Canada's Housing Bubble

Nov 25, 2010 Ben Rabidoux financialinsights.wordpress.com

The Hot Asian Money (HAM) story just won’t go away.  I’ve already addressed this issue twice in prior posts.  But it’s like a bad fart….it just seems to linger.

As I have said before, I don’t disagree that there are rich foreign investors buying Vancouver real estate and that it has had some direct and indirect effects in buoying prices, but I’m highly skeptical that it will save a Vancouver housing market that is currently considered the most unaffordable in the world.

Today we see that the Globe ran an interesting article exploring this very topic:

Is Vancouver in a real estate bubble?

(Hat tip to Ray for emailing me this story….thanks)

The article is an overall interesting read and should stand as a case study on how to write an investigative journalism piece relying almost exclusively on anecdotes from sources of questionable reliability.  It’s impressive, really.

Despite the author being a frequent contributor to Vancouver Magazine (suggesting he is likely a resident of Van Town and perhaps has a slight bias) to his credit he at least tries to present a balanced argument.  As with virtually all mainstream media articles though, I question why the primary data sources are realtors.  Is there no one with an arguably more balanced perspective?

Let’s see what the article actually had to say.  I really liked this quote:

“When wealthy Chinese immigrants buy property in Vancouver—and they utterly dominate the top end of the market—they’re actually buying a form of insurance. What the federal and provincial governments get out of these newly minted Canadians turns out to be a modern form of the infamous head tax that was imposed on Chinese migrants in the 19th century. And what Vancouver gets is an economy that boasts a lot of froth, and not much substance. From all three angles, it feels like a relationship that is built not so much on Commitment as on enjoying the good times while they last.“

I think the last sentence astutely summarizes the broader problem.  If this ‘rich Asian’ dynamic is in fact true, it implies that there are structural issues in economic growth for the city of Vancouver.  Further to that point, it implies a tremendous amount of vulnerability to policy changes by either government (like the significant recent changes to investor immigrant laws), as well as economic instability in China.

The notion that these rich Chinese investors ‘utterly dominate’ the high end market is bandied about often, though only as a passing anecdote.  Though it certainly is possible that this is happening, I have yet to see convincing stats proving that this is in fact the case.

“The buyer will likely be from China as well: Lui estimates that up to 80% of recent sales in this price range have been going to buyers from mainland China.”

She estimates.  Hmmmm.  This is what journalistic integrity amounts to today?

Let me advance this thought:  Could it be that Manyee Lui’s experience is vastly different that most other realtors?  Manyee Lui is fluent in English, Cantonese, and Mandarin and clearly targets this buyer group as explained on her website.  It’s not a stretch to assume that she also receives a highly disproportionate number of Chinese buyers.  Come on….Who is a Chinese investor going to use as a realtor:  someone who speaks their language and understands their culture, or other realtors like this dude?

So is it possible that this is her experience with rich Chinese investors in the high-end market?  Of course.  Is it a stretch to assume that this is the case for all home sales in this market segment? Big time!

But let’s not let it rest there.  The 2010 Landcor report on the Vancouver housing market indicated that a total of 977 properties in the Metro Vancouver area are owned by non-residents from Asia.  This number also includes residents from Australia, Indonesia, Japan, the Philipines, etc, not just China and Hong Kong.

Yet in 2009, the last year of full sales data, the Greater Vancouver Real Estate Board reported 35,669 total sales.  So even if all 977 owners purchased their properties in the same year, it would only represent 2.7% of the total sales volume.

Now this only documents foreign ownership of Vancouver homes.  It doesn’t count those who obtain citizenship through Canada’s Business Immigration Program.  What total volume of sales might they make up?

The article notes that Vancouver gets about half of the annual 10,000 or so people who immigrate under the entrepreneur and investor classes.  Simple math tells us that this number is approximately 5000 people (not 5000 households).

The article outlines a typical scenario in which, “one of the parents, usually the wife, moves to Canada with the children while the husband stays in Asia, coming for visits when he can.”  So the number of total investor immigrants represents 2500 households at best!  When this number is compared against the total annual sales volume for the Greater Vancouver area, we find that it accounts for at best 7% of total sales!  That puts things in a whole different light, doesn’t it?  As it turns out, rich Asian investors undoubtedly account for less than 10% of the total sales volume, and I would suggest that it is likely significantly less than that given the propensity of many Asian cultures to live in extended family (multigenerational) households.

Now given that the entire article is premised on the argument that there are lots of rich Chinese investors coming to Vancouver to buy extremely expensive houses, the above data calls this foundational assertion into question.  In fact it leaves it in a smoldering pile.

From here the article goes on to outline a series of anecdotes and some very old data largely intended to disprove the bubble hypothesis.  It then waders aimlessly for several paragraphs as it explains how the new Asian population presents some unconventional business opportunities.  So an article that starts out discussing real estate ends up discussing random emerging business opportunities, largely ignoring the question in its title.

To be fair, this article is an interesting examination of the unsustainable economy of Vancouver and serves to highlight the sociocultural factors that drive Chinese immigrants to buy houses to their own financial detriment.  But it is long on anecdotes from arguably biased sources and extremely weak on substantial facts.  At best, the Vancouver real estate market is relying on the continued influx of a relatively small group of wealthy immigrants to purchase their massively overpriced real estate.  At worst, it’s relying on the continued perpetuation of a tired old story to keep its own residents piling on unservicable debts.  Either way, I’m far from convinced of the sustainability of this present dynamic.

Cheers,

Ben