What Really Scares Canadians about Foreign Investors in Vancouver?

For people looking for affordable housing, Vancouver might not be the best place to search. Despite being one of the most picturesque places in Canada, Vancouver is scaring off potential homebuyers with its real estate prices – a hyped up issue this year due in large part to the #DontHave1million social media campaign.

According to CBC news, the housing prices in Canada rose 9.5% last year, but that increase would only be 3.4% if you took out Vancouver and Toronto, Canada’s real estate price-boosters.

Vancouverites are concerned about the reasons for such a dramatic increase in housing prices. Prevalent commentary on the issue includes anecdotal speculations that real estate prices are rising because of foreign buyers, more specifically, people from Mainland China. Although some have blamed such responses on ignorance and exaggeration, it seems to be a common opinion among locals.

Chinese Buyers in Vancouver

Prior to 2015 there had been a distinct lack of empirical (or any) evidence on the issue of foreign investments, be it due to the difficulty coming up with an effective methodology, or lack of cooperation from the province. Recent research by Andy Yan, however, suggests that at least two-thirds of the housing in West Vancouver was acquired by people with a last name suggesting a link to China. Furthermore, this group accounted for more than 80 percent of houses sold that were valued at over $5-million.

The information from this study may not be sufficient to draw definite conclusions on the influence of foreign investors on market prices, but it does raise interesting questions. For example, the research showed that 36 percent of property in the study is now owned by homemakers and students. The question is, considering the fact that the median income for an individual with a bachelors degree is about $42,000, where did they get the money from? The suggestion is that the money was brought over from China.

A word of caution: the study is not implying that foreign investors from China are to blame for Vancouver real estate prices. However, if foreign investments have an influence on the market, the provincial government should be addressing this.

So What’s the Problem?

If we have foreign investors buying houses in Vancouver, the question remains, what are the concerns associated with foreign investment, and why is it a problem under the current regulations?

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The Price

If foreign investors are buying houses for higher prices, it is reasonable to assume that the rest of the market will be affected: if there is great demand for high-price houses, the market is less likely to drop prices. This is a concern when interest rates stay low, making it possible for anyone to afford a house if they are willing to saddle themselves with a ton of personal debt.

Furthermore there is an issue of bidding wars: even when a house’s market price remains affordable (or at least acceptable) it is often sold for more than the asking price. It is possible that foreign buyers and investors also play their role in making it harder for others to match their price.

The Neighbours

The complaint is often heard that homes in some Vancouver neighbourhoods seem vacant or unoccupied for prolonged periods of time, or that they are bought and sold frequently with no one moving in or out. This phenomenon is often attributed to foreign buyers who either use foreign property as a financial investment, or only buy a house to use it for their summer vacation. This continues to drive prices up, but does not help to establish or develop a neighbourhood community.

In fact, places like Coal Harbour are notorious for their empty spaces and disappearing stores. With the nickname ‘Cold Harbour’, the area is known to be a home to many part-time residents. Some homeowners don’t stay for more than a few months a year, making both business and neighbour interactions close to impossible. Moreover, about a quarter of the condos in the area are investor-owned, but always unoccupied.

The Taxes

There has been concern about taxpayers who own a home in Canada but have a family member with an income source from working in their home country. They are referred to as “astronaut” families: the Canadian home owner has little declared income, while the real home buyer works (and lives) in another country. This can allow the owner to evade GST and capital gains. It is also assumed that many astronaut families come from the same areas as those with a prevalence of Chinese migrant buyers.

The BC government has promised to look further into the tax loophole and put an end to this tax avoidance by some homebuyers, but results remain to be seen.

The Money

Or more specifically, the laundering of it. This is becoming more of an issue in Canada, as it seems as though large sums of money can enter the country relatively easily.

The real estate market is said to be at a higher risk of being susceptible to money laundering than many other industries. For one, businesses and professionals are required to report every large (over $10,000) and suspicious transaction to FinTRAC (The Financial Transactions and Reports Analysis Centre of Canada). However, only eight suspicious transactions were filed by real estate agencies in the last three years (2012-2015) in Vancouver; a number that, according to experts, is very low.

The lack of reports from real estate agents to FinTRAC seem concerning, especially considering reports on the high volume of money coming into the country. In the past, real estate agents have said that they often do not deal directly with transactions, as the finalizing of deals often happens through lawyers, who are not obligated to report to FinTRAC. This discrepancy, unfortunately, gives more opportunities to abuse the current regulations.

There have also been noted cases when Canadian banks helped their clients find ways around the yearly limit ($50,000) on money allowed to be transported from China. Some banks were using multiple wire transactions and third parties to transfer higher sums of money, despite the Chinese law. On top of that, even when banks report suspicious transactions to FinTRAC, most of them end up going through anyway. There doesn’t seem to be much investigation into those transactions.

The Government

The concerns listed above may not necessarily be “proven”, as some might argue. However, they are still valid – at least due to the fact that they are recurrent enough to need more investigation. Many of the concerns (especially money laundering and tax loopholes) are attributed to the lenience of border laws and regulations. The province’s declaration to look into the issue is the first step towards change. The next step is determining how to conduct thorough investigations into these concerns and creating an action plan to fix them.

What’s Next?

So what could be done to help solve the ultimate problem: to drive the prices in Vancouver down? Here are a few suggestions:

  • Allow researchers like Andy Yan to have access to data, so that more definite conclusions about the influence of foreign buyers can be drawn.
  • Look further into tax regulations for home buyers and owners (not only on the provincial, but on the federal level).
  • Petition the government to bring in new policies that could potentially help drive the market prices down, for example a discussion on the luxury tax, and make Vancouver more affordable for middle-class families.

 

Sources

Can you afford to live in Vancouver if you #donthave1million? – Global News

Average house price in Canada up 9.5% to $448,862 – CBC news

New study: Vancouver housing market fuelled by Chinese buyers– The Globe and Mail

Bidding war gets Vancouver homeowners more than $1 million over their asking price– National Post

At Vancouver’s ‘Cold Harbour’ a neighbourhood hollows out The Globe and Mail

B.C. pledges to close loophole that allows some real estate investors to dodge taxes– The Globe and Mail

Canadian banks helping clients bend rules to move money out of China – The Globe and Mail

 

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