In Vancouver, 33% of sales are to Chinese investors (National Bank)
Buying a home in the US or Canada has been an effective way for foreign residents to launder some money and get their wealth out of harm’s way. In the trophy markets on the US West Coast and in the Canadian cities of Vancouver and Toronto, rumors of a massive influx of Chinese money have swirled with growing intensity for years.
The Chinese economic elite are worried about a devaluation of the yuan. They’re worried about getting rolled up by their own government. They’re worried about markets collapsing. They’re worried about pollution. They’re worried about a million things. They have one foot out the door. If push comes to shove, they’re ready to make the move.
So capital flight from China has turned into a tsunami. And this money has to go somewhere.
The meme is this: These desperate buyers prefer a higher price because it’s more efficient for them to get their money out. This pumps up prices. Which impresses other Chinese investors, and they flock in ever greater numbers to those markets. American-Chinese businesses have sprung up to cater to them with special packages that take care of everything, including travel arrangements.
The real estate industry, benefiting from higher prices and higher unit sales, has largely downplayed this trend. Realtors and sellers love moneyed buyers and are not inclined to ask too many questions.
Estimates of the magnitude have ranged all over the place. Thick opacity covers much of the industry in this respect, and there is no city-by-city data.
In San Francisco, one of the hot spots for Chinese buyers, it has been estimated that the percentage is around 3% to 5%, so not huge. But prices are set at the margins. These prices then cascade through the market via the multiplier effect of comparable sales in the area, which is used to determine future prices.
The National Association of Realtors comes up with annual estimates of foreign buyers. As we reported last year, it found that in the 12-month period through March 2015, buyers from China had plowed $28.6 billion into US residential real estate, surpassing Canadians as top foreign homebuyers for the first time.
This $28.6 billion is interesting. It’s a survey-based guess from an organization with an agenda. And it is a national average. But there are only a small number of markets where Chinese buyers are active in large numbers, so a national average, even if accurate, obscures local trends. And buyers can hide behind shell companies, so the beneficial owners might never be known.
In August, we reported on RealtyTrac’s much juicier, and darker, version of what is going on with Chinese buyers in West Coast markets [Foreign “Smart Money” Frets about Turmoil at Home, Flees, Plows into US Housing Bubble 2, Thinks it’s a “Safe Haven”].
There are other reports and estimates, but reliable city-by-city data is nowhere to be found. For whatever reason.
Now another estimate, this time for Vancouver, the hottest housing market in Canada, which itself is currently one of the biggest housing bubbles in the world. Peter Routledge, a financial analyst at the National Bank of Canada, authored the eye-popping note, which in turn was reported by Bloomberg.
Foreign buyers are a hot topic in Vancouver, where home prices have soared to levels that are nearly as ludicrous as those in San Francisco. According to the Real Estate Board of Greater Vancouver, the “benchmark price” for all types of homes in February soared 22.2% year-over-year as home sales jumped 36%.
Who is buying all these homes, at these prices? No one knows.
But according to Routledge’s study, in 2015, Chinese investors plowed C$12.7 billion into Vancouver homes, out of C$38.5 billion in total sales. That’s 33%!
In Toronto, Chinese investors accounted for C$9 billion of the C$63 billion in total sales, or 14%!
And in San Francisco? He didn’t check. But we wouldn’t be surprised if the number came out fairly high as well. These numbers are far higher than industry soothsayers would like us to believe.
He cautioned, however, that these “back of the envelope calculations” were, as Bloomberg rephrased his note, a hypothetical approach to gauge capital flows. To get the data, he’d extrapolated from a Financial Times survey of 77 high-end buyers and data from the US National Association of Realtors. This way of approximating what’s going on in the market, he said, pointed to the need for reliable data.
The new Canadian government, bowing to pressures to do something about the distortions caused by the influx of Chinese money, announced on Tuesday in its 2016 Budget that it would earmark C$500,000 to figure out how to track foreign buyers:
Households rely on housing market data to make informed decisions in buying and selling their homes, while governments depend on data to design effective housing policies. 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.
But Philip Cross, a former chief economic analyst at Statistics Canada, the agency charged to do this, told Bloomberg that the C$500,000 could only pay for five researchers for one year, and would “not be enough to even plan a potential survey or data collection method.”
So perhaps, it’s just another gesture designed from get-go to not lift the veil of obfuscation.
Canada Mortgage & Housing Corp., the government housing agency, is also trying to figure out how many foreign buyers ply the Canadian housing market.
In the US, the Treasury Department is launching a pilot program to identify and track foreign buyers that hide behind shell corporations. But it is limited to only high-end properties, and only to two markets, Manhattan and Miami-Dade, and only to buyers hiding behind shell corporations. So no real answers either.
Like San Francisco and other trophy cities, Vancouver is struggling with an affordability crisis for locals. To get a grip on the problem, the city commissioned a report last year, and the results were just presented to the City Council. Read… The Vacant Condos in Vancouver