This year has been a wild ride for Canadian home buyers and sellers. Surging prices, overvalued properties and a short supply is being blamed on foreign investors, which have enjoyed great returns since the country began to bounce back from the recession.
However, there is concern from the federal government that they are pricing out locals. This is most pressing in the Vancouver market, the second hottest in the country, but new taxes introduced by the B.C. Liberal party meant to even the playing field for locals, at the same time, devaluing the real estate investments of Vancouverites. The Vancouver market is already seeing signs of cooling because of the 20 per cent overvaluation on properties.
Home sales across Canada are down and has economists pointing to an eminent cooling of the national housing market in 2017 after a red hot couple of years. The pressure is now on the federal government to find a resolution and have plans to delve deep into housing market data to evaluate how much the housing market relies on foreign investor to stoke demand.
When it comes down to it, the real reason Canadians are not selling is because they fear they won’t be able to afford a more expensive home, while at the same time inevitably losing value on their existing home in 2017.
The ‘Big Chill’
Existing home sales were down 2.8 per cent between April and May, according to the Ottawa-based Canadian Real Estate Association. The average price of a home has risen steadily since 2009 and its biggest jump was in May, which saw values rise by 30 per cent from the year before.
Robert Hogue, senior economist with the Royal Bank of Canada, predicted this exponential growth was simply not sustainable.
“The long-awaited cooling of Canada’s housing market may be finally at hand,” Hogue told the Financial Post. “Only time will tell. When you look at market conditions in Canada’s two hot markets, it is still very, very tight.”
2016 saw a 6.1 per cent increase in sales, with a record 536,400 properties going on and off the market. However, 2017 sales will almost come to abrupt halt with a likely increase of only 0.2 per cent, according to the CREA.
The impending downfall is putting pressure on the still fairly new Liberal federal government to take action. Finance Minister Bill Morneau has been tasked with investigating how much influence foreign investors really hold in the Canadian real estate, especially in Vancouver and Toronto – the two hottest markets.
“At some point, the stretch in affordability is going to start weighing on the demand side, but it’s clear affordability is now affecting the supply side first and causing people to stay put,” Hogue said.
Foreign investors, especially those from China, see Canada as good real estate investment compared to the United States when it comes to conditions for raising a family, in comparison to the high crime rate in U.S. cities.
Detached home prices in China are an unrealistic investment because of the National People’s Congress’s ‘one property’ rule, which limits in-country financial opportunities. In Shenzuan, 98 per cent of residents live in apartments because the average price of a detached home is an unfathomable $50 million to buy. This makes the average Canadian home price of just over $503,000 extremely tempting.
There are three types of foreign investors: families, individual overseas investor and group investors. They are looking for high returns and the cities are where the majority of demand resides.
People are increasingly moving to cities for a variety of reasons, whether it be for job opportunities or for the overall quality of life they provide. In 2014, 54 per cent of the world’s population lived in cities, by 2050 there will approximately be 66 per cent living as urban dwellers.
However, all three levels of government are not taking necessary measures to ensure the healthy growth of the country’s metropolises of Vancouver and Toronto. The current vacancy rate in Toronto is under 3 per cent, which makes you wonder why developers are not clamoring for the opportunity appropriately reshape the housing landscape.
The government has done little to provide incentive to developers to build because of high land taxes among other revenue streams being heavily relied upon until the price of oil bounces back. Therefore, an inquiry by Morneau and Prime Minister Justin Trudeau’s cabinet into foreign investors will find the issue of rising housing prices is not a consequence of overseas buyers, but a symptom of a market that is ill-prepared for sustainable growth in urban centres because it is being hampered by a tax code in need of serious reform.
Boom and Bust in Vancouver
The current 20 per cent overvaluation on properties in Vancouver has caused a downside risk in the housing market. This is because in terms of long-term economic health, it ultimately leaves the market exposed.
The futility of the Canadian housing market is no more apparent than in the lack of affordability that already exists due a number of factors such as stagnant wages. There is currently an indebtedness of 165.5 percent of disposable income tied to housing, which is among the highest of all the major developed countries.
The idea of a $1-million home was unheard of just a decade ago, but now it’s far too common. For example, in 2005, just 11 percent of detached homes were valued at $1 million in Vancouver city limits; in July 2015, the number increased to 91 percent, according to BC Assessment who examined 66,825 properties.
Phil Soper, chief executive officer of real estate firm Royal LePage, told the Globe & Mail that this skyrocketing increase in Vancouver property value is simply not sustainable.
“You have severe affordability issues in Vancouver. It has become a serious public-policy issue, so it’s not healthy,” Soper says. “We’ve got a market in Vancouver that is appreciating too quickly. Prices are moving upward at an irrational rate.”
Royal LePage surveyed 53 markets across Canada and found that the average price of a home increased by a staggering 6.5 percent over the last year, with the average price of a home topping out at $500,688 in the fourth quarter.
Increases are not expected to last forever. According to a June housing report from TD Bank, one of the largest banks in the country, sees the real estate housing party coming to an end.
It states “There is little debate Canada’s hottest markets like Vancouver are ripe for a correction; the difficulty is predicting its timing.”
It elaborates by assuring the housing bubble is not predicted to burst in the near future, but instead prices will stabilize later this year to compensate as more properties enter the market; “Over the second half of 2016, some moderation in resale activity and price growth should become evident as bond yields pull off their lows and stretched affordability leads to a cooling in domestic and foreign housing demand.”
If you are planning to cash in on Vancouver’s real estate market, keep in mind that the report predicts housing prices will drop between two to four percent in 2017.
The new federal Liberal government’s implementation of a new real estate requirements last February, states all prospective homeowners must pay a minimum of 10 percent down payment on a home of over $500,000 will likely not have an impact on the market, as they had expected. Soper says it’s only a “slight tap on the brake” in terms of Canada’s two most expensive cities.
The B.C. Liberal Party’s passing of a new tax on foreign investors has them looking elsewhere to Toronto and Montreal. The new tax announced in late July requires foreign investors to pay an additional 15 per cent of the home’s value in property transfer tax. The new tax is meant to even the playing field for local buyers looking to enter the Vancouver housing market, where 10 percent of all property sales in the city are from foreign buyers.
However, Fitch Ratings says the market was cooling before the tax was announced, which leaves local home prices vulnerable to changes in the Canadian economy.
“We feel that the foreign investors have been propping up real estate in Vancouver, creating more demand, which is raising prices,” Susan Hosterman told the Globe & Mail, director of U.S. structured finance at Fitch Ratings. “With them potentially out of the picture, Vancouver is more susceptible to Canadian supply and demand behavior, which is mainly driven by employment.”
The national real estate landscape has been strong since the financial crisis, but Vancouver monthly home sales have dropped 21.5 percent since peaking in February. This is despite a respectable local unemployment rate of 4.4 percent reported in July, therefore the lack of sales is directly tied to soaring housing prices propelled by foreign investors and lack of affordable development, as well as fragmentation in the national economy due to factors relating to the downward trend in Alberta oil production.
On the other hand, leading real estate experts like Jordan Teperman, executive vice-president of Haven Developments, see Toronto’s market continuing its rise in property value due to foreign investors from Vancouver shifting their focus to the Greater Toronto Area due to the new Liberal taxes. Teperman points to his development projects already 85 percent sold out after only four months on the market. More than 60 per cent of these buyers were from out of province, the U.S. or overseas.
Canada’s economy is remarkably stable compared to the rest of the Western world because of the prevalence of violent crimes, xenophobia and economic uncertainty in Europe and the U.S. Therefore, it’s unrealistic to cutoff foreign investors from the opportunities Canada has to offer, who are more than willing to aid in alleviating an impending housing crisis (if hasn’t already started) by pouring funds into development projects. The ‘real’ housing crisis is the product of stagnant wages that forces those from smaller population centres to cluster in cities like Vancouver and Toronto; this increased the demand and in turn, the cost of living. The overvaluation puts the country in a sticky situation if the economy does not pick up the pace and risk consequences even more dire than a high price tag, think possible spikes in urban unemployment and homelessness.
The real concern should be when the next recession (or even worse, a depression) comes, how hard will a real estate market built on a house of cards tumble?
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