Whether or not you believe foreign buyers leave us at risk of becoming tenants in our own country, efforts to curtail their activity are clearly having a material impact on Canada’s big urban markets. Any careful real estate investor needs to be conscious of the real and potential ripple effects.
Back in February of last year, I dove into the increasingly complex issue of speculative buying by investors in overheated markets like Toronto and Vancouver.
Speculative buying is by no means exclusive to foreign interests. Domestic investors do this as well, but as I explored in that column, it’s the activities of individuals and corporations from abroad which have raised a lot of concern.
At the time, the Union of B.C. Municipalities had just tabled 32 recommendations designed to fix the home ownership and rental crisis across Metro Vancouver and beyond. This mirrored similar steps in Ontario to cool Toronto’s market. For the lower mainland of B.C., the big concern in recent years has been the activities of Asian buyers in particular.
Just over a year later, a report by CBRE Ltd. has documented a profound shift in activity in Vancouver as a result of new regulatory measures.
B.C. has spooked Asian investors
The report found Asian investments in Vancouver fell to near $350 million in 2018, compared to more than $1 billion in each of the previous two years.
Now, this report comes with the caveat it only tallies up foreign buyer transactions which have been disclosed and/or ferreted out. The authors emphasize many of these foreign buyers take pains to stay under the radar.
Toronto, meanwhile, saw a modest uptick in Asian investment to $526 million last year. The big deal was the purchase of an office building for $256 million by China’s Tigra Vista Inc.
As reported by Bloomberg earlier this month, “Chinese investors are retreating globally following government restrictions on capital outflows in 2016. In Vancouver, Asian investment dropped off even more last year due in part to a series of new taxes instituted by the government, including a speculation and wealth tax on homes.”
CBRE expects that additional measures being considered by the B.C. government have also scared off foreign investors. Namely, a sizeable fine for non-disclosure of a property’s owner(s), either $100,000 or 15 per cent of a property’s assessed value, whichever is greater.
These investors watch the fundamentals
All of which paints an interesting picture about Chinese investors. They obviously value land as an asset and want to get title to land where there is security of title. Canada is one of the most title-secure places in the world.
Second is that these investors are watching key markets and their fundamentals, and don’t want to just throw money around.
The flight from Vancouver appears to indicate a desire to shift from a highly priced market that may offer little to no short or near-term upside in value, to other active markets where there is better chance of short-term gains.
Real estate investors by nature favour stability, no matter where they come from, and B.C.’s crackdown is creating instability.
They are likely not acting alone
Lastly, there is the government of China’s concerns with currency outflows and the influence it no doubt is having on the activities of Chinese investors abroad.
China is not alone when it comes to currency restrictions. The other two big ones are India and Russia. The U.K. was part of this club, too, until 1979. A host of smaller countries also play this game, but they obviously lack the clout of China, India, Russia or the U.K.
It’s no coincidence that these four nations favoured or continue to favour currency restriction. This is a consequence we still feel today, in 2019, of the geo-political turmoil that defined the 20th century.
China suffered through its revolutionary phase after the end of its imperial dynasty. Czarist Russia died in 1917, then the Soviet Union collapsed 70-some years later, with breakaway states taking assets and business with them.
India endured a terrible transition in the 1940s as it was carved up into today’s India, Pakistan and Bangladesh. The U.K., meanwhile, suffered enormous economic challenges with two world wars and the breakup of its empire.
Faced with these challenges, it should come as no surprise that these nations decided to impose currency controls in an effort to create and maintain economic stability.
China, I’ve read, may be better understood from the perspective of a corporation with a tightly organized board of directors and a strong strategic plan.
Watch the trend
This is a country that virtually wrote the book on government (having had organized government for most of the past 4,000 years), with a deep understanding of the need for government, what happens when government fails and how to manage its business.
If China’s currency controls are having a real effect, this will be the result of specific government policies where the board of directors has decided there has been too much outflow.
What I suspect we are seeing here in Canada is the effect of this policy as Chinese government officials react to new measures being imposed within key Canadian real estate markets and advise Chinese investors on how best to respond.
What will be interesting to watch over the longer term is whether these currency controls grow increasingly restrictive, where Chinese investors now active in Canada and elsewhere are potentially required to repatriate their funds.
After years of market exuberance in the lower mainland of B.C., investors are well-advised to watch who is buying/selling, or not, and where short-term prices are headed.
To discuss this or any valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.