Toronto and Vancouver have been making headlines over their rapidly escalating home ownership costs, and as the pace of Canada’s house price inflation continues, concerns and speculation on the overheated domestic housing market and its impact on the Canadian economy’s trajectory have intensified.
Over the last four years, Toronto has witnessed house price increases of 40%. Vancouver’s house prices increased by the same percentage in less than two years, outdoing Toronto’s pace of price growth. Regional housing market divergences mean that while Toronto and Vancouver housing markets exhibit explosive growth, in resource-dependent regions like Alberta, Saskatchewan, and Newfoundland, house prices have either remained flat or decreased.
In an effort to cool off Vancouver’s housing market, the government on August 2 implemented a 15% land-transfer tax on non-resident buyers in metro Vancouver. This move was designed on the assumption that a key factor behind Vancouver’s unprecedented house price growth is the influx of investment from non-resident property investors. The non-resident property investors of concern are primarily Asian investors prompted by a weak Canadian dollar and lured by the prospect of solid returns and an economic safe haven for their investments. The policy hopes to price out foreign investors, allowing for a modest correction to the regional housing market for British Columbia. The trouble is that this claim is based on little evidence, as the B.C. government has only recently started collecting data on foreign ownership.
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B.C. Finance Minister Mike de Jong recently released figures for foreign money spent purchasing Metro Vancouver and B.C. real estate. The reports state that over the five-week period spanning June 10 to July 14, foreign nationals accounted for 9.7% of residential real estate transactions in Metro Vancouver and 6.6% of sales across the province. Looking at Canada overall on the geographic revenue exposure front, FactSet GeoRev shows that key names in Canadian real estate like Colliers International derived over 18% of their annual revenue from Asian markets (half of this exposure came from China alone).
Despite this, there is still uncertainty as to what these numbers mean in the context of assessing the importance of non-resident property investors to the narrative of Vancouver’s escalating house prices.
Limited data is available historically on foreign property ownership in Canada, but the same isn’t the case for the United States. There, similar concerns regarding the impact of property investment from non-resident investors are turning the spotlight on a few urban centers, among them San Francisco.
In the US, San Francisco experienced house price growth comparable to Canada’s hottest urban housing markets. Over the last four years, the city saw a 60% price increase as per the S&P Case-Shiller Home Price Index. According to the California Association of Realtors’ 2014 International Home Buyers Survey, despite an appreciation of the US dollar in 2014, the dollar level of home sales to non-residents was roughly 7% of the total US Existing Homes Sales market of $1.2 trillion. The momentum from previous years continued with 36% of international buyers in California hailing from China in 2014.
Similar to Canada, research conducted by the National Association of Realtors on the profile of international home-buying activity in the United States over the last year shows that foreign buyers were found to typically purchase more expensive properties and have accounted for an increasing dollar volume of purchased residential property in the US over the last two years.
It is certainly possible that sales to non-resident property investors have had a part to play in escalating home prices in Vancouver and Toronto. The 18% year-over-year drop in Vancouver home sales since news broke of the 15% tax goes hand-in-hand with this theory, suggesting that the newly levied land-transfer tax in B.C. is indeed working as intended.
While it is important to analyze the weight of this factor as just one of many regarding Canadian home prices, any policy that could have an effect on demand for real estate from foreign investors will also affect Canada’s GDP. As Canada inches closer every quarter to becoming a “real estate nation,” items like real estate sales commissions are contributing significantly to overall gains in nominal GDP for Canada. While some parties may welcome a cooling-down of regional housing markets, the Canadian economy is unlikely to be a benefactor of any decrease in demand for real estate.