A new “boogeyman” in Canadian housing markets: The sneaky, little foreign buyer

A new “boogeyman” in Canadian housing markets: The sneaky, little foreign buyer

It's official. Foreign ownership of Canadian real estate is becoming an issue. Activists in Vancouver have demonstrated at least once in the past year demanding more data be released concerning levels of ownership by foreigners of Canadian real estate.

Newly elected Prime Minister Justin Trudeau paid heed to the protesters in his first budget, allocating $500,000 to Stats Canada to collect better data on foreign ownership.

Write it down: The new "boogeyman" in Canadian housing markets is the sneaky, little foreign buyer. Hiding money from other jurisdictions, they're putting home ownership out of the range of young Canadians, don't you know. An entire generation of young Canadian citizens have been locked out of home ownership by foreign money. Some can't even buy on the specific block of that trendy neigbourhood they want.

house on the corner
House on the corner by Benson Chan

It's a crisis. Or so say the papers.

That prices are rising is not in question. The Toronto Real Estate Board reported recently that the average price for a detached in the downtown hit a high of $1.258 million in April. This is a remarkable and "massive" increase from the same period last year. Prices have risen 19 per cent since last April. The report went on to calculate that the price increases are about $16,820 per month now, or—to think about it on a daily basis—the price of a home in downtown Toronto is currently rising by $550 per day.

Here's the thing, though. It's not the foreign money driving home prices up and pushing younger nationals out of the Canadian real estate market. That's not quite the entire story.

Check out a report from BMO Nesbitt Burns that suggests the issue of foreign nationals buying up vast amounts of property here is a "boogeyman"—an unreal haunting, an imaginary thing spooking the chatter around real estate.

The report suggests that the real reason for the exuberant and lofty prices in Toronto and Vancouver are not foreign buyers, but those old and most base of economic forces: supply constraints and population growth.

Robert Kavcic, senior economist, Nesbitt, writing in the report warns against solely "blaming foreign buyers for the surging price gains." According to Kavcic there are deeper economic trends at work.

For one, interest rates are at historically low levels. The oddly low current rates have made it much easier for the average person to carry a larger mortgage. This is a big driver of demand for housing. "A five-year fixed mortgage is barely above the expected long-run inflation rate," writes Kavcic. That is, there is no reason for a young couple not to take out a large mortgage and buy a home. "The longer [the low rate] lasts, the hotter these markets will burn," he says.

The dearth of suburban manufacturing jobs and the rise of digital and media jobs downtown has seen mobs of young millennials repopulate the cores of Canadian cities. Kavcic notes that Toronto and Vancouver have been responsible for 75% of net job growth in Canada. Among those returning to populate the once-abandoned core areas are those aged 30 to 39—the age of the typical first-time buyer. This is creating strong demand. These are some of the reasons why some young people can't immediately move into the exact neighbourhood they want to.

cumberland
Cumberland shadows by Danielle Scott

Writing in the report Kavcic says, "It’s easy to blame the foreign-buyer boogeymen for the home price gains in Vancouver and Toronto...Sure, all anecdotes suggest they are playing a role in some neighbourhoods—we just don't know exactly how big that role is."

Kavcic also points out that playing into the rise in home prices is the low supply of housing. Downtown Vancouver is built out. In Toronto, according to the BMO report, "development restrictions contributed to 2015 seeing the lowest annual number of detached home completions in 37 years."

It should also be noted that the latest available statistics available from the CMHC on the amount of foreign ownership of Canadian real estate suggest foreign buyers own as much as 10 per cent of downtown Toronto condominiums built in the last five years. The number drops to 3.3 per cent once all the condos in the greater Toronto area taken into account. The numbers drop even more outside of the city.

So there is foreign ownership. Whether or not that's too much is a matter of some more debate.

There are a lot of good reasons to consider foreign ownership a net benefit to current markets.

For one, the foreign money is helping fill voids in the Canadian market. Foreign investors are buying smaller units downtown and renting them out. This is providing much needed rental units in these active areas. The money is facilitating the building out of areas where there is not enough liquid housing for all the young people living, working and going to school in the downtown core. Surely this is a good thing.

Foreign money provides volume, liquidity and buoyancy to real estate markets. This is good for many locals.

Outside of downtown Toronto and Vancouver the housing market in Canada is nowhere near as tight. There is a remarkable amount of existing cheap real estate not far away, like Hamilton for example.

Sometimes it's just not in the exact area some would like. That's the thing about real estate. There's only so much to go around.

Some are taking advantage of this. There are baby boomers now selling out a GTA home and moving further into southwestern Ontario for a slightly milder climate, a cheap home and instant retirement account. That is, the foreign money is funding the retirement of home-owning boomers hoping to cash out.

Many think the government would be foolish to work to destroy demand in the Canadian real estate market at a time the Alberta economy is cratering as a result of the downturn in the price of oil.

houses
Other side by Lisa De Jong

Dean Orrico, president and chief investment officer with Middlefield Capital was recently quoted in an interview as saying that the government will want to "tread carefully" when it comes to funding StatsCan and foreign home ownership data.

"I don’t think the federal government really wants to disrupt the strength in the housing market right now for fear that might be a break in the third leg to the stool," Orrico said. "I think they want to be very, very careful. And maybe this nominal amount—really, an insignificant amount—to try to tackle this issue of what’s driving the market is really quite intentional on their part."

Ben Rabidoux of market research firm North Cove Advisors pointed out the amount is quite small. He claims this was not enough money to seriously tackle the issue. "The money should be directed to CMHC, but $500,000 is a token amount that won't make a meaningful difference anyway. It's simply for appearance," Rabidoux said.

Downtown Toronto and Vancouver are more vibrant than ever, so it's understandable that foreign buyers want to put some money here. Toronto is safe and well-ordered. It's in a peaceable country near a huge body of water. It's far from the world's conflicts. Positive returns on real estate keep registering year-after-year.

What's not to love?

Sure, there are some issues. Getting rid of the use of "assignments" in Vancouver real estate market—having whatever premium gets written into the contract by a succession of agents is money that should go to the seller of the home—is good policy. But the fact that Vancouver real estate is considered solid stash for cash is a good thing. That others think your local area attractive is a positive indicator of real value. The same can be said for Toronto. For homeowners, higher prices are a good thing.

Be careful not to kill the golden goose.

Title photo by Freaktography

SJ00ML

9 Responses

  1. Leslie Dennis

    Good article. Certainly food for thought. I feel there are several factors playing on the tempo and dynamic of the current Toronto market. As I can really only speak for Central (C03-C14) there continues to be a lack of product and strong demand to buy, therefore driving prices up … No new trend there. The continued low prime and lending rates encourages buyers, locally, then add to the mix, the poor value of our CANADIAN dollar, making Canada a haven and a ‘bargain’ to foreign investors.

    1. Richard Silver Post author

      Thanks for your comments. We have built a wonderful country. Are we surprised that others would not like to share in our good fortune…

  2. Stephen Rudberg

    Great article. Explains a lot and makes sense. Tight supply of detached homes (supply and demand) combined with Foreign Buyers contributing to increased prices. Plus continuing low interest rates driving the market in Toronto and Vancouver.

  3. Andrew Peck

    You did a great job of nailing the real issue…as has always been the case, our market is driven by supply and demand. Right now demand is out pacing supply. I watch my investments in RRSP’s and Mutual funds declining over the years, interest on savings accounts in the bank earning negative interest when inflation is factored in…but real estate is performing well. Smart investors are putting their money in smart places. I am tired of media suggesting that my neighbours who immigrated from China more than 10 years ago are somehow “foreigners” and are harming our markets.

    1. Richard Silver Post author

      I totally agree as we live in a country of immigrants and foreigners except for our First Nations inhabitants. With each group immigrating there has been a backlash but the next generations forget.

  4. Russell Hutchings

    I am a Realtor and have seen the percentage of offers from offshore buyers steadily increase in the Oakville area. 5 years ago approximately 30-40% where Asian. Today it’s closer to 80%. Each offer I and other local realtors are involved in are multiple offers, with 4 out of 5 of the offers Asian. And not Asians that have been living in Canada for years. The deposits are coming from offshore and we now require proof that it has arrived in Canada, as many closings have been delayed from funds arriving late. Never before in history have we had this perfect storm. Low interest rates. Low Canadian dollar. Low inventory/ supply. High demand/ mostly foreign dollars. Billions of dollars from Asia that want out of their countries for a variety of political and socio economic reasons, by a number people that have earned a disproportionate amount of profit over the last decade.

    Prices in our neighbourhood are up close to 25% in the last 6 months.

    Is this a good thing? It’s all relative to anyone that owns and plans on moving. They get a good price on their home but in return, pay a high dollar for their new home. It is no longer possible for young and average income earners to afford locations that would give them a reasonable drive to work. They are being driving out of the GTA. I don’t believe that any real estate market increases that grossly exceed the inflation rate, can in the long run, be a positive. We are selling our country, and need to react as Australia did years ago, placing limitations on foreign ownership.

  5. Kelowna Life

    Allowing Foreign buyers to take advantage of these beautiful land has a positive outcome.
    I’m not going to think twice too if i was offered a home in Toronto and Vancouver!

  6. David

    Exactly. You know there’s a big foreign investment when you have housing/condos being built and there are signs in Chinese, and not to mention Remax YouTube banner ads in Chinese.

    And also a side note, I checked Canada’s population growth, according to statcan, since 1999 we have relied heavily on immigration to keep a stable population. Lifelong Canadian citizens are not having kids, they either dont want them, or it’s simply too expensive.
    link to statcan.gc.ca

    People have to wake up, a Canadian citizen cannot buy property in most other countries without having worked or studied there for a year, or they simply have strict rules. So how is it our government allows foreign investment to run rampant? It’s too damn easy to get into the market, you don’t even have to live here! I’m tired of the political correctness, we need stricter rules to protect the our citizens and our land instead of selling out to the highest bidder.

    1. Richard Silver Post author

      Canadians until last year have been the second largest buyers of US Real Estate. There are no barriers to Canadians buying in the US except for some higher property taxes in certain states.

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