It’s a nice perk for an international student coming to study in Canada when their parents buy them a condo so they don’t have to worry about paying the monthly rent. Even if it means mom and their siblings living with them, although this seems to be more typical of detached and semi-detached home buyers from abroad. Canada Mortgage and Housing Corporation, or CMHC, released a report on the phenomena in December 2014, but admitted that there are gaps in the data since people buy through third party nominees or other avenues. As CMHC president Evan Siddall said “We can’t phone people in Singapore or Hong Kong, we don’t know who to call.” So their report on foreign ownership of condos, in Canadian cities like Toronto and Vancouver, that gave surprisingly low numbers for estimated foreign ownership should be seen as just that; an estimate that will have to do until they get better data. In countries from Australia to Denmark to the UK and the USA, they collect far better data on foreign home ownership and apply tax policy to control speculation. In Australia’s case, they put in place restrictions requiring foreigners to invest in newly developed real estate that helped boost the supply of new homes rather than drive up prices of existing ones. Whether Canada follows suit depends on if the government and the CMHC start collecting better data, and whether privacy laws or special interests prevent them from doing so.
For now, however, the CMHC does not see foreign ownership of condos or homes in general as a problem. Foreign ownership of condos in Toronto is 2.4% and in Vancouver 2.3%., according to the CMHC study. The result does not include so-called “astronaut” families where Dad grinds out his millions of yuan in Shanghai and elsewhere, while Mom and the kids reside and go to school in places like Vancouver or Toronto. And it does not include recent arrivals that have obtained their permanent residence. When it comes to estimates, at the other end of the scale are the real estate people who tend to like to brag, but at the same time are knowledgeable about local markets. For example, Toronto’s “condo king” Brad Lamb has estimated that half of all condos are being sold to foreigners. He should know. He takes their money. Toll Brothers, the U.S. luxury home builders shied away from Toronto after deciding that over half of owners did not reside in their condos. That leaves analysts with an enormous gap between what the CHMC estimates and what condo developers say is the extent of foreign ownership in places like Toronto and Vancouver. But it is safe to say that the demand for condominiums from wealthy foreigners who come to stay, or to study, or to invest from overseas in real estate in major Canadian cities, is considerable and not set to freeze up anytime soon.
Does that mean that condo prices are being pushed into the realm of the unaffordable the way semi-detached and detached homes are in Vancouver, and now to a lesser extent Toronto? Brad Lamb, the Toronto developer states that within a few decades only the wealthy will be able to afford a home in Toronto and the rest of us will be living in condos, whether as owners or as renters. That’s already started to happen in Vancouver and he may be right. On the other hand, some worry that a bubble is forming and that foreign investors are more likely to sell and get out in a downturn compared to locals with deeper roots in the city are. But more worrying to many, is whether owning a home, more likely a condominium and not a detached home, is becoming an unaffordable luxury for the majority of Canadians. In fact for many, the rental market’s newly available supply of apartments is thanks to the booming construction business which is providing a large supply of new condos. And the vacancy rates in rental properties support this theory. In Toronto, the average vacancy rate in rental properties is a low 1.6% across the GTA region. New households keep arriving in major cities and need that first home where they can start saving for a down payment on a property, for example often in the 905 area in the suburbs of the GTA (named after the local area code). In Vancouver, however, urban planner Andy Yan has estimated that in the downtown core, 60% of condos are not lived in by their owners and 15% are actually empty. In fact, Vancouver has been labelled a so-called “hedge” city where wealthy foreign investors park a portion of their savings in real estate just in case things get tricky back home in places like China. In the financial markets, hedges are notoriously volatile instruments and subject to wild swings in prices. One wonders what happens to a “hedge” city when the real estate market turns south.
So are wealthy overseas buyers of condos for friends and family a blessing or a curse for Canadian cities? It depends on who you ask. Chris Catliff is president and CEO of Blue Shore Financial Credit Union, a boutique financial shop that specializes in servicing wealthy clients in the Vancouver area. He thinks that these types of investors will prevent a downturn because they don’t have to sell when interest rates go up. They have plenty of offshore investments and cash to cover any increase in mortgage costs. “The house might be empty but it doesn’t mean it’s going to be sold” as Catliff states. Unfortunately, that raises the specter of zombie neighbourhoods where a significant portion of the properties are empty at least part of the year, while working families struggle to find an affordable first home. The following table shows the problem:
|City||Single Family Home Price|
Should Vancouver be 5 times as expensive to own a home in as Montreal? Or the 2nd most unaffordable city after Hong Kong? By any measure of income and job growth in the local economy, there is a disconnect. The only way to account for such wide disparities is foreign money. And that foreign money that has driven detached homes beyond any reasonable level is also flowing into condos. Maybe not at the rate that people like Brad Lamb would like you to believe, but certainly at a higher rate than suggested by the latest CMHC study. Condo prices have not surged nearly as much as home prices in Canadian cities have. That means your best bet is to line up for that new condo development and put in a bid. And if you have to compete with a successful entrepreneur from the other side of the Pacific Rim who needs a cozy third home for his kids, the powers that be in Canada seem to suggest that you better get used it.