Happy Monday Morning!
The federal government has extended the foreign buyer ban another two years, meaning foreign nationals will be banned from buying residential properties in Canada until 2027.
“By extending the foreign buyer ban, we will ensure houses are used as homes for Canadian families to live in and do not become a speculative financial asset class,” Finance minister Freeland said in the statement.
“The government is intent on using all possible tools to make housing more affordable for Canadians across the country.”
There’s just one problem, this has not made housing any more affordable. Probably because there are no foreign buyers, at least not how the government defines them.
Foreign buyers have been a trickle since the BC government introduced a 15% foreign buyers tax in 2016, later increasing it to 20% in 2018. It’s hard to say whether the tax slowed foreign purchases or whether it was Chinese policy makers clamping down on capital flight. Likley a combination of both.
Nontheless, in recent years foreign buyers as a percentage of total residential sales in BC has averaged around 1% of all transactions. It spiked to nearly 3% of transactions just before the federal ban last year, a whopping total of 450 foreigners jumped the cue.
If you really want to measure foreign influence on the Canadian housing market you can’t look at someones passport, since most “foreign buyers” are actually Canadian citizens, permanent residents, and students, many of whom don’t earn an income nor pay income taxes here. However, they are tremendously wealthy and choose to legally and, sometimes, illegally park their cash here.
A recent hit piece from journalist Sam Cooper highlights a story of an HSBC banker exposing "Fake Chinese income" mortgages that fuelled the Toronto Real Estate Bubble.
The whistleblower, a Canadian business school graduate, was staggered by the suspicious home loans he discovered in 2022 when he joined a mortgage approval team in a small HSBC branch on the outskirts of Toronto.
Chinese migrants living across Toronto were obtaining mortgages from HSBC while supposedly earning extravagant salaries from remote-work jobs in China. In one example, an Ontario casino worker that owned three homes also claimed to earn $345,000 in 2020 analyzing data remotely for a Beijing company.
In other examples, an HSBC mortgage client claimed to earn $700,000 annually for remote work in China, while simultaneously living in Canada and paying off a $10,000 student loan.
Another woman who owned homes in Aurora, Markham and Scarborough, worked part-time as a hairdresser while also claiming to earn $536,280 at a “Business Manager” job in Guangzhou.
The most shocking case shows that one woman that owns at least four Toronto properties opened her HSBC Aurora bank account in 2013, claiming to be a “Homemaker with no annual income.”
But her Toronto account soon received incredible amounts of wire transfers from HSBC China accounts, and paid out “high value cheques” to third parties for real estate purchases.
This case suggests the “Toronto Method” shadow banking described in FINTRAC’s 2023 study has been seeping into the Toronto real estate for about a decade.
And yet in 2020, this same woman applied for another HSBC Canada mortgage, claiming to earn $763,000 remotely from her job in China.
We could go on but you get the point. None of this activity would be captured by the federal governments foreign buyer ban. The ban will do nothing to improve housing affordability but it will score political points for a Liberal government desperate to regain some ground in the polls.
Ironically, the recent slump in the Chinese economy will do more to slow the flow of capital into the Canadian housing market than any local politician could ever do.
Per Bloomberg, a new batch of overseas assets acquired in a decade-long Chinese expansion spree are starting to hit the market as landlords and developers decide they want cash now to shore up domestic operations and pay off debts — even if that means taking a financial hit. Beijing’s crackdown on excessive borrowing has left few developers unscathed, even those once considered major players. A unit of Guangzhou-based China Aoyuan Group Ltd., for example, which is in the middle of a $6 billion debt restructuring plan, sold a plot in Toronto at about a 45% discount to the 2021 purchase price late last year, according to data provider Altus Group.
If you’re looking to follow along at home here in Vancouver all you have to do is monitor the luxury pre-sale condo market, which is often a good proxy for measuring Chinese capital flows. It has been struggling for years, and the buyers who bought in at exorbitant prices are now enduring significant losses at several prominent buildings.
They say when a butterfly flaps its wings it can sometimes be felt miles away…
A butterfly flapping its wings is used as a metaphor in non-linear systems theory to illustrate how a small event can lead to large effects. It was classically used to describe how through various feedback loops of temperature, humidity, wind, sunlight, and other weather changes the flapping of a butterfly’s wings can lead to the development of a hurricane. As used here it seems to be a linear unclear metaphor. A few speculators have clearly not lead to a major problem in the housing market. But as usual the banking industry is operating in bad faith with respect to approving mortgages.
And that leads to some other reasons as to why there is a housing crunch and the role of the butterfly effect in that market. It begins with the neoliberal notions or bad beliefs that markets should determine pricing and availability of goods and services. Housing was changed from the concept of a home to a market asset. And the butterfly got airborne morphing exponentially into a housing bonanza for some and lack of affordable housing for others.
When I purchased the new home in which I now live, the builder contracted with the different trades to mark up their work and he then marked it up further. The price of the home did not reflect that actual cost of its construction. It then allowed the insurance companies to mark up their premiums and the banksters to provide exorbitant mortgages. Each time a home was sold that determined the price of the next home sold and its mortgage.
A simple example was insulating the ceiling of my attached garage. I was able to persuade the builder to allow me to bring in my own contractor who charged me $300. The builder wanted $600 for the same contractor. Since the contractor was a friend, I asked him about the discrepancy and he said that when he was asked to bid on insulating the homes in this subdivision, the builder told him to mark up the price he charged the contractor by 30%.
I ran into the same problem with the flooring. I wanted a certain laminate floor and the builder asked for a $14,000 up-charge for it. The credit for the supplied carpet was negligible. I went to a flooring company and he estimated and eventually installed it for $7000.
Factor those into the eventual price and the impact on the mortgage costs across an entire industry.
The price for building a new home in Canada ranged on average last year from $200-300 per square foot factoring in the profit to the builder. That means the 1500 square foot home in which I live would cost $450k. Comparable homes to mine are selling now for close to $1 million.
What if those providing mortgages were restricted to an amount comparable to a percentage of the actual building costs and not the bloated up-charged costs? Insurance rates would be lower and real estate fees would be lower.
On a balance sheet we look at assets minus liabilities equal equity. Play with that formula and set policy accordingly.
Great report Steve. Underscores a lot of what we realtors believe to be the case. Thank you.