the first year), but more important, to track activity: How many units are owned by people who don’t pay any tax in British Columbia? How many condo units are owned by people who don’t rent them out, and leave them vacant? How is this money entering Canada? At this point, the government doesn’t have a clue
Others point to countries like Australia, which requires foreign purchases to be vetted by its foreign investment review board and approved only if they contribute to the creation of new housing stock. A similar approach has been proposed for the U.K. Ellis, however, says the policy hasn’t done much to rein in house prices Down Under, since there are many ways for determined offshore investors to circumvent the rules.
In any case, it’s not exactly Canada as the country imagines itself—cowering from foreigners willing to pay for a taste of our order and civility; wondering if the next big purchase will nudge us into social dislocation, or corruption requiring aggressive government intervention. If for no one else, you’d hope we might get ahead of the problem for the sake of Paul Shen, who’s settling into his new home in Victoria. Should such dark forebodings come to pass, the life he followed his heart to find will look eerily similar to the one he left behind.
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NAME: vancouver-housing-china-is-buying-canada
DESCRIPTION: ] by Charlie Gillis, Chris Sorensen and Nancy Macdonald @macleans.ca - How China’s affection for Canada’s real estate is reshaping the nation’s housing market well beyond Vancouver
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