As you are probably aware by now, we are currently in a Canada-wide housing boom, with multiple offers resulting in homes selling well over the asking price. While I empathize with the challenges and frustration buyers face, I find it equally frustrating that the mainstream media continues to pump out misleading information as to the cause of this crisis.
As an example, in Vancouver, I see headlines daily targeting _foreign buyers, greedy investors, and speculators hoarding empty homes._ Asian students declaring 30K incomes and buying multi-million dollar mansions, or money laundering through BC casinos. These are the stories that sell newspapers – but unfortunately do not get to the cause of the problem.
I want to discuss these various factors and their impact on the housing market.
Vancouver is part of a global capitalist economy. We invited the world here with events like Expo 86 and the 2010 Olympics. Capital will flow wherever there is an opportunity, and Vancouver is now an international city recognized on the world stage. However, I can tell you that in my time in this industry, only once have I had client initial under “foreign buyer” on the contract of purchase and sale, meaning they would have to pay the 10% foreign buyers tax (which, incidentally, has had zero impact on real estate prices in the lower mainland, and likely cost more to implement than the tax will generate) Most foreign buyers will simply wait until they get their permanent resident status before buying a home here. One other point to consider – during the global pandemic, immigration had been shut down. If foreign buyers were a significant contributor to price inflation, wouldn’t we have seen a major housing correction?
There is no doubt that money laundering is a serious issue and needs to be addressed. In their review of the sector, an Expert Panel estimated that more than $7 billion in dirty money was laundered in B.C. in 2018, and between $800 million and $5.3 billion was laundered through the real estate market, raising housing prices by an estimated 5%. To put this in perspective, year-to-date, BC residential sales dollar volume stood at $90.4 billion**_. Keep in mind the estimates by the Panel are not conclusive, and in my opinion, are likely overblown. The bottom line – while I support anti-money laundering legislation, the reality is that this is not the main driver of home prices in BC.
Investment And Speculation:
I deal with investor clients all the time, and they are buying apartments and putting in good long-term tenants. Investors are providing accommodation to those that can’t afford to buy, in exchange for a decent return on investment. With a rental vacancy rate hovering around 1%, we desperately need more investment, not less. Unfortunately, the NDP has capped rent increases so that investors are unable to raise rents to cover costs, leading many investors to cash out of the market completely. The unintended consequence is that this tightens supply even further.
Speculators, on the other hand, are typically looking for a faster return on capital and betting (in my view, rightly so) that prices will likely increase. As an example, I purchased a pre-construction condo recently, which I plan on re-assigning (flipping) in a year or two. Does this mean I am contributing to price inflation in the condo market? Absolutely not. Keep in mind, the developer typically needs to be 70% pre-sold in order to secure bank financing on a project. Speculators are, in fact, financing new products that will be delivered to the end-user, regardless of whether it’s as a principal residence or investment. More speculation should equate to more homes being built – which would soften prices, not accelerate them. What we need is a pro-business government that is supportive of investors and speculators, as they are part of the solution, not the problem. Again, the government is pitching more “speculation taxes” to hammer investors and speculation – which is counter-productive to bringing more supply into the market.
People often point to all the blacked-out windows in the downtown skyline and claim that wealthy investors are sitting on these condos vacant. First of all, all of my investor clients are putting tenants into their units. No sane investor would buy a condo just to leave it empty, foregoing tens of thousands of dollars in rental income. What I do see are pied-a-terre’s, for instance as a secondary residence. Coal Harbour has many of these, where the wealthy owner might spend six months of the year in Vancouver, and the rest in Hawaii or Southern California. I suppose you could legislate that these be rented when unoccupied – however, what is a luxury coal harbor condo going to rent for? $1200 a month? Get real. Mandating these homes to be rented would not create affordable housing, and in addition, most strata corporations have enacted legislation prohibiting short-term rental.
The Development industry:
Despite popular sentiment to the contrary, the development industry is not responsible for rising prices. Developers have to make a business case for building product, and right now government at all levels are working against them. Exorbitant Development Cost Levies and Community Amenity Contributions combined with a lengthy permitting process are all roadblocks to new construction. In response, the industry has no choice but to build what makes economic sense. In downtown Vancouver, that means ultra-luxury condominiums starting at $1800 per square foot all the way up to $3000 per square foot. Take a look at some of the new projects underway – there is nothing that I would consider remotely affordable. Even central Surrey is pushing $1000 per square foot for new concrete construction. The government talks a lot about housing affordability – but in reality, they have their hand in your back pocket at every opportunity.
The Bottom Line:
Real Estate operates under the basic law of supply and demand. We desperately need more homes to shelter our growing population. To increase affordability, we would need to see a pro-business government that cuts taxes and red tape, streamline the approval process, and allows much higher density in our urban centers. Even if this were to happen tomorrow, it would take years, if not decades, to get enough supply into the pipeline to materially impact prices. Right now Canada is already short 1.8 million homes, with 400,000 new immigrants coming into the country every year under the Liberal government. That does not include students and foreign workers, which are estimated to be around another 400K per year. Most of these immigrants are not looking to buy in Regina Saskatchewan or Calgary Alberta – they are primarily looking to Vancouver and Toronto.
To summarize, I believe that Greater Vancouver is on the verge of a massive real estate boom over the coming decade – one that could see past price appreciation look tame in comparison.