I've lived in Vancouver for 5 years now and have been a firm believer in the unbalanced, frothiness of this market the entire time. All typical measures of inaffordability have been shown to be consistently off when comparing the local population's overall income, current debt levels and overall income growth in the recent past.
My wife and I are both doctors and could "afford" to buy, but I could never rationalize the purchase despite home ownership being aggressively pushed on us from all Vancouver locals and our parents who have obviously made money in real estate over this extended bull market, albeit in Winnipeg/Ottawa markets.
In the last few months however, I feel like I've been analyzing the local situation in Vancouver incorrectly.....
I agree with the majority of the bearish posters on this thread who point to the national indicators such as historic low interest rates coupled with historically high debt levels, combined with a prolonged period starting in late 1990's of purposeful manipulation by CMHC to increase home ownership via longer amoritization periods and lower minimum downpayment requirements. This national trend shows this cannot go on forever based on the macro/microeconomic trends that govern our national/provincial and municipal landscape for Canadians. Eventually either a recession, higher interest rates or lack of consumer/investor confidence in real estate being the golden ticket will lead to either prolonged stagnation or decline in prices in the majority of our National markets. Coming from Manitoba, this is the viewpoint I have held consistently for Winnipeg's market, and felt Vancouver's hot market was explained by its locals unbridled enthusiasm for all things real estate. It truly is more manic than any other area in the country, because everyone knows multiple "average Joe's" who have made hundreds of thousands in this local market. It perfectly describes everything related to a speculative bubble.
The problem with Vancouver real estate is there is a significant non local market force in the foreign Chinese buyer. I don't believe the rest of the country is affected by this at any similar order of magnitude, although the Toronto market may be somewhat affected. Many posters have alluded to the Chinese foreign buyer influence, but I don't think we have delved deep enough into why this money flows to the Vancouver market, and what factors would potential reverse or diminish its flow. This is the part that has me questioning whether this long term rise will actually decline. I don't want to debate if foreign buyers are truly having an effect - anecdotal and objective evidence is continuing to mount; the only question may be is it the primary driver of recent increases or secondary/tertiary contributer. I've attended some forums with Dr Ley and personally feel the link is clear
http://www.theglobeandmail.com/life/home-and-garden/real-estate/some-wonder-if-its-time-vancouver-acts-to-slow-foreign-buyers/article24341903/Now these are some commonly held beliefs as to what motivates the Chinese foreign buyer to buy million dollar homes with cash:
1. Taking capital out of China provides a possible call option/exit strategy if an individual's business gets nationalized.
2. Canada has less stringent immigration laws regarding obtaining permanent residency status relative to other Western countries including an "investor" class that eases the application process if the applicant is wealthy. This again gives an individual a call option on leaving China if political unrest or corruption/witchhunts occurs.
3. Access to Western educations for their children
4. Environmental concerns for China/Chinese desire for natural beauty of Vancouver
5. It has been very lucrative as an investment over the last several years
6. Canada appears to have the most lax laws on foreign property ownership compared to other Western countries.
7.It also appears we have lax laws on bringing large amounts of currency into our borders relative to other Western countries:
http://www.vancouversun.com/news/Vancouver+airport+tops+country+seizures+undeclared+cash/8043419/story.htmlThere are likely many other possible motivations and some of the above may be anecdotal or incorrect. I previously believed that regardless of the motivation, once the bubble "pops" in the rest of Canada which will eventually occur, the foreign buyer would immediately be dissuaded from continuing to purchase as price declines would scare them from placing capital into a possible losing investment. I now think this is probably wrong.
The above border cash seizures article references that the supposed amount of capital outflow allowable to a Chinese citizen is $50,000/ year CAD equivalent. To have overall Chinese outflows in the billions/year as referenced in the article, individuals are obviously deciding the risk of keeping their cash in China is riskier than being caught taking larger sums out of the country. The Chinese foreign buyers are not utilizing local mortgages to purchase Vancouver homes. Anecdotal evidence has shown the majority are cash purchases. As noted above, even when CBSA finds undisclosed large amounts of cash at the border, the person pays a fine but keeps all their cash without further investigation. A multi million dollar cash real estate purchase by a Canadian citizen would likely send CRA on an in depth audit, but there is no concern by Canadian authoritities when it is a foreign buyer.
Couple the above with this recent article that suggests Chinese policy will ease limits on foreign capital flow along with a depreciating
CAD relative to the yuan, it appears capital outflows to Canada may see a sustained surge.
http://www.wsj.com/articles/china-to-ease-limits-on-overseas-investments-1432841526So to summarize, I can see many natural incentives to encourage Chinese citizens to continue to have their capital flow to Western countries and will not be abated by:
1. tougher foreign ownership laws (see Australia and Hong Kong's real estate price growth despite making foreign real estate investment harder),
2. Chinese National policy (has currently been ignored and is set to ease further)
3. Increase in interest rates (purchases are largely cash)
4. Chinese recession - I think this would continue to see higher capital outflows as there is a higher chance of nationalization of private businesses in poor economic times rather than continual economic growth
So if there is potential tidal wave of external capital flow that doesn't necessary act based on fundamentals, does this not mean Vancouver prices potentially have a long term trend to rise even despite the astronomic growth thus far?
