How would Vancouver’s housing bubble burst? Look to China

(Vancouver Sun)
Published: February 16, 2017


No question is more on the minds of Metro Vancouver homeowners and renters than how and when the region’s housing bubble could burst.

After stratospheric escalation, a punctured bubble would be disaster for hundreds of thousands of over-mortgaged homeowners. Yet it could bring relief to those desperate to get into housing.

Last summer’s B.C. government 15-per-cent tax on foreign buyers and the federal government’s stress test for mortgages have slowed the volume of sales in Metro Vancouver, particularly at the top end.

But, despite suggestions from a few voices in finance and real estate, the city’s bubble is intact: Prices remain at record highs after jumping by 40 to 60 per cent in two years.

Unaffordability continues to be a crisis, especially for the young. No meaningful link exists between the city’s tepid median wages and runaway real estate values.

The conventional wisdom is you can’t be sure you’re in a housing bubble until it bursts. Yet there is little doubt Metro Vancouver is extremely vulnerable to a free fall.

The Swiss Bank USB rates Metro real estate as the most likely to experience a sudden downward correction of 17 large cities, including London and Hong Kong. And the longer the bubble lasts the harder the crash.

What is most likely to cause the bubble to rupture?

SFU urban studies professor Wu Qiyan, UBC geographer David Ley and others are most closely watching China, the fast-growing powerhouse of 1.4 billion people.

They make a convincing case that no other factor — including interest rates — is as important, as surveys showing 40 to 60 per cent of China’s wealthy individuals want to emigrate and buy housing in another country.

In 2016 China’s rich injected more than $33 billion into U.S., Australian, British and other global housing markets. We don’t know how much they bought in Canada because, as Ley said, this country ranks among the few “in the civilized world” that doesn’t publish foreign investment data.

Yet it’s clear the West Coast of Canada and the U.S. is the most popular destination for China’s elite, according to the Hurun Report. China is now a “fundamental” of Metro’s housing market, says Ley, author of Millionaire Migrants: Trans-Pacific Lifelines.

Even though Metro is small, the Hurun Index shows China’s moneyed class are more attracted to Metro than even large “gateway” cities such as Sydney, London and Singapore.

Metro’s housing market has long been tied to China’s economy. Our real estate prices have gone up and down in tandem with China’s fluctuating economy since the 1990s, according to data compiled by Bloomberg News.

China’s trans-national citizens are especially drawn to Metro Vancouver, Ley said, for its clean air, climate, trusted universities, relatively short flight times and existence of a Chinese-speaking community that makes up one fifth of the population.

Given the key role China’s wealth plays in Metro, the question both Wu and Ley ask is: Will the country’s hardline Communist leaders finally succeed in stopping the illicit flight of its capital?

All eyes should be on China’s new edict, which began Jan. 1, say Wu and Ley. Will it be more effective than others? It demands a written pledge that yuan converted into U.S. dollars will not be used to buy property overseas. It also creates a government black list and harsher penalties for violators.

“If China can control the outflow of its currency — and keep it to only $50,000 US per person a year — it would greatly impact the housing market in Metro Vancouver,” said Wu.

“I think this … crackdown will be much more strictly enforced and will be longer lasting,” adds Victor Shih, of the University of California, San Diego, who researches the impact of elite networks in China.

China’s Ministry of Commerce reported this week that Chinese investment in offshore property has fallen sharply since last year. But Chua Han Teng, of Fitch’s BMI Research in Singapore, said “I think the impact (of capital controls) is probably limited.” China’s financial systems are porous and there is still, he said, “a great desire for people to try to bring their money out.”

It’s likely the latest restrictions will mostly make it difficult for middle- and upper-middle-class Chinese to transfer money out, Ley said.

But the problem for Metro Vancouver is that China’s ultra-wealthy, including its billionaires, have probably already transferred much of their money to secret accounts, with the Panama Papers revealing Hong Kong as the most crucial hub for laundering capital to tax havens.

“The most important factor for Metro housing is whether capital keeps coming out of China,” Ley said.

“China has tried to block it before, but each time it keeps coming. As long as that capital keeps coming, I do not anticipate our bubble bursting.”

Even though Ley puts great weight on China, he adds that rising interest rates could also play a role in a downturn.

British financial analysts, he said, have noted the country has the “cheapest mortgage rates in 300 years.”

They cannot last. “One day we will get cumulative rate increases,” he said, and they will affect overstretched Canadians as well as offshore investors.

Metro residents are among the most leveraged. The Bank of Canada reports hundreds of thousands of Metro households have indebtedness that exceeds their annual incomes by 150 to 450 per cent.

“It’s especially the people in the newer suburbs of Langley, Surrey and the Tri-Cities who are mortgaged up to the hilt,” Ley said.

Even though Metro Vancouver and Toronto residents have experienced housing bubbles that deflated since the 1980s, Ley believes most remain in denial. They haven’t paid attention to just how bad the subprime mortgage crash of 2008 was for Americans.

Millions of Americans not only lost their jobs, but their homes were foreclosed. Ley thinks their sense of betrayal fuelled the rise of populist President Donald Trump.

Ley is also convinced the outrage Metro residents felt over inflated housing prices was the political reason for Premier Christy Clark breaking out of her usual pro-foreign-investment stance and applying the 15-per-cent tax.

An Angus Reid poll revealed 90 per cent of Metro residents supported the move. That included most of those “profiting” on paper from the bubble, whom Ley said worried for the future for their children and grandchildren.

It appears the 15-per-cent tax may have had some impact on China’s elite.

The Hurun index reports China’s wealthy now rank Metro Vancouver sixth, instead of third, as the city they most want to emigrate to and buy dwellings in.

Los Angeles and San Francisco remain in first and second. Vancouver has been replaced by Seattle. New York and Boston fill the fourth and fifth spots.

But the 15-per-cent tax apparently did not puncture the bubble. One Metro Vancouver index reported housing prices began nudging up again in January.

Offshore investors, says Ley, recognize the purchase tax is not permanent. They note Clark has already relaxed the rules, making it possible for non-citizens who pay Canadian taxes to not pay it.

That means, for instance, 170,000 foreign students and non-permanent residents in B.C., more than one third of whom are from China, are again allowed to freely buy luxury or other homes in Metro as proxies for foreigners.

Some speculate the NDP would be tougher than Clark, whose party is politically indebted to the real-estate industry, at restricting offshore capital in order for Metro housing to return to some semblance of affordability.

But neither party has made crystal-clear promises about housing policy. So we won’t really know what will happen until after the May 9 B.C. election.

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