By Ben Myers, Senior Vice President, Market Research and Analytics, Fortress Real Developments
As seen in COLLECTIONS by Harvey Kalles Real Estate Ltd., Brokerage – Fall 2016
You can’t read an article about residential real estate in Canada these days that doesn’t mention foreign buyers. It is the topic du jour for sure. In June, the average price of a resale single-detached house in Metro Vancouver increased 40% annually per data from the Canadian Real Estate Association. This is clearly abnormal, and all of the blame for the rapidly rising house prices have been assigned to offshore investors. In Toronto, the average single-detached resale house price was up 20% year-over-year, could foreign investors drive Hogtown’s prices up to Vancouver-level craziness?
I give a couple market presentations to Realtors every year and I make it a point to ask them about their personal observations of the market, and what buyer groups are driving demand in their neighbourhoods. I was generally surprised at how many real estate agents mentioned the number of international buyers they had bidding on their low-rise listings this year, much more than I was used to hearing about. Because of my experience in the new condominium market, I knew foreign buyers were prevalent in new high-rise buildings, but low-rise is a different story. However, keep in mind that foreign investors help get towers built in Toronto by improving developer pre-sales in new condominium buildings; they can actually help add supply to the overall marketplace. If offshore investors are buying up resale housing, that could be a problem because they would be subtracting from supply and driving up prices.
I recently polled a group of Canadian Realtors on the breakdown of their client base and was surprised with the results. The respondents indicated that 12% of their clients are foreign buyers or recent immigrants, 13% are domestic move-down buyers, 23% are local-move across buyers, just under 25% are Canadian first-time buyers, and 26% are domestic investors. The share of buyers that were either foreign or newly landed immigrants was not surprising, the level of domestic investors surely was.
In reviewing literature for my next bi-annual Market Manuscript housing research report, I came across a study from Australia, a country which has been struggling with the issue of high foreign buyer interest for several years. A team from the University of Sydney found that domestic investment has had a far more significant impact on house prices than foreign investment. In fact, the UK, Australia and New Zealand have all now implemented restrictions on foreign property investment in their countries in recent years, and all are still experiencing price inflation. In fact, Auckland, London, Bristol, Melbourne and Sydney are all in the top 30 cities for annual price growth in Q1-2016 according to a Knight Frank housing report on 150 global cities.
It is much easier and convenient to have foreign buyers as the scapegoat, people from other countries distorting and perverting our housing market for their personal gain, they’re an easy target. In reality, a US study showed that just 25% of non-resident foreign buyers in the States were motivated by “pure investment” purposes, the majority were looking for a vacation home or a permanent residence for their future immigration.
CIBC Chief Economist Benjamin Tal spoke at length with a group of Toronto-based Realtors that deal with clientele in China, based on these conversations he also observed that pure foreign investment in Canadian residential real estate is probably much smaller than perceived by many. He went on to say the buyers are in a “satellite family situation” where money comes from outside the country, but family members reside in Canada. Flipping is not their main motivation notes Tal. We shouldn’t be surprised that much of the motivation behind foreign investment in Canadian real estate is to establish roots for future immigration – we take for granted how great Canada is, and how safe and livable our cities are. A much more plausible theory for appreciating house prices are domestic investors, a more difficult group to identify, single-out, and punish.
We can go one more layer deeper here as well. The reason we have domestic investors is they fundamentally believe that we’ll continue to see positive population growth. Secondly, a lack of supply has resulted in higher prices, which has enticed more domestic investors, and more foreign investors. An independent think tank in New Zealand, puts the blame for the housing affordability crisis in Auckland on the lack of new housing supply, not offshore buyers. When asked about a proposed foreign buyer tax, a top analyst in New Zealand responded with, “taxes don’t build houses.”
The government of Ontario is looking to further restrict low-rise housing supply in an attempt to protect farmland and decrease infrastructure costs. This artificial constraint on supply has driven up house prices according to numerous recent reports. Several economists have noted that interest rates will stay low for several years to come due to slow global growth. Low borrowing costs have contributed to high house prices as well. Both of these factors are not expected to change drastically in the coming years, so don’t expect Toronto house prices to come down any time soon.
Australian officials have directed foreign capital into the new housing market to help boost supply and construction employment. The Reserve Bank of Australia concluded that the presence of foreign buyers, especially Chinese buyers, have contributed to greater growth in new home supply. In the GTA, top high-rise condo developer Tridel indicated at the most recent Toronto Real Estate Forum that 5% of their buyers in 2015 were from outside of Canada. The panel at the Forum was in agreement that foreign buyers are long-term investors that rent their units out and contribute to Toronto’s much needed stock of affordable rental housing.
Instead of looking at foreign buyers as an enemy of stability in our market, we should look at them as friends of new affordable housing supply, and high employment among our tradespeople, mortgage industry, and Realtor network. A move to unreasonably tax or ban foreign ownership should be reviewed with much scrutiny, as it could have major unintentional consequences like interrupting our new housing market, and damaging our international reputation. A ban on foreign ownership could infringe on our property rights, we should be able to sell our property to whomever we please.
We can only prevent unhealthy price increases in our market by focusing on the right problem. The low cost of borrowing, strong immigration, and solid employment have all increased supply, while green initiatives, lack of infrastructure and transit funding, and high development charges have all contributed to lower supply. High demand and low supply are the main culprits behind more investors and higher prices, not foreign buyers.
Ben has 15 years of real estate research experience in Canada and the United States, and analyzes residential housing markets on behalf of Fortress Real Developments, a diversified real estate development firm. To read more about the Toronto and Canadian housing markets, follow the news section at www.fortressrdi.com, or you can find Ben on twitter @benmyers29 and @Fortressrdi