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Limits to foreign ownership

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Someone over at the Vancouver Courier is of the opinion that foreign buyers have driven up the cost of real estate in Vancouver.

Of course, capitalism requires competition, and free market principles should drive our housing market. But we no longer control that market. And despite growing evidence of market dysfunction, Premier Christy Clark, who could stiffen provincial regulation, and Mayor Gregor Robertson, who could increase taxes on foreign property owners, cede our land to foreign buyers.

Not so in Australia.

In recent years, Australian cities have experienced Vancouver-style real estate booms, with housing prices soaring from Sydney to Melbourne. Like here, buyers from China help drive Australia’s speculative real estate market. Faced with mounting public pressure, in 2010 the Kevin Rudd government introduced strict regulation aimed at foreign ownership. Under the new rules, the Foreign Investment Review Board (FIRB) screens foreigners (including temporary residents and students) to determine their land purchase eligibility. Foreigners can’t buy existing properties and must build on vacant land within two years of purchase or face government-ordered sale. Scofflaws face capital gains confiscation. Finally, before foreign homeowners leave Australia, they must sell. No more overseas landlords Down Under.

Full article here. Is it time for BC to start looking at regulating home ownership and foreign buying?

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Anonymous

@WFT?: …Two million Canadian households would be in trouble if rates went up only 2 points…

And 85% of those live between Comosun St. and 176 St. God I love this place!

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Absinthe

@patriotz: Totally agree that it really isn't just about whether or not we've saved equivalent. I started looking at the housing market in 2002, when our first child was born. We weren't in any position to buy – I was just out of school and there were loans, we'd just had a baby, and we were starting RESP investment – but I thought I'd start learning about the market, start a down payment savings plan, etc. Already it was pretty clear that we would take a "lifestyle hit" to buy, but there were some places that I knew with concerted saving for downpayment, we could reach. In 2003, I started asking other people their experiences. I was raised by a single parent in a rental, so I wanted some sense of what ownership might be like. First person I talked… Read more »

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Makaya

@WFT?: From that article: "The rising trend in the ratio does, however, flag the fact that Canadians are becoming more leveraged and are more vulnerable to an economic shock than they were heading into the 2008-2009 recession," he said. "Personal finances are also more exposed to swings in real estate valuations, as the bulk of debt accumulated in recent years has been mortgage related. To be clear, there is good reason to believe that Canada has avoided the imprudent borrowing and lending decisions in the United States, but this does not rule out the possibility – the likelihood in fact – that Canada will experience a housing correction when interest rates do eventually return to more normal levels." TD estimates that a rise in interest rates of two percentage points would mean trouble for about 10 per cent of Canadian… Read more »

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Anonymous

so you are way too ahead by running all the way to ottawa? the public sector needs quite a bit of arm-chair economists.

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patriotz

@jesse:

"Hopefully over that time they will have saved above what they would have by owning."

Someone who bought in 2005 would have paid way more in expenses than rental value at least until 2009. That is money thrown away.

That means that someone who didn't buy in 2005 does not have to wait for the return of 2005 prices to break even with someone who bought then.

Before someone chimes in "that's only if they invested the difference", not it's not, it's up to the consumer to decide when and how to spend their money. Someone who spends less for the same accommodation is ahead on that criterion alone.

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WFT?

Two million Canadian households would be in trouble if rates went up only 2 points.

http://www.theglobeandmail.com/report-on-business…

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patriotz

@emmi:

Do you understand what marginal buyer means? Market prices are determined by the buyers who are least willing and able to pay, not the ones who are most willing and able. The richest buyer on the block does not determine the market price, the poorest buyer does.

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jesse

@Best place on meth: "Better to rent and wait."

A family who made that call in 2005 will likely have waited about a decade for real prices to retrench. Hopefully over that time they will have saved above what they would have by owning.

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Best place on meth

@jesse:

>>>A shift of 10% lower sales and 10% higher inventory (say) would see some retrenchment of prices in these areas; in my view we could see something approaching sanity within about 5-6 years with such conditions. In terms of housing busts that’s not an unreasonable time scale, though for many families waiting that long puts their children half way through grade school.<<<

If they buy a $500K house now and it falls by $50K per year then they're not doing their children any favours by losing patience and jumping in.

Better to rent and wait.

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emmi

: “If the market were driven by foreign buying, only foreigners would be buying. As you say, the amount of money and effort spent to market to locals speaks for itself.”

Not so. The banks don't do valuations based on rent, they do them based on comps. Access to leverage and credit is determined by how much the last HAM spent on the house down the street. Even if only 1/5 of the sales were HAM, the taps on the bank vault still open wider for all and sundry.

In cali it was often pump and dump schemes by realtors selling to one another that set the comps. Same results. It opens the taps at the banks based on a transient situation. When the comp setter vanishes so do the comps and then the music has stopped.

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Makaya

And another MSM article pointing to the danger of Real Estate! Our love affair with home ownership might be doomed We all know someone who’s worn love goggles. They start dating someone new and their whole world starts revolving around that special someone who can do no wrong, even though everyone else seems to think otherwise. Once the honeymoon phase is over, the goggles come off, a dramatic breakup ensues and suddenly everything seems so clear. “Why didn’t you guys say anything?” the friend asks. Human psychology is a powerful thing. (…) Add it all up, throw in the highest debt-to-income ratios in history for the average Canadian and the long-term prospect of interest rates rising and it’s pretty easy to see why Mr. Rabidoux’s website could become incredibly popular after the fact: He’s trying to point out what the… Read more »

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Patiently Waiting

Uh oh, Scotiabank is selling its Bay St. tower

http://www.theglobeandmail.com/globe-investor/sco…

Last time banks did that was just before another bubble burst:

"Royal Bank of Canada (RY-T52.990.541.03%) sold its head office and portfolio of more than 30 buildings in the late 1990s. In 2000, Canadian Imperial Bank of Commerce (CM-T76.341.111.48%) sold its Commerce Court complex of four buildings, including a tower right across the street from Scotia Plaza, for $618-million. That’s the current record for a single sale of an office complex in Canada."

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fixie guy

@130 jesse: Fraser Valley benchmark prices have risen as 'nutzoid' as the rest, 240% from 2000 values in a decade. Quick Google result:

http://www.fvreb.bc.ca/statistics/Package%2020111…

Perspectives may have morphed since the days when all BC was on fire and 3/4 mill was asking for a 700 sq. ft. leaning old timer with granite counter tops in Revelstoke but there's little value gained in downplaying the situation in the Lower Mainland. In any long term historical sense, it's still toon town.

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patriotz

@Makaya:

"Let’s just say that there has been more than one driver behind this bubble…

– immigration (genuine and not so genuine)"

Immigration (or domestic migration) does not and cannot cause bubbles. If the demand for shelter grows faster than supply you will see increasing real rents (we haven't even seen that in Vancouver, rather real rents have been declining). But prices out of proportion to rents (i.e. a bubble) are a result solely of buyers willing and able to pay such prices.

Now immigration may lead to misconceptions which result in people paying inflated prices, but that doesn't make it a functional cause.

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Makaya

@DEFAULT NAMEe:

"Patience serves as a protection against wrongs as clothes do against cold. For if you put on more clothes as the cold increases, it will have no power to hurt you. So in like manner you must grow in patience when you meet with great wrongs, and they will then be powerless to vex your mind."

Leonardo da Vinci (1452 – 1519)

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jesse

@Makaya: The other thing I should note is that the aggregate numbers hide that not all parts of REBGV have been doing as well as the areas most concentrated on by this and other blogs. That is, while foreign capital flows were almost assuredly positive into neighbourhoods like Van West, West Van, Richmond, and potentially Burnaby and North Van in the first half of 2011, other regions were not doing so well. Fraser Valley, while not crashing, has been struggling since 2009. This is the so-called "bifurcation" mohican has highlighted before. Prices in Vancouver and surrounds are certainly high but I don't think the market has gone from "nutzoid" to "ludicrous" in many areas; it's just been in a holding pattern. A shift of 10% lower sales and 10% higher inventory (say) would see some retrenchment of prices in these… Read more »

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vangrl

Rob Carrick on Facebook put up a crazy graph of Canadian real estate. Realtors trying to talk down the obvious concern….pretty funny

http://www.facebook.com/robcarrickfinance

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jesse

@Makaya: Agree, it's too early to make a call (like CBC with "calling" elections) of another severe housing market recession.

In 2008 weakness first appeared in March and really became evident in June/July that things weren't all peachy. That said, 2010 exhibited all the signs of 2008 for the first 5 months of the year but sales recovered in the second half of the year and we all know about 2011's craziness in the first few months (especially March).

See here: http://housing-analysis.blogspot.com/2012/01/grea…

Look how closely 2008 and 2010 inventory and sales tracked each other through the first few months, only for 2010 to get another jolt of energy from July onward.

One thing I can say is that, so far, 2012 is different, and not in a good way if you want higher prices.

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crashcow

@crashcow: 30-yr us treasury bond yield

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crashcow

222 years of interest rates!

http://www.ritholtz.com/blog/wp-content/uploads/2…

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Anonymouse

I've had two friends buy their first homes in the past two weeks (Vancouver-born WASPS), both their first purchases, both SFHs on the East Side, both with at least $200K in inherited money, and both of whom are aware of the bubble potential but are so desperate to own their own detached property. Both paid in the $700-$800K range for houses that probably require a shitload of work.

I'm 38 and make $100K/yr (2 kids wife not working) and could probably over-leverage myself, spend the next 5 years on reno's, cut my lviing space in half by having to get basement suite tenants… but we're still content (just barely) to sit on the sidelines like we have been since 2007. But the persistence of this f#@!ing bubble is really starting to get to me.

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Makaya

@WFT?: "Isn’t it bursting now? What does a bursting bubble look like in the early stages?"

I would love to believe so, but it's still a bit early to call it a burst (remember 2008/2009). I guess by the end of the summer, we'll have a better idea whether the early signs of weakness we're witnessing now are the "beginning of the end" of this bubble or just "noise". We'll see.

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Makaya

@patriotz: "If the market were driven by foreign buying, only foreigners would be buying. As you say, the amount of money and effort spent to market to locals speaks for itself."

Let's just say that there has been more than one driver behind this bubble. In addition to the main factors (CMHC and dirt cheap money), I would say (in order of importance):

– local craziness (i.e. local speculation as per Vreaa's definition)

– immigration (genuine and not so genuine)

– foreign speculation

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WFT?

@Makaya:

"nasty for pretty much everybody once it bursts."

Isn't it bursting now? What does a bursting bubble look like in the early stages? I wonder if anyone konws. Can we compare the dramatic data we are now seeing to the bursting of the bubble in other markets?

If someone has th day off today, perhaps they can put together a statistical picture of a bubble starting to burst.

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Makaya

@Patiently Waiting: "Anyhow, this crap has gone on far too long. If we are “different” or if the bubble burst, it doesn’t matter now, this city is ruined for years…decades really."

Sad but true. This bubble has been damaging for most people, and will be nasty for pretty much everybody once it bursts.

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