The unseen hands that help to shape Canadian home prices

January 29th, 2013

 

The Globe and Mail

Tuesday January 29, 2013

Byline: Tavia Grant

http://www.theglobeandmail.com/report-on-business/economy/housing/crucial-bit-of-missing-information-may-be-driving-canadian-home-prices/article7935464/

Canada’s housing market is a bubble about to burst in some cities, or in the midst of a soft landing. Either way, a crucial piece of information on just what’s driving the market is missing in action.

Unlike in other countries such as the United States and Australia, neither the Canadian government nor industry keeps track of the number of foreign buyers or where they come from. Anecdotal evidence about foreign buyers abounds, yet hard evidence is lacking.

It’s crucial, missing information. Understanding what’s sparking demand in real estate can offer insights into the health of the market and what’s driving prices, and to help to predict cycles.

It can also help politicians make wiser decisions, such as whether restrictions may be needed if speculation becomes too high.

“It’s very hard to have a policy debate about what we should do when we don’t really know what’s going on,” said Tsur Somerville, director of the University of British Columbia’s centre for urban economics and real estate.

On a quiet leafy street north of Toronto, Mr. Zhang – who asked that his full name not be used – taps the walls and inspects the furnace of a $2.68- million home.

He has five days in the city to make his decision. This five-bedroom house, with Jatoba cherry wood floors and a home theatre, is a little over his $2- million budget, but he’ll see half a dozen others this week before making a selection.

He’s looking to buy because his 15-year-old daughter will be attending private school in Canada later this year. The owner of a steel business in Beijing has applied to immigrate to Canada, and figures he may as well purchase a home now.

“Canada is a beautiful country. It is good for living, for higher education and it is not that populated,” said Mr. Zhang, who would eventually buy a $2.2- million home in Oakville, Ont.

Rumours are rife about foreign buyers. In Toronto, Russian and Iranian buyers, flush with cash, are snapping up condos. In Vancouver, Chinese investors are buying luxury apartments. In the Maritimes, wealthy Americans and Europeans are acquiring coastal vacation property.

Estimates of the level of foreign buying are all over the map. In the Toronto and Vancouver markets, they can range from 3 per cent to – in some pockets of the condo market – upward of 60 per cent.

Shifts in the housing market can have huge spillover effects on the broader economy, on everything from retail sales to employment and the building of new shopping malls.

And yet, “we’re missing quite a meaningful part of housing activity in this country,” said Sherry Cooper, chief economist at Bank of Montreal.

Canada’s housing market has boomed since the recession, until lately. Without knowledge of the source of buying, Ms. Cooper said, “we have difficulty assessing just how sticky this money is, how vulnerable we might be to international capital flow changes, or what are the fundamentals that determine what has been extraordinary building and buying in our major cities.”

Canadians, meanwhile, are flocking to the U.S. market, snapping up holiday homes in the sun. They are now, by far, the biggest bunch of foreign buyers of American real estate. Just how do we know this? Each year, the National Association of Realtors publishes a study on international buying activity in the U.S. It shows who the biggest buyers are, the fastest-growing nationalities of buyers (Canada, China), where they’re buying (Florida, California), why (bargain vacation homes) and how levels of foreign buying change from year to year.

The industry has collected this info for more than five years, gleaned from questionnaires and follow-up emails to 50,000 real-estate agents. It’s valuable information for the public, officials – and the industry itself, helping realtors better understand their markets, says Jed Smith, the association’s Washington-based economist.

It’s a contrast to Canada. CMHC does not monitor or compile data on foreign investors. The Canadian Bankers Association doesn’t keep data on this. Nor does the Canadian Real Estate Association. The Bank of Canada doesn’t track it, though Governor Mark Carney has noted that heavy investor demand – much of it foreign – “reinforces the possibility of an overshoot in the condo market in some major cities.”

As for the federal government, Finance Minister Jim Flaherty told The Globe and Mail last April that it doesn’t have a good handle on the amount of foreign money in the country’s housing market.

Monitoring foreign buying in Canada poses challenges. Some buyers purchase homes through local family or a lawyer’s office, so on paper they appear to be living in the country. Plus there may be privacy concerns around asking buyers where they come from or why they’re buying.

International interest in Canadian property is unlikely to abate any time soon. Volatile stock markets and Canada’s reputation for economic stability are luring investors. So are housing prices that are still lower than other major global centres. And, unlike many countries such as Australia and Switzerland, foreigners face no restrictions on home buying.

Interest in Canadian residential real estate among foreign buyers has been steady in recent years, with particular interest from Asia, says Luis Lopez, head of business development, for RBC Wealth Management.

There’s also more wealth sloshing around, looking for a safe place to park. Globally, 175,000 people crossed the millionaire threshold last year, led by growth in emerging markets like China and India, according to Boston Consulting. Investors from mainland China tend to see Canada as one of the top destinations for real-estate investment, according to real estate services provider Colliers International.

Tony Ma agrees. The agent in Markham, Ont., has hosted several groups of visiting Chinese buyers in recent months alone. They typically buy a house for $1-million or $2-million, either to live or as an offshore investment. Canada’s multicultural communities, affordability and democratic system will continue to lure buyers, he says. “I don’t see this market cooling any time soon.”

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