The Modern Chinese Laundry

According to Global Financial Integrity, about US$1.252 trillion in illicit financial outflows left Mainland China between 2003 and 2012. In 2012, the amount of money leaving China had increased to an astonishing quarter of a trillion US dollars!!

Illicit Outflows 2003-2012

How much of that money is making its way to Vancouver? According to China’s list of the top 100 international fugitives, 26 of them were most likely in Canada. And according to Ian Young’s analysis of immigration data, 80% of Chinese millionaire immigrants to Canada are planning to locate in BC — the vast majority of whom likely settle in the Greater Vancouver area.

Using these figures, we can estimate the amount of hot money flows that could end up here. If we assume 26% of these financial outflows are destined for Canada, and 80% of those individuals locate in the Vancouver area, there was a potential flow of almost US$52 billion into the Vancouver area in 2012 alone!

According to the REBGV, total sales volume for the Greater Vancouver region was $18.6 billion in 2012 — only about 36% of the potential hot money flow from China that year.

Of course, not all laundered money ends up in real estate. But if only a small fraction of it does, that is more than enough to have a dramatic effect on local housing prices.

 

BC Liberals, “Let Them Rent”!

With all the recent attention this online petition to limit foreign buying in Vancouver has been getting, it’s elicited a few responses from the BC Liberals. Here is one from Rich Coleman.

Foreign buyers have flocked to one of Vancouver’s most hotly anticipated housing developments, raising new questions about whether it’s time government intervened in the city’s increasingly unaffordable real estate market.

B.C. Housing Minister Rich Coleman dismissed the idea of provincial intervention, however, arguing it would be unfair to people who have already invested in housing, including locals.

“The real estate economy has been a free market economy for decades and people have made significant investments based on that,” Coleman said.

“And to go out and decide that we’re going to put those investments at risk for British Columbians and folks that own property in B.C. doesn’t make a lot of sense to me.””

And here is another from Christy Clark.

Realtor Lorne Goldman estimates 25 per cent of his clients are foreign. While countries like Australia have put limits on what foreign investors can buy, Goldman wonders whether similar restrictions in B.C. “could backfire.”

Some fear such limits could stall the city’s real estate market, a sentiment shared by B.C. Premier Christy Clark.

“By trying to move foreign buyers out of the market, housing prices overall will drop,” said Clark. “That’s good for first-time home buyers but not for anybody who is depending on the equity in their home to maybe get a loan or use that to finance some other projects.”

So there you have it. The BC Liberals have spoken, and what they are saying is:

  • Foreign buying is driving up the price of housing.
  • They don’t want to stop it because it will decrease the windfall being enjoyed by long-time homeowners.

For all the lip service given to affordable housing, it’s clear from their actions that no level of government is interested in pursuing any policies which could actually make home ownership affordable to anyone who isn’t already on the gravy train. In other words, “Let them rent”.

Mystery Solved?

In my last post from September 2013, I noted that housing prices were once again increasing. At the time, I thought Vancouverites were rushing to get into the market before rates increased. But price increases have now continued for over a year and a half, so it seems clear that was not the reason. As I continued to watch the market, I tried to look for a better explanation. Other than the usual housing bubble rationalizations — everyone wants to live here, we’re running out of land, etc. — the conventional wisdom for recent gains seemed to be low interest rates. But even with historically low rates, housing affordability was already near record lows. It doesn’t seem plausible that already-strained households have been able to keep the party going for so long.RBC_Mar2015_Afford A market driven by low mortgage rates should look more like this: RBC_Calgary_Afford I also noticed a clear disconnect between the first phase of the bubble (2002-2008) and the second phase (2009-present). During the first phase, all of the Canadian bubble markets increased in a similar fashion. As an example, compare the price history of Victoria and Vancouver. Vancouver Vs Victoria The first peak occurred in mid-2008. Up until then, both markets moved together. But after the initial recovery in 2009, Vancouver began to behave differently than Victoria and other Canadian markets. Over the last 5-6 years, something very different has been going on here. In my opinion, the difference has been foreign buying — mostly from Mainland China. Unfortunately, there is no hard data on the amount of foreign ownership, so I’ve had to base my opinion on the excellent work of Ian Young, Andy Yan and others.

But after years of listening to claims that foreign buying is too insignificant to drive a market as big as Vancouver, I think I’ve found definitive proof. When housing markets are driven by easy financing and low mortgage rates, appreciation is higher for low-end, entry-level homes than it is for more expensive homes. Entry-level buyers are much more likely to max-out on debt than older, wealthier homeowners. This was the case in US bubble markets. For example, look at San Diego. Low-priced homes increased much more than high-priced properties. SanDiegoPriceTiers This was also true during the first phase of the Vancouver bubble. Here is a scatter plot generated from the April 2009 REBGV Stats Package, showing 5-year appreciation by price. It’s clear that lower priced properties appreciated more.

5 Year Change 2009

Click image for clearer view

I then created the same plot using data from the most recent Stats Package, and the results are pretty startling. High-priced homes have appreciated much more than less expensive properties over the last 5 years.

5 Year Change 2015

Click image for clearer view

 

I can’t think of any realistic scenario where local Vancouverites were able to send this bubble into overdrive with the help of lower mortgage rates — especially when you consider CMHC no longer insures mortgages on homes sold for more than $1 million. The only plausible reason I have been able to come up with is a massive influx of offshore wealth.

Update: Not everyone is familiar with scatter plots, so here are the MLS HPI graphs from the Real Estate Board. As in the scatter plots, these graphs confirm (lower priced) condos appreciated more before 2008, and (higher priced) single family homes have appreciated more in recent years.

HPI_2004_2009

HPI_2010_2015