Foreign Money and Vancouver Real Estate

The case for foreign money’s role in VanRe I’ve been asked by a few people to post this summary, so here it is. The case for foreign money (which is not the same as foreign buyers, or foreign investment) as the leading historical explanation for Vancouver’s extremely high unaffordability (which is not the same as high prices) is quite comprehensive. It rests on a mix of academically peer-reviewed research and long-term data – which should be viewed as gold-standard material, produced by experts in the field – rigorous industry and other data, and the opinions of numerous economists. This is not to say that other factors (such as, say, interest rates or restricted supply) do not have an impact on Vancouver’s unaffordability, but that whatever impact they do have has historically been drowned out or greatly magnified by that other force: foreign money. Ian Young, South China Morning Post, September 11, 2017. (Note that the following reflects long-term and historical data and conclusions. It’s not meant to represent a right-now-this-instant assessment of the Vancouver real estate market, because the cited data doesn’t cover right-now-this- instant. Rigorous study typically takes some time, especially if it’s peer reviewed. Questions? I can be reached on [email protected] ) 1.

Firstly, the historical correlation between foreign immigration to Vancouver and housing costs has been incredibly strong, at +0.94 over 25 years from 1977-2002. This is a peer-reviewed analysis by UBC’s Oxford-educated Prof David Ley, the most eminent geographer in Canada who has devoted 30 years to studying unaffordability in Vancouver and property bubbles around the world. He is a world-renowned expert. Ley concludes the link between foreign immigration and housing costs in Vancouver is “unusually decisive”. The correlation between housing and other oft-cited factors was insignificant or even negative: interest rates (-0.12), domestic migration (-0.32), joblessness (+0.16), rental vacancies (-0.03). See Millionaire Migrants, (publishers Wiley-Blackwell (2010). More: http://www.scmp.com/comment/blogs/article/1440792/immigration-property-prices-and-vancouverexperts-view

2.

Now, correlation is not proof of causation. But it is evidence of causation if accompanied by a plausible causal mechanism, and Ley’s case is very simple: Vancouver attracts lots of rich immigrants and rich immigrants buy real estate.

3.

In 2010, Profs Marcus Moos and Andrejs Skaburskis also published peer-reviewed research which concluded that Vancouver’s high unaffordability could be attributed to the de-coupling of local housing from local labour markets, because immigrants’ housing consumption had become less tied to their local income. It was instead determined by their arrival with established wealth and unreported foreign income. The abstract: “The analysis reveals a de-coupling of local housing from labour markets as recent immigrants’ housing consumption became less tied to their local labor market participation. Labor market income measured in national datasets becomes less instructive in explaining housing market outcomes and neighborhood change if immigrants arrive with established wealth and continue to earn unreported income outside the country”. See Markus Moos & Andrejs Skaburskis (2010) The Globalization of Urban Housing Markets: Immigration and Changing Housing Demand in Vancouver, Urban Geography Journal. http://www.tandfonline.com/doi/abs/10.2747/0272-3638.31.6.724

4.

The academic conclusions of Moos and Skaburskis match those of CRA auditors with decades of experience I have spoken to recently. Their raw CRA data from the mid 1990s resulted in an internal report with the conclusion that wealthy new immigrants were playing a huge role in the luxury housing market and likelihood that these buyers were engaged in widespread tax cheating, by obscuring their ongoing foreign earnings. For instance, in Coquitlam and Burnaby, more than 90 per cent of top-end, C$600,000-plus purchases in which buyers were identifiable were made by new immigrants, they discovered. More: http://www.scmp.com/news/world/united-states-canada/article/2005794/canada-tax-chiefs-knew-foreignmoneys-big-role

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This overwhelming connection between recent immigrant buyers and Vancouver’s luxury housing market has been ongoing.

6.

For instance, in 2010, Landcor Data (the region’s most respected real estate number cruncher) found that, 74% of all luxury buyers in Vancouver’s Westside and Richmond had purely mainland (PRC) Chinese names (excluding all Chinese names with even remotely Westernised variants). Not only that, Landcor found that this proportion was soaring, from 46% in 2008, to 68% in 2009, to 74% in 2010. That’s a proportional increase of 61% 20082010. In sheer numbers, the presence of buyers with such names was up by 280%. Clearly, this escalation was driven by new immigrants and applicant immigrants, since it cannot be explained by a similarly increasing Canadian-born ethnic-Chinese population in Vancouver: there was no such increase.

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In 2013 and 2014, these findings were replicated by MacDonald Realty using the same methodology (PRC Chinese names only, no HK, Taiwanese or English variants) applied to its own City of Vancouver sales. The results: 70% of all 2014 sales above $3m; 33.5% of all detached house sales (2013); 48% of dollar-value of detached houses (2013); 21% of all sales $1m-$3m; and 11% of all sales under $1m.

8.

Reuters did a similar study based on land titles of homes sold for more than $2m on Vancouver’s Westside in 2015. Among a random selection of 50 titles, “nearly half” met the “PRC Chinese names only” criteria.

9.

In 2015, housing researcher Andy Yan (now director of Simon Fraser University’s City Program) went through every piece of sales data for three Westside neighbourhoods and found that 66% of ALL recent detached house buyers in some of the city’s most expensive neighbourhoods had “nonAnglicised Chinese names”. The figure rose to 85% of sales above C$3m, and 91% of sales above $4m. See: http://www.scmp.com/news/world/article/1875500/ethnic-chinese-housing-researcher-defends-work-vancouvers-white-mayor

10. The findings of Yan, Landcor, Macdonald and Reuters are remarkably consistent. 11. So what does it prove? It does NOT (in isolation) prove that these buyers are Chinese or Canadian or immigrants or not. What it does demonstrate with a very high degree of certainty is that these buyers are ethnically Chinese, and that their mother tongue is Chinese. In the case of Landcor, Macdonald and Reuters, that their mother tongue is Mandarin Chinese (Yan did not distinguish between mainland and non-mainland purely Chinese names, but the consistency of his results with the three other data sets suggests very strongly that the overwhelming majority of his study’s buyers’ had Mandarin Chinese as a mother tongue).

12. However, according to the 2006 census www.bcstats.gov.bc.ca/Files/446a8009-bd89-4d18-967d-e9f0c7e4ce53/2006CensusProfileBritishColumbiaCensusDivisionsandSubdivisions.xlsx , Mandarin mother-tongue speakers made up only 3.9 per cent of the City of Vancouver’s population, and 7.7 per cent of the population of Richmond http://www.richmond.ca/__shared/assets/Languages6251.pdf (even if we include half of all non-specified-Chinese speakers, those numbers only rise to 8.7 per cent and 14.4 per cent respectively). 13. Clearly, their buying presence far outstrips their actual presence according to the 2006 census. The huge excess in the 2010-2015 Chinese-name research MUST come from either new immigrants or foreign non-residents. Either way, this strongly suggests the use of foreign wealth or ongoing undeclared foreign earnings to make purchases, at least in the top end of the market, since we know for a fact that wealthy immigrants do NOT declare high income in Canada (they declare refugee level income, in fact). See http://www.scmp.com/comment/blogs/article/1929324/studyreveals-awfulness-canadian-investor-immigration-income-tax and http://www.scmp.com/comment/blogs/article/1715970/canadas-millionairemigrants-earn-less-refugees-so-why-bother-wealth?page=all

14. Similarly, the excess of ethnic Chinese buyers at the top end of the market cannot be explained by a tendency towards higher Canadian incomes: no such tendency exists, and in fact, ethnic Chinese incomes are substantially lower than those of the general Canadian population (according to the 2006 Census ethnic Chinese median/avg income = $22,907/$32981; vs general Canadian population $26,850/$36,301). 15. To understand the sheer scale of these numbers of buyers it is essential to understand the two prime conduits for wealthy migrants who end up in Vancouver: The now-ended Federal Immigrant Investor Program and the ongoing Quebec Immigrant Investor Program. These schemes brought a total of 190,487 people to Canada from 1986 to 2014, representing 50,652 original households. (Arrivals under the QIIP in 2015 and 2016 likely number 10,000-12,000 and 4,000 households, so we can round this up to 200,000, and 54,000 households). They have been mostly Chinese (incl HK and Taiwanese), and recently overwhelmingly from mainland China. (n 2010, 58.2% were from the People’s Republic of China, followed a distant second by those from Taiwan, 7.9%.

16. Historically, 60 per cent of IIP/QIIP migrants end up in Vancouver (at least, BC, although the number choosing to live elsewhere is minuscule, according to Census data), so, about 120,000 individuals and 32,400 households. To these we can add about 12,000-13,000 Vancouver household arrivals under the entrepreneur-class scheme, the other main source of wealthy immigrants to Canada. So, about 45,000 of these so-called millionaire migrant houeholds. 17. How much are they worth? The federal government never released entrepreneur wealth data, and it stopped issuing IIP/QIIP wealth data in the 1990s. But back then, the government said their arrival funds averaged C$2m-$2.5m. How much now, 20 years later? Likely, substantially more, if for no other reason than that in this period the minimum wealth requirement rose from $800,000 to $1.6million.

18. So, the most conservative estimate of the total wealth brought by millionaire migrants to Vancouver must be substantially higher than $100billion. Considering the increasing wealth of such migrants since the 1990s, and the fact that they declare minuscule ongoing domestic earnings in Canada, how much foreign wealth and income have they brought to Vancouver? I’d confidently double that. Maybe more. And +/-$200billion is an insane amount of money in a city like Vancouver, with a population of 2 million, and where such migrants are concentrated in areas with total population of

around 1 million. It’s overwhelmingly huge. It would be enough to give about C$220,000 in untaxed cash to every single household in Metro Vancouver. Or $750,000 in cash to every single household in the City of Vancouver. It’s bonkers. 19. Put these arrival numbers in perspective: Vancouver’s intake of millionaire migrants has historically far exceeded the intake for the entire United States (from 2005-2012, there were 9,540 approved EB-5 applicants; assuming an average of three persons per household, about 28,620). Vancouver has received more rich immigrants under wealth-based programs than any other city in the world, by far. 20. There is now a strong consensus among economists of the strong role played by foreign money in Vancouver’s market. Tom Davidoff has reckoned that were foreign money to become absent from the Vancouver market, there’s “no way prices don’t fall” by 25 to 50 per cent,and “it’s very hard to think that anything other than outside capital flows are driving unaffordability right now”. Even Tsur Somerville – a longtime denialist - has conceded that the massive spike in prices since 2015 must be down to foreign money: “The only thing that you can point to that’s changed are two things: one, the lowering of the Canadian dollar and two, a massive change in the official currency reserves in China.” See https://www.biv.com/article/2016/2/vancouver-real-estate-it-supply-and-demand-or-fore/

21. There have been other expert demonstrations of the strong correlation between the property market in Vancouver an foreign money and its proxies. Here, from TD Economics https://www.td.com/document/PDF/economics/special/GTAHousing_Mar2017.pdf

22. 23. Here, from Bloomberg

24. 25. It’s possible to undermine any of this data with various arguments. But I want someone to show me ACTUAL DATA to contradict it. Every stat that I’ve been shown to this end is hugely flawed: for instance, the REBGV stat about the small number (4%) of “foreign” buyers in Vancouver excludes ALL IMMIGRANTS, and is thus irrelevant to the role of immigrant buyers. Same with the CMHC.

26. Similarly, the obsession with supposed lack of supply to satisfy a growing population in Vancouver is easily disproven: Vancouver has a very LOW number of new residents to housing starts; historically, over a 25-year period, it’s 2.4, below that of Toronto 2.9 or Calgary 206. https://www.theglobeandmail.com/real-estate/vancouver/vancouver-housing-supply-isnt-the-issue-affordability-is-data-shows/article31794288/ It’s currently a ridiculously low 1.3. 27.

28. 29. http://udi.bc.ca/wp-content/uploads/2017/05/Q1-2017-State-of-the-Market-1.pdf 30. As for interest rates: as previously demonstrated, the correlation between Van prices and rates is extremely bad. So bad as to be irrelevant. Historically, Vancouver’s market has moved in a manner totally disconnected from rates.

31. As for debt levels – the addiction to easy credit – it’s clearly a factor, but a pretty irrelevant one. High levels of debt do not determine prices; prices determine high levels of debt. In any case, the entire world has access to cheap money and easy credit, yet Vancouver’s situation is currently virtually unique, in the scale of its unaffordability combined with the speed at which it reached these levels.

32. 33. To update this chart data: Since 2004/05, price:income unaffordability in London +23%,San Fran +19%,NY -17%,Sydney +37%. Vancouver is up by +123%. Nowhere in the world comes close, except Hong Kong (similarly driven by Chinese money). 34. And this is without mentioning the anecdotal evidence, from every local realtor I’ve spoken to, which overwhelmingly concurs that foreign money – Chinese money - has been the driving force in Vancouver’s market.

**ENDS**