I had a memorable exchange once with a professor whose mind I greatly admired. One day after class, we began talking about economic predictions and the experts who stake claim to “knowing” how the future will unfold.
In the middle of our chit-chat he paused, then remarked: “Stevie, just remember that an economist is an expert who will know tomorrow why the things he predicted yesterday did not happen!”
I chuckled, but his words planted a seed. Since then, I’ve developed what you may describe as a healthy-scepticism towards those in the business of predicting. But, there are a few exceptions, Michael Campbell is one, more on him shortly.
Real estate price appreciation has been a hot topic on both the national and local level as of late. Houses in Toronto and Vancouver have seen double digit gains year over year and this trend does not seem to be letting up.
Governments are concerned. Buyers are concerned. Market observers are concerned. Inevitably, this fog of fear has dimmed the lense of rational analysis. The result, foreign buyers of Canadian real estate have emerged as public enemy # 1.
Michael Campbell, an insightful economist weighs in on this and other market dynamics at play in both cities. While based largely in Vancouver, I’ve found his ideas and observations readily applicable to the Toronto market place as well. Have a read:
“At last count I’ve seen or heard 2,463 warning since 2012 about the coming collapse in Vancouver and Toronto’s housing markets. We’re still waiting.
Forgive the glibness but there was so much wrong with that analysis that I don’t know where to begin. Hint: The price vulnerability at the $2 – $3 million plus price range has little to do with affordability as so much analysis suggests.
At the risk of oversimplifying, allow me to divide the residential market into two segments – single detached [Vancouver & Toronto] homes and entry to mid level condos and houses in the distant suburbs.
Prices of entry to mid level condos and lower priced houses in the suburbs are principally impacted by low mortgage rates and in-migration. So the question about the price risk is really about the likelihood of falling demand due to rising interest rates and a significant drop-off in the number of people moving to Greater Vancouver (and to a lesser extent [Greater] Toronto).
There’s no evidence to suggest that those two critical factors are changing. The Bank of Canada has stated rates are going to remain stable into 2017 and the strong BC economy continues to attract in-migration from Alberta and other parts of Canada.
There’s also no sign that new building supply will be sufficient to meet the demand created by newcomers moving to Greater Vancouver – (and millennials moving out of their parents’ basements).
So What About The Danger of a Big Price Decline at the Upper End?
It’s only in the last year that people are starting to understand the impact of foreign buying on the price of single detached houses in Vancouver and the accompanying ripple effect on the immediate suburbs.
We still don’t have a lot of data but some firms and financial firms have provided some insight but I suspect most don’t understand the nature of the trend and why the probability is strong that it will keep going.
The foreign buying from China, Iran and other troubled areas is motivated by a lack of confidence in their home government. So they move their capital in search of safety.
The list of preferred destinations and investment vehicles is relatively small compared to the amount of capital moving – ($1.2 trillion left China in 2015). US treasury bonds are the first choice followed by other assets like stocks, real estate and art.
And when it comes to real estate – New York and London top the list of preferred markets but Vancouver and Toronto, along with Sydney, Melbourne and Singapore now occupy a close second.
Billions of dollars are pouring into these markets, which has resulted in sharp increases in prices – along with complaints about foreign ownership.
The question about the stability of the $2 – $3 million plus residential markets in Vancouver and Toronto is really about the prospect for continued inflows of foreign capital, especially from China.
If that capital stops coming due to escalating efforts by the Chinese government to stop money from leaving the country or the federal, provincial or municipal governments enacting laws that prevent discourage foreign buying, then activity at the upper end will decline significantly.
But without that type of push by government – there is no reason to suspect that the inflows will stop because the problems in other parts of the world aren’t going to go away.
But would a price collapse necessarily follow if the inflow of capital slowed and purchases declined due to government intervention. I think the probability is no. Sharp price declines are usually precipitated by forced liquidation as a result of credit problems.
I don’t think that’s the nature of the market in Vancouver or Toronto. While we don’t have the statistics, anecdotal evidence suggests that a big percentage of the upper end purchases are made with cash not credit.
For the high-end foreign buyers the whole point is to get as much money out of the home country (China, Iran etc) as possible and out of the reach of their government.
The market may cool but unless some event or government action forces liquidation then prices will remain relatively stable due to the large cash component in the purchases.
One more factor – the drop in the loonie versus the Chinese renminbi continues to put our real estate on sale, which further adds to the probability that the current trend of capital moving into the upper end of the real estate market in Vancouver and Toronto will continue.”