Foreign capital distorts Canadian home prices

While many within the real estate industry loathe admitting it, foreign capital is, without a doubt, distorting the prices of homes in key Canadian markets.

“If you’re a market cheerleader, you want to say that it’s just because this place is so good, or other things like there’s not enough supply,” said Butler Mortgage’s Ron Butler. “But in reality, it’s two things: low interest rates and foreign capital.”

Satellite families hell-bent on getting money out of their countries have been inflating real estate markets internationally to the point that foreign buyer bans have been contemplated in a few places.

“People who have citizenship and PR cards receive monies from offshore,” added Butler. “They’re less concerned about the price they pay and more concerned about getting money out of the country they want to get it out of. In terms of the transfer of foreign capital to people here in Canada to buy houses, it’s a significant number. In Vancouver, it’s more significant than it is here in Toronto, but here I suspect it’s 10-15% of buyers. We shouldn’t try to parse the people; we should parse where the money came from. It’s foreign capital and the conduit it comes through doesn’t matter.

“It has been distorting prices for the best part of eight years, and it accelerated in 2015 when we saw the highest run-ups.”

In Vancouver, most foreign capital comes from Mainland China, while in the Toronto region the monies mostly come from China, Iran and Gulf Arab countries.

“I’m not suggesting this is money laundering and I’m not suggesting these people are criminals in any way,” said Butler. “I’m saying these are people who have a desire, which may be very reasonable, to get money out of their home countries, but that doesn’t change the fact that it has distorted the pricing in our key marketplaces. Never, in the history of the whole world, has this much money moved out of one country to other countries.”

Mortgage broker Iain Macfadyen of Vanderkamp Vancouver noted that the satellite families who have driven prices skyward don’t bother with mortgages because they don’t need to, but the foreign buyer and vacancy taxes have quelled their activity.

“When the new taxes came in, they stopped coming as much as they had before,” he said. “But at first the taxes didn’t go as far as Abbotsford and Squamish, and those markets stayed buoyant when the rest of the detached market plateaued. Before the non-resident tax, certain markets were supported either by non-residents or new-to-Canada buyers. We saw that with certain neighbourhoods, like Vancouver’s west side.”

The foreign buyer taxes, according to a Royal LePage report on luxury housing markets, coincide with Montreal’s real estate market becoming white-hot.

“Provincial measures to dampen foreign buyer activity in Toronto and Vancouver have increased demand for luxury property in Montreal, but this demand is mostly seen within the downtown condo market,” Marie-Yvonne Paint, a Royal LePage Heritage real estate broker, said in the report. “We are seeing an increase in demand for presale condo units where investors will buy several units to benefit from a discount.”