“Housing in Vancouver is insane — it was insane when I left and it’s more insane now.”
That’s from 33-year-old Kevin Oke, co-founder of LlamaZoo Interactive who left Vancouver for Victoria two years ago because he couldn’t afford to buy a home in his native city even while earning a generous salary as a lead designer at a video-game company whose clients included Atari and Ubisoft Entertainment SA.
Kevin isn't the only one leaving. Vancouver added only 884 net new people age 18-24 last year according to Statistics Canada, and many observers worry the soaring cost of housing will eventually strip the city of its burgeoning tech economy.
(a representative listing from Point Grey)
We’ve spilled quite a bit of digital ink documenting the “three-alarm fire” (to quote Bank of Montreal chief economist Doug Porter) that’s burning in British Columbia’s housing market. Here, for those who missed it, are some informative posts:
- Vancouver Real Estate Goes Full-Retard; Average Home Price Now $1.8 Million
- How Vancouver Is Being Sold To The Chinese: The Illegal Dark Side Behind The Real Estate Bubble
- Meanwhile In Canada, A Real Estate Bargain Emerges…
- Calgary's Housing Market Collapses While "Three-Alarm Blaze" Burns Next Door In Vancouver
According to the Greater Vancouver Real Estate Board, residential property sales in Greater Vancouver rose 31.7% in January, 46% above the 10-year sales average for the first month of the year and the second highest January ever. The benchmark price for a detached home in Vancouver: $1,293,700. The benchmark price for an apartment: $456,600. The latest data from the Canadian Real Estate Association shows the average price of a home in Canada rose an astonishing 16% Y/Y last month to more than $500,000. Underscoring the extent to which British Columbia and Ontario are driving the market, stripping out those two provinces pulls the national average down to under $300,000.
Prices in Vancouver surged 26% in February.
So what's behind the inexorable rise? How is it possible that "fixer uppers" like the residence shown above go for $2,500,000? It's very simple. Chinese worried about continued market turmoil and a weaker RMB, are moving money out of the country. As CAD slid against USD, Chinese "investors" found Canadian real estate to be comparably priced vis-a-vis US real estate in USD terms. Wealthy Chinese funneled their dollars into the Canadian market, driving up prices. In short: capital flight from China has created a massive housing bubble in cities like Toronto and Vancouver. Throw in the fact that some of these locales - like Waterloo, Ontario - are becoming tech hubs, and you have the recipe for overheating markets.
Just how prevalent is Chinese buying, you ask? Well according to National Bank's Peter Routledge who did some "back of the envelope" calculations, fully one-third of all Vancouver real estate purchased in Vancouver last year was bought by Chinese investors.
"Chinese investors spent about C$12.7 billion ($9.6 billion) on real estate in the western Canadian city in 2015, or 33 percent of its C$38.5 billion in total sales," Bloomberg writes, citing Routledge and analysts Parham Fini and Paul Poon who "extrapolated from a Financial Times survey of 77 high-end buyers and data from the U.S. National Association of Realtors." Here's a bit more from The Globe And Mail:
Without any Canadian-specific data on foreign investors to go on, the economists came up with their estimates by extrapolating from two international surveys of realtors and buyers.
One is an annual report on the level of foreign home-buyer investment by the National Association of Realtors, based on surveys of real estate agents in the United States. It estimates that Chinese investors bought $28.6-billion (U.S.) of real estate in the U.S. housing market between March, 2014, and March, 2015, a seven-fold increase from the $4.1-billion they spent in 2009.
The second is a multiple-choice survey by the Financial Times of 77 wealthy Chinese investors who had bought real estate outside of China. Of those, 33.5 per cent said they bought homes in United States, while 11.7 per cent invested in Vancouver and 8.3 per cent in Toronto.
Combining the two surveys, the economists estimate that Chinese investors spent roughly $9-billion (Canadian) on home sales in the Greater Toronto Area last year, or 14 per cent of all total sales volume in the region.
In the Greater Vancouver Area, they estimate Chinese investors spent $12.7-billion – or 33 per cent of total sales. That figure, they say, lines up with research from B.C. urban planner Andy Yan, who found that 66 per cent of all sales of 172 detached homes in three west-side Vancouver neighbourhoods within a six-month period were to buyers with non-Anglicized Chinese names.
The economists admit their survey is somewhat unscientific, but say such attempts highlight the importance of collecting better data on the influence of foreign investment, and even immigration, on housing market affordability.
"Lacking adequate Canadian data to address this issue, we revert to data produced in other countries (primarily the United States) and derive inferences or hypotheses for Canada," Routledge explains. "The National Association of Realtors (NAR) in the U.S. produces an annual profile of international home buying activity. The NAR defines an international buyer as either (1) a non-resident foreigner, or (2) a resident foreigner – i.e., recent immigrants (in the country for less than two years) or temporary visa holders (residing in the country for at least six months)." Here's more from the note:
As illustrated in Figure 1, the NAR estimates that buyers from China invested US$28.6 billion in U.S.-domiciled residential real estate properties over the 12 months ending March 31, 2015, up from just US$4.1 billion in 2009.
We infer from this data, therefore, that the purchase volume for buyers from China in Toronto and Vancouver in 2015 must be some proportion of the U.S. figure of US$28.6 billion. The question is: what proportion?
Figure 2, we depict the results of a multiple choice survey the Financial Times solicited from 77 high net worth and affluent individuals from China (admittedly not a statistically significant sample size). Of those who had purchased residential real estate outside China, 33.5% had done so in the United States, 11.7% in Vancouver, and 8.3% in Toronto. From this survey data, one could hypothesize that for every four high net worth investors from China who purchase a U.S. residence, one purchases a residence in Toronto; and for every three high net worth investors from China who purchase a U.S. residence, one purchases a residence in Vancouver. One can then apply these ratios to the NAR’s estimate of US$28.6 billion in U.S. residential real estate investment made by buyers from China. From this, we hypothesize that, in 2015, homebuyers from China invested ~US$9.9 billion / Cdn$12.7 billion in Vancouver residential real estate (on a total 2015 residential real estate purchase volume in greater Vancouver of Cdn$38.5 billion, according to the Real Estate Board of Greater Vancouver); this amounts to 33% of total purchase volume.
Routledge and co.'s bar napkin figure is alarming to say the least and underscores the need for Canadian officials to monitor the situation more closely before foreign investors price everyone completely out of the market. "Currently it is not possible to fully understand the role of foreign homebuyers in Canada’s housing market since a comprehensive and reliable data set on the number of homes sold to foreign homebuyers does not exist," the country's 2016 budget says. Canada will devote CAD500,000 to "solving" the data collection problem:
Budget 2016 proposes to address this data gap by allocating $500,000 to Statistics Canada in 2016–17 to develop methods for gathering data on purchases of Canadian housing by foreign homebuyers. This initiative could involve collaboration with the provinces, such as British Columbia, which recently announced its intention to have homebuyers disclose whether they are citizens or permanent residents of Canada or another country.
Right. CAD500,000. That should do it. "Investing only 25.7 percent of the cost of an average price of a detached home in Vancouver is, at the very least, a touch on the low side," Routledge remarked, dryly.
It sure is. Especially considering that the need to closely monitor developments in Vancouver and other "three alarm fire" markets is only going to grow in the months and years ahead as China's hard landing continues to necessitate an ever weaker RMB to juice flagging exports. Meanwhile, the effort to stamp out overcapacity in China's industrial sector will invariably put enormous pressure on the country's banking system which is laboring under a mountainous pile of NPLs, the true size of which no one fully understands. Once the bad loan burden finally becomes too much to shoulder (which it will once the half trillion in receivables on Chinese companies' balance sheets create an intractable working capital problem), the PBoC will be forced to recap the banks at an enormous cost that, if Kyle Bass is correct, will lead to a 40% plunge in the yuan. All of that means more capital flight and more Chinese buyers for prime Canadian real estate.
With Canadians now sitting on the highest debt-to-income ratio of any G7 country and with 50% of Canadians admitting they are within $200/month of being unable to pay their bills, it wouldn't take much in the way of higher housing prices to put a severe strain on household balance sheets. And it's not exactly like Stephen Poloz can cut rates much further unless he wants cucumbers to cost CAD10 each.
But don't despair Canadian home buyers. There are bargains aplenty in Alberta...