vancouver-toronto-foreign-investmentPhoto: JWPhotography2012

At least one economic research firm, known for its bearish take on Canadian real estate, isn’t sold on the argument that foreign investment is the main factor behind high-flying home prices in Toronto and Vancouver.

“We are sceptical of claims that Canada’s housing bubble is primarily due to foreign investors,” writes Paul Ashworth, Capital Economics’ chief economist for North America, in a recent report that follows the BC government’s announcement of a new tax on foreign homebuyers.

“Blaming foreigners for a country’s problems has always been a handy fall-back for politicians, whether it’s a lack of jobs, crime or, in this case, housing affordability,” Ashworth adds, before pointing the finger at Canadians instead.

Effective August 2nd, foreign nationals and foreign corporations must pay a 15-per-cent property-transfers tax when they purchase a residential property anywhere in Metro Vancouver.

The tax was implemented after public outcry concerning Vancouver housing affordability — and the role overseas buyers might be playing in heating up the market — as well as a call from Gregor Robertson, the city’s mayor, for the provincial government to take action.

But in the Capital Economics report, Ashworth draws attention to stateside markets that have higher shares of foreign buyers than what showed up in recently reported data on the Vancouver market.

According to the latest numbers from a month-long BC government study, one in 10 Vancouver home sales — about 11 per cent of all transactions — involved foreign nationals in a 34-day period.

However, in Florida, he points out, foreign buyers were involved in 22 per cent of all home sales last year. In California, these purchasers accounted for 16 per cent of sales, he says, attributing numbers to the US-based National Association of Realtors (NAR) in both cases.

“Yet prices increased by only 7 per cent in Miami last year and 10 per cent in San Francisco,” says Ashworth.

On the other hand, the benchmark price of a Greater Vancouver home was $917,800 last month, surging 32 per cent from a year ago, according to the Canadian Real Estate Association (CREA). Greater Toronto Area prices swelled 16 per cent over this period to an average of $647,600.

So what is the primary factor responsible for such huge price gains in Canada’s hottest markets, then? “This is mainly a home-grown problem caused by low interest rates and irresponsible lending,” Ashworth asserts.

Despite tighter rules on amortisation periods and down payments, the loan-to-income ratio on new insured mortgages has soared,” he continues.

loan-to-income-ratioChart: Bank of Canada

Ashworth brings up the Bank of Canada’s most recent Financial System Review, which says close to 40 per cent of insured mortgages for homes in Toronto last year had a loan-to-income ratio in excess of 450 per cent. This was the case for roughly 33 per cent of mortgages issued in Vancouver in 2015.

“What has really changed in the past 12 months is not a big increase in foreign buyers, but a further decline in interest rates, which has allowed lenders to relax lending standards even further,” says Ashworth.

Capital Economics has presented this argument before — albeit in less detail — drawing criticism from Douglas Porter, BMO’s chief economist, who plotted a side-by-side comparison of household credit and home price growth in Canada.

Porter noted household credit has remained relatively flat while home prices have spiked, suggesting “something besides domestic borrowing has clearly fanned the flames.”

Granted, Ashworth “wouldn’t dismiss the foreign investor story completely.” The low Loonie does make Canadian real estate cheaper for foreign investors who can capitalize on a favourable exchange rate, he notes.

“Let’s hope we’re right about foreign investors playing a minor role in the current bubble,” says Ashworth.

“Because if we’re wrong and this new tax scares foreign investors away and triggers a big drop back in home sales, it could have a significant impact not just on the BC government’s finances but on the entire economy,” Ashworth concludes.

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