For years, the Chinese have been blamed for inflating the Vancouver housing bubble, increasing the price of real estate beyond the reach of many locals. The theory is that the Chinese make money in China through licit or illicit means, and then illegally launder it by buying Vancouver real estate. (I use the words “illegally launder” because China has currency controls. Anyone transferring enough money out of China to buy a house in Vancouver has almost certainly violated these Chinese laws.)
Historically, I’ve always discounted the “the Chinese caused the housing bubble” theory. Though there are a fair number of ethnic Chinese in Vancouver—roughly 28% of the population according to recent Statistics Canada data—that doesn’t imply that ethnic-Chinese real estate purchasers are foreigners or using foreign money to buy. Instead, it might mean that the people buying houses are Canadians who happen to have a ethnic Chinese ancestry, and are buying—just like many non-ethnic Chinese Canadians—because interest rates are super low, and they view Vancouver real estate as a “can’t lose” investment.
However, I’ve recently changed my tune. I now think Chinese money is a significant driver of the Vancouver housing bubble.
Why the change?
As a Canadian, I’m almost instinctively averse to blaming a particular group for bad things. I don’t believe I’m any more racist than the average Canadian, and I don’t want to espouse racist views. However, I also think that ignoring data and eschewing analysis for fear of being perceived as racist is short-sighted. Evidence should determine policy, and we shouldn’t allow the fear of being branded a racist constrain our analysis.
So, there’s a couple of data points that I find convincing. The first is that in the west-side of Vancouver (i.e. the really expensive side where the median detached home is typically in the $3-3.5M range), a huge percentage of buyers are of Chinese ancestry. One study indicated that 70% of the homebuyers’ names were Chinese, and 36% were homemakers and students.
Now that doesn’t mean that these were foreign purchasers. They could be ethnic Chinese Canadians. But it seems unlikely. For one, how can a homemaker or student with no income afford at $3M dollar home? The most likely explanation is that they’re getting money from elsewhere.
The problem with suggesting the money isn’t foreign
What’s more, if these buyers mostly are Canadians, that actually suggests a bigger problem than the housing bubble. To buy a $3M home, you need a massive income, like half a million dollars a year. The median family income in Vancouver is about $75K. So, if you’re saying that all these ethnic-Chinese purchasers are Canadian, you’re essentially saying that ethnic-Chinese Canadians are making five or six times more money than other Canadians.
If that’s the case, we really need to be asking how our systems are failing the non-ethnic Chinese Canadians who cannot afford these dwellings. Are we discriminating against the non-Chinese? Should we institute taxes on those of Chinese ancestry (or give money to everyone else) to level the playing field?
Of course not. It seems extremely unlikely that ethnic-Chinese Canadians have some huge economic advantage over others in Canada, or that Canada has massive systemic discrimination against the non-Chinese. A far simpler explanation is that foreigners and foreign money are behind most of the purchases in the west side, which is why so many purchasers are ethnic Chinese. To not believe that, one has to go through considerable contortions.
The second data point
The second data point suggesting foreign money is a major cause behind the housing bubble is the impact of the 15% foreign buyer’s tax. Christy Clark, in response to complaints from her top donors (condo developers), recently rolled back this tax only six months after it was implemented, making it so that people who have a work permit in Canada won’t have to pay. (This largely eliminates the tax, as people don’t actually have to work or pay taxes in order to get a work permit. Working or not, I imagine pretty well every foreign buyer will spend a couple of hours getting a work permit if they can save $500K on their $3.5M west side house purchase by doing so.)
Regardless, it was interesting seeing the impact of this tax. Essentially, it killed the market for single family homes in Vancouver. In contrast the condo market is still extremely strong (and was even before Christy Clark decided to further subsidize her developer friends by creating interest free loans to first time buyers who buy condos). Condos, of course, are the only thing most people who earn their money locally can afford to purchase.
Thus, to me, the single family home transactions plummeting at the same time as the foreign buyer’s tax was implemented while rest of the market remained hot suggests that foreign buyers with foreign money were likely behind a huge portion of single family dwelling purchases in Vancouver. If the single family dwelling market were driven by local money, I’d expect it to be as hot as the condo market as locals sell their condos in order to upgrade to houses. But it isn’t. It’s dead.
Thus, this data point further reinforces the first data point that a large percentage of the people buying single family homes in Vancouver are foreigners using foreign money.
My bottom line
Consequently, I believe foreign money and foreign buyers are a significant force behind the Vancouver housing bubble. While it is possible to contort yourself in order to avoid the conclusion that foreign money is a major factor, to do so would be intellectually dishonest, ignoring the simplest, most-likely-to-be-true explanations because they are politically unpalatable. (And, if evidence comes to light that indicates that these conclusions are wrong, I’ll change my beliefs.)
Of course, if Chinese money is a major factor behind the Vancouver real estate bubble, the natural question is, “what should be done, if anything?” To me, that’s a far more challenging question, one I may take up on a future blog if I can think of some good answers.