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Douglas Todd: Why Vancouver house prices became so out of whack

Opinion: Metro Vancouver suffers a double whammy in regard to outrageous house prices. It’s a gateway city for foreign capital. And it’s located in a country that compounds unaffordability through unrivalled population growth.

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There has been a great deal of confusion when it comes to figuring out why Metro Vancouver housing prices are so astronomical, especially in the past decade.

But it is becoming increasingly clear why the Vancouver region’s prices have grown so out of line with the rest of Canada and other major economies.

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Metro Vancouver suffered a direct hit almost a decade ago, at the same time gigantic amounts of capital were moving out of China, contributing to residents dealing with some of the most unaffordable prices in the world (with Toronto a close second).

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This phenomenon has been captured by Josh Gordon of McMaster University and economist David Williams of the Business Council of B.C. Their research counters past accusations by politicians, real-estate industry executives and pundits that it is xenophobic to suggest such a thing.

And now the Bank of Canada and countless others are recognizing that overall Canadian prices and rents are exaggerated compared to other well-off countries — largely because of Canada’s unprecedented population growth, almost all of which comes from international migration.

Let’s start with a closer look at how the Vancouver region became such an outlier.

Metro Vancouver property values usually run more expensive than the country’s largest other 20 cities. The work of Gordon and Williams makes clear it has been normal for Metro Vancouver prices to be on average 2.2 times higher than in other large Canadian cities.

The Vancouver region’s twice-as-expensive ratio can be explained by many factors. The most obvious is that the West Coast metropolis offers an attractive place to live, due to its temperate climate and natural beauty. It is also a special magnet in Canada for immigrants, foreign students and other guest workers because it has large diaspora communities, whether Chinese, South Asian, Filipino or Iranian.

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But that doesn’t explain a big house-price anomaly that struck about eight years ago. Gordon and Williams found in 2016 that Vancouver-area values suddenly jumped to 3.1 times higher than other major Canadian cities.

Gordon housing chart
Metro Vancouver’s prices soared at the same time hundreds of billions of dollars were being moved out of China. They tempered when the foreign-buyers tax was put in place. Source: Josh Gordon, McMaster University sun

That occurred at the same time money started pouring out of China. It’s sometimes been called “China Shock.”

There were many reasons an estimated $1 trillion US left China so rapidly, headed especially for real estate in Canada, Australia, the U.S. and Great Britain. At the time, China’s wealthy elite were dealing with a stock-market collapse and crackdowns on alleged corrupt officials by President Xi Jinping. Communist China’s rich wanted an overseas haven for their assets.

We can understand how that surge of Chinese capital impacted Metro Vancouver by looking at what happened in Australia, which is more transparent than Ottawa about reporting on the source of incoming foreign capital. Its data shows Chinese money outflows changed in a startling way a decade ago.

In just three years there was a 600-per-cent jump in the volume of Chinese real-estate investment in Australia — leaping from $5.9 billion a year in 2013 to $31.9 billion in 2016, before declining.

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A similar pattern occurred in Metro Vancouver, a gateway city similar to Sydney.

When Metro Vancouver’s price ratio peaked in 2016 in comparison to the rest of Canada, creating an extraordinary bubble, two things happened: The B.C. government took the then-unprecedented move of imposing a tax on foreign buying, which settled at 20 per cent. At the same time, there was a drop-off in capital flight from China, which began after President Xi made it harder for the country’s citizens to get their money out and urged elite Communist party members to bring their assets back home.

Then in 2018, Metro Vancouver prices relative to the rest of Canada dipped again. That coincided with the B.C. NDP bringing in the then-controversial speculation and vacancy tax. It was designed to discourage property investment, especially by so-called “satellite families” in which breadwinners earn most of their money offshore.

After the tax was brought in in 2018, Gordon and Williams discovered, Vancouver-area prices dropped back to their normal ratio — of about 2.2 times the national average.

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Australia and China outflow
The amount of real estate investment from China into Australia peaked in 2015-16 That’s much like in Metro Vancouver. Source: Australian Foreign Investment Review Board (FIRB). sun

The work of Gordon and Williams, combined with the Australian data, help us understand why Vancouver-area prices went out of whack with the rest of the country. And housing analysts say the foreign capital doesn’t go away once it’s here — it inflates prices over the long term.

This is all bad news for residents of the Vancouver area who are struggling to afford a decent place to live.

And there is another level of bad news: Prices in Canada’s major cities have also been growing extremely fast compared to other countries.

The U.S. Federal Reserve Bank of Dallas, which monitors global economic trends, reports that Canadian housing prices since 2015 have skyrocketed roughly twice as swiftly as prices in the U.S., United Kingdom, Germany and France.

Why? Even the stodgy Bank of Canada, which is hard to accuse of being racist, in January acknowledged that the country’s rapid population growth, 98 per cent of which comes from international migration, has led to higher costs for housing.

The National Bank of Canada’s chief economist, Stefane Marion, is also among the many voices lamenting how years of welcoming record-breaking numbers of new residents is strongly contributing to inflation, especially of shelter costs and rents.

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Unfortunately, many politicians and the development industry obfuscate the issue by putting virtually all the blame for lofty prices on a lack of supply, plus mortgage rates and bureaucratic red tape.

But a host of housing analysts, such as Steve Saretsky, John Pasalis, Ron Butler, Stephen Punwasi, Ben Rabidoux, Patrick Condon, Mike Moffat and others, counter that Canadian developers, especially in Metro Vancouver, have been building new housing at a frantic rate — yet still cannot come close to keeping up with demand.

That demand has been exacerbated ever since 2015, when newly elected Prime Minister Justin Trudeau began to crank up targets for new permanent and non-permanent residents to rates far more intense than any other Western country. Last year, Canada’s population grew by a record 1.25 million people because of it.

Meanwhile, a huge cohort of people in Canada who seek a place to live at a reasonable price, including many newcomers, continue to suffer.

For Metro Vancouver, it all adds up to a double whammy: The gateway city has its own distinct house-price problems, and it’s located in a country that compounds them.

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