China's favorite offshore money laundering hub is officially no longer accepting its money.
According to data released by British Columbia’s Ministry of Finance on Thursday, foreign investors officially disappeared from Vancouver’s property market last month after the local government imposed a 15% surcharge to curb a record-shattering surge in home prices. Overseas buyers accounted for a paltry 0.7% of the C$6.5 billion of residential real estate purchases in August in Metro Vancouver; this represents a 96% plunge from the seven weeks prior, when foreigners were responsible for 16.5% of transactions by value.
According to the latest data overseas buyers snapped up C$2.3 billion of homes in the seven weeks before the tax was imposed, and less than C$50 million in the next four weeks. The government began collecting data on citizenship in home purchases on June 10. The ministry said auditors are checking citizenship or permanent residency declarations made by buyers and also reviewing transactions to determine if any were structured to avoid tax (spoiler alert: most of them were).
Across the province, the participation of foreigners dropped to 1.4% of transactions by value in August, from 13% in the preceding seven weeks.
Prior to the new real estate tax home prices were almost double the national average of C$473,105; however we expect a sharp corretion in the coming weeks - as we pointed out at the beginning of September, the average price of detached Vancouver properties promptly crashed following the news tax, dropping 17% on the month, and 0.6% on the year, to C$1.47 million ($1.13 million) in August, wiping away one year of gains in a few weeks.
As Bloomberg notes, the plunge in foreign participation joins other signs of a slowdown in Canada’s most expensive property market.
The silver lining is that while transactions may have ground to a halt, the government did pick up some extra tax revenues: British Columbia has raised C$2.5 million in revenue from the new levy since it took effect. Budget forecasts released last week indicated that the Pacific coast province expects foreign investors to scoop up about C$4.5 billion of real estate through March 2019.
That may prove optimistic, because as reported two weeks ago as Chinese buyers wave goodbye to Vancouver, they have set their sights on another Canadian city: Toronto.
According to the Star, sales of $1-million-plus Toronto-area single-family homes rose 83% year over year in July and August. That’s 3,026 homes, with 55 per cent of them inside Toronto’s borders. That’s not entirely surprising given that the average cost of a detached home in Toronto was about $1.2 million, said Sotheby’s CEO Brad Henderson.
“While $1 million is still a considerable amount of money, it’s difficult to find a single-family home in the city of Toronto for less than $1 million and it is not uncommon to find homes in the $2-million, $3-million or even $4-million-plus range,” he said.
Sotheby’s says sales of homes in the $4-million-and-up category rose 74 per cent in the region and 58 per cent in the city in July and August. Sotheby’s said it expects Toronto’s luxury market to take the lead among Canada’s cities, outpacing Montreal, which probably will become a target for investors from Europe, China and the Middle East.
“What the (Vancouver) tax introduced is . . . some uncertainty as to what other policy issues the city or the province may introduce, which would adversely affect investors,” Henderson said, adding that investors are looking elsewhere, including cities outside Canada.
“But, if they are looking in Canada, we believe Toronto will be the most logical place for people to consider. Montreal and Calgary will probably also get a look-see,” Henderson said.
Or maybe not.
As CBC reported earlier this week, economist Benjamin Tal of CIBC said that Ontario will have little choice but to copy Vancouver and implement a tax on foreign house buyers. In a recent note to clients, the economist said the biggest problem facing policymakers with regard to hot housing markets in Toronto and Vancouver is a limit on the supply of new homes.
"The main reason behind higher prices in the [Greater Toronto Area] is a policy-driven lack of land supply," Tal said. "And with no change on that front, policymakers have to use demand tools to deal with what is essentially a supply problem."
Tal doesn't speculate how much of a tax could be under consideration for Toronto, nor does he have any insight as to when and how it might be implemented.
A foreign buyer tax is not the only possible response to the problem of high house prices. Among other possibilities, Tal cites:
- Compelling banks to tighten their lending practices by making them pay for their own mortgage insurance.
- Raising the down payment minimum to 10 per cent, even for homes under $1 million,
- Closer monitoring of lending to subprime buyers.
- Offering tax incentives to developers to make more purpose-built rental buildings, including more flexible rent control rules, as ways of cooling Toronto's housing market.
Tal says Toronto's housing market has been inflated by cheap lending to people who would have no business getting a mortgage if rates returned to more typical levels.
Of course, if Toronto does what Vancouver did and tries to spook away foreign buyers, the housing bubble will simply keep jumping city to city, first in Canada, then in move to the US, and back over to Europe, until soon the entire world makes it clear that China's $30 some trillion in deposits that are just itching to be parked offshore are no longer welcome, forcing the Chinese government to finally deal with the alarming consequences of its own unprecedented monetary injections, which now amount to some $4 trillion in new money creation mostly by way of bank "loans" (and thus deposits) every single year.