“It is different this time,” “This is the place everybody wants to be,” has been the talking points when referring to the impressive rise of Vancouver and its real estate market. Unfortunately all markets that experience a rapid escalation of asset prices, as we have seen in Vancouver, eventually experience a painful contraction whereby, as macro investor Raoul Pal puts it, “The big uglies come out.” Are we starting to see what those big uglies are in the Vancouver real estate market?
Vancouver has been the victim of a number of economic events in the world that have culminated in the development of its current dangerous real estate bubble. Central bankers driving interest rates down to historic lows and keeping them there for years, the rapid rise of China’s economy along with the massive number of its newly printed Chinese millionaires, the rise of corruption in China, the exodus of this corrupt money along with Chinese government efforts to reign it in, are just a few of these events.
Life in Vancouver, where the talk of real estate riches and Vancouver suddenly becoming the place to be, has become the favourite subject among its residents, although they may not be aware that other regions in the world have experienced the same impact and will experience the same result.
Top residential real estate brokerages in the US have been promoting US homes to investors in China for years. Brokerage firms in Canada, Australia, New Zealand, and other countries have done the same. They have set up units in China and have partnered with Chinese real estate portals, such as juwai.com. However, one place where the real estate bubble is most prevelent is in China itself. According to a recent report by Bloomberg, a fifth of China's housing is empty. That's 50 Million homes!
This is what happens when rampant speculation in a market is not contained. Unfortunately when there is money to be made people disregard the splitting hangover that the all night party can bring.
So what has the impact been in Vancouver?
For too long Vancouver disregarded the longer term risks and turned a blind eye to the massive amounts of corrupt speculative money that was pouring in from China. The low interest rates fuelled the building in Vancouver in order to satisfy the insatiable thirst for Vancouver real estate. (This was pretty much the same story in Australia and New Zealand). There was a rapid rise in prices pushed up by Chinese buyers, in addition to Vancouver residents rushing into the market for fear of missing out. The result was Vancouver real estate became quickly unaffordable to many of its own residents.
Only recently has the government tried to halt the rise. In 2016, Vancouver became the first Canadian City to collect an empty homes tax, charging one per cent of the home’s assessed value if the owners are not living in it or are renting it out for less than six months. In addition, the government also imposed a 20% foreign property buyers tax.
Elsewhere, New Zealand’s parliament banned many foreigners from outright buying existing homes in the country - a move aimed at making properties more affordable. New Zealand is also facing a housing affordability crisis which has left home ownership out of reach for many.
Canada, New Zealand and others are not the only ones taking measures to reign this in. China has begun cracking down. Over the last decade, an estimated $3.8 trillion in capital has left China. Net foreign direct investment over the same period of time has amounted to $1.3 trillion, leaving the country with a net loss. To reduce capital flight, the Chinese government has developed a complex system of capital controls, such as limiting transfers of $50,000. However, that has not stopped the Chinese from being creative. The CEO of a Chinese company moved $750,000 from China to Metro Vancouver for a real estate deal with the help of nine strangers who each brought $50,000 into Canada for “tourist purposes,” according to a B.C. Supreme Court judgment.
But in spite of these controls the damage has been done and now increasing interest rates may just be fuelling the fire as the news starts to trickle in.
According to economists at the Royal Bank of Canada, owning a home in Vancouver is the most unaffordable it has ever been in any Canadian City. In fact, they found affordability to now be “at crisis levels” where it would take a record 88.4 per cent of one’s income to cover ownership costs. Statistics Canadareported that, “Credit market debt as a proportion of household disposable income increased to 169.1 per cent as growth in debt outpaced income. In other words, Canadians owed $1.69 in credit market debt for every dollar of household disposable income.”
Credit reporting agency TransUnion released data showing that Vancouver residents have the highest debts among those who are in major cities, owing an average of $38,753 in non-mortgage, consumer debt through the first quarter of 2018.
Vancouver residents, and Canadians in general, are growing increasingly anxious about their ability to handle higher interest rates, with a new survey showing a rising proportion of consumers fear they will be pushed over the brink. Rightly so, they are concerned mostly about their high-ticket items such as a mortgages and car loans.
As we began this article, the explanation for Vancouver’s real estate rise was its attraction as a city, at least according to many of its residents, its natural beauty and idyllic west coast location. Although in my opinion this is true (considering it is my home town) to a point. There is a difference between speculation and purchasing a home to live in. The first clue that we were dealing with speculators, as is the case in China, should have been the number of empty houses and condos in Vancouver (which was the reason the city eventually created the empty homes tax).
What has been the effect of these controls on speculators?
Vancouver is now ranked as the worst place in the world for luxury homebuyers seeking a return on their investment, according to a global survey of 43 “prime residential” cities. The Knight FrankPrime International Residential Index found that, while luxury property prices globally were up an average of 4.2% in the third quarter, compared with the same period in 2017, they fell 11.2% in Vancouver, where luxury home sales have tanked. No other Canadian city made the list, and Vancouver ended up ranked No. 43.
For those in Vancouver who refuse to believe bubble talk and believe that the Chinese will keep purchasing and supporting the real estate market for years to come, they may want to rethink that. Beijing has warned of its zero tolerance for dual nationality. Now some foreign citizens who held on to their Chinese identity documents fear the consequences of returning, according to South China Morning Post. In addition, it is hard to believe that the Chinese will be rushing to give up their Chinese citizenship at a time in history when China promises to be the next great economic powerhouse.
The problem with living through a bubble is often the most vulnerable get hurt, as we saw very clearly during the housing bubble and financial crisis of 2007 in the US. The same is most likely to be true for the Vancouver residents that extended themselves purchasing overpriced real estate that they could ill afford. The international speculators will move on as they continue their worldwide search for return. As in other locations, it is likely that they will not hang around long enough to see the real damage that remains once all the air has been taken out of the bubble.