Canada has a severe housing affordability crisis.
A new UBS report released in September states that Toronto and Vancouver have the world’s third and fourth largest housing bubbles. This means that they’ve experienced a rapid increase in home prices fueled by demand and speculation. Housing in both cities has become virtually unaffordable for domestic earners – to demonstrate, more than 90% of all detached homes in Vancouver are now worth over CAD $1M, while the last census data reports that the median household income is around $70 000. With such a staggering disparity, the Royal Bank of Canada notes that it would take almost 120% of a typical household income to cover ownership costs of these homes. Canada’s average household debt is the highest of all G7 members, and has surpassed the levels observed in the UK and US before the global financial crisis of 2008.
Why are Canadians living in this rapidly growing housing market bubble? And how is it possible that the average home can cost over CAD $1M, when the average household income places most Canadians out of reach?
It’s worth looking at one factor driving skyrocketing home prices in Canada: Chinese capital. It’s a fact that our Prime Minister, who had repudiated this as a cause of soaring housing prices, conceded to in 2016.
There are several push-and pull-factors to explain Chinese interest in Canadian real estate. While investment may be an obvious motive, the most cited pull factor is educational opportunities. China has been the biggest source of Canada’s international students in recent years. Push factors include instability and low confidence in China’s economy, a plummeting stock market, the surprise devaluation of the yuan, and increasing government restrictions on capital outflow, which have increased the urgency of moving money offshore.
In 2016, President Xi Jinping tightened those restrictions, ruling that Chinese citizens may move a maximum of $50,000 abroad annually. In more aggressive moves to curtail capital outflows, Chinese citizens must disclose the intended use of the yuan they wish to convert, and must pledge not to purchase property (among other acquisitions). But last year, economists estimated that approximately $1.2 trillion (U.S.) had flowed out of China since 2015 – an enormous sum that affected economies around the world.
How has so much capital fled China with these restrictions in place?
Citizens have found many ways to shirk China’s capital controls, most notably through China’s underground banking system. Chinese officials have intensified crackdowns on these lucrative shadow banks, which run parallel to commercial banks but are completely unregulated. One way to move money out of China is through the hawala network, a form of money laundering that relies on peer-to-peer lending where money transacted does not physically leave the country of origin. In 2017, the government bust of a shadow bank in Shaoguan revealed that more than 10, 000 citizens had used the bank to funnel $3 billion U.S. out of China. With increasing restrictions on capital outflows, using shadow banks to invest in real estate abroad was perceived as a reliable way of protecting one’s assets.
What can Canada do to stem the tide of Chinese capital pouring into the domestic real estate market?
Despite increasing capital controls and the occasional government seizure of real estate assets abroad, the Chinese government cannot successfully contain capital with the underground banking system in play. However, Canada can put regulations in place to make real estate less attractive to foreign buyers. Australia and New Zealand have taken aggressive measures to rein in offshore demand. Australia has restricted foreign buyers to new housing, not existing housing. New Zealand has banned the selling of any housing to foreigners, foreign trusts, corporations, and temporary residents.
British Columbia has introduced a 20% non-resident property transfer-tax in Vancouver, and Ontario has introduced the same tax for the Toronto area, at 15%. While these measures may have slowed sales in these areas, they have also diverted Chinese buyers to lower-priced markets, such as Montreal. This suggests that Canada needs universal, country-wide non-resident buyer legislation in order to stem the affordability crisis. Other measures could include restrictions on mortgage loans to domestic earners with taxable income only.
If properly managed, investment from China could certainly benefit Canadians. But the housing crisis demonstrates that Canada needs to be better prepared to manage Chinese expansion if it is to yield fruitful, rather than damaging results. Perhaps the housing crisis offers some key questions to consider as Canada looks to China for strategic trade opportunities.
Felicia Leone is a Master’s student at the Norman Paterson School of International Affairs in Ottawa. She is specializing in conflict analysis and resolution. She holds a BA in Political Science from Concordia University.
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