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Battle Lines on the Shifting Home Front

Does debating the impact of foreign investment on residential prices obscure a more important debate?


For Canadians there are a few deep seated public issues that seldom reside far from media headlines and opinion pages.  These include our children and their education, healthcare and, of course, the accessibility and cost of home ownership. In recent years, the last has been dominated by astronomical increases in Vancouver’s and Toronto’s residential prices, particularly ground-based houses.  With their nominal house prices almost doubling over the last seven years, affordability continues to be hotly debated in the media, academia, public forums and, of course, provincial and federal legislatures.

This debate, to paraphrase Lord Durham’s 1839 Report, usually constitutes two sides warring in the bosom of a single concept.  That concept is the principle of supply and demand. On one side, largely embraced by governments, the argument holds that excess demand, notably from foreign investors is responsible for the rapid climb in residential prices.  Not so, say some economists, bankers and developers.  The real problem is the shortage of supply largely created by foolish government policy and inefficient regulatory procedures.  Of course, both sides are saying the same thing.  If there is too much demand there is clearly not enough supply; but if supply is too little there is clearly too much demand.  The demand side proponents, however, believe the component of demand responsible for the rapid price rise is not valid demand and should be suppressed by government. The supply side counters that all the demand is valid, but supply limits are largely artificial and mainly created by provincial governments.  There are those, of course, whose opinion includes both views, leaning more or less to one side or the other. 

The recent introduction of a foreign owner investment tax in BC last August and in Ontario this April suggests the demand supply argument has the endorsement of governments. With Ontario’s subsequent release of its revised Places to Grow regulations with increases in density and restrictions to sprawl, the supply siders has been dealt a further blow.  The real impact of foreign owner investment on demand, however, remains hotly debated; so too is the question of actual supply. But in the end, does this debate only muddy a much more important debate about affordability and the viability of our urban and home ownership culture?

An Excess of Demand?

To be considered the offending culprit, demand must in some way include “excess demand.” In other words, demand is exceeds expected demand given household formation and domestic incomes.  Prior to the 2008 meltdown in the US, for example, sub-prime mortgages created an unsustainable housing bubble by allowing buyers into the market who could not maintain payments over time. Some argue an extended period of very low mortgage rates in Canada is contributing to excess demand that will prove problematic when/if interest rates rise or house prices in Greater Vancouver and the Greater Toronto Area fall significantly. The federal government gave credence to this argument when it reduced the maximum mortgage payback period back from 30 to 25 years and introduced tighter Central Mortgage and Housing Corporation (CMHC) insurance restrictions.

But over the last couple of years, media headlines have tended to focus not on domestic but foreign demand, especially from China.  Non-resident investment taxes in BC and Ontario suggest provincial authorities accept this narrative. The housing industry along with some bankers and economists disagree, arguing suppression of supply is the problem.  Josh Gordon, Assistant Professor at Simon Fraser University’s School of Public Policy argues strongly for the demand side.  In his recent report, In High Demand: Addressing the demand factors behind Toronto’s housing affordability problem (March 2017) and a lengthy interview with Building, he squarely points the finger at foreign investment demand.

In summary, he argues the astronomical increase in income to price ratios (above 5 is considered problematic) in GV and GTA compared to other Canadian cities indicates low interest rates and poor investment in social housing cannot explain the magnitude of the price increases. While he concedes there is some inelasticity in Toronto’s housing supply, “its estimated impact,” he writes, “is not nearly large enough to generate the price levels Toronto has witnessed…”  Even assuming a high level of inelasticity of supply, American evidence suggests Toronto’s income/price ratio should be not much above 5 whereas it is a huge 10 to 11. In Vancouver, the ratio is 12, but a whopping 28, 23 and 37 in Richmond, Burnaby and East Vancouver respectively. “There is no way local income is buying houses,” he says bluntly. In fact, a recent Vancouver report on income relative to house prices by municipality found the higher the house price the lower the jurisdiction’s income. 

MLS home price index

MLS home price index, year over year % change, composite price, January 2017

Gordon presents data to suggest Toronto housing construction over the last decade has actually kept up with population demographics; that is, the ratio of population to housing completions has not changed significantly.   This suggests, he writes, “that shortfalls in supply are due to demand factors not captured in population growth, such as foreign investment and multiple property ownership by both domestic and foreign investors.”  In September 2016, the Globe and Mail presented data from Vancouver Planner Andy Yan that showed a 25-year near constant new population to new residential unit ratio of 2.4.  The problem, Tan says, is affordability with the type of housing being built – as high as $1700 per sq. ft. says analyst Jon Bennest – being bought up by largely foreign money.

Both Gordon and Tan argue that excess demand from foreign investors is driving exceptional residential price increases.  “In a 2014 survey,” writes Gordon, “Vancouver ranked third globally as a preferred target for [foreign] real estate purchases, while Toronto ranked sixth.” 

Ben Myers of Fortress Real Development, also interviewed for this article, leans toward the supply side argument but also reports on the reason why Chinese investors are attracted to the Canadian market.  On the push side these include concerns over possible devaluation of the Yuan, desire for diversification and relaxed investment outflow rules; and on the pull side are Canadian “asset safety,” low volatility of rental rates, acceptance of long term commitment despite low return rates and establishing a second home or destination for immigration.  To these drivers, Gordon adds two cities with large diaspora communities and growing populations and economies. This is supported by Canadian public policies including limited concern with money sources, weak capital gains taxation and enforcement, low property taxes leading to low carrying costs and a weak currency. “We have created’” he summarizes, “an extremely attractive equity.”

Supply Suppression Drives up Prices?

A rising chorus within development-related industries argue lack of supply and not inappropriate demand is the culprit.  Most importantly, argue supply side advocates, Gordon is wrong for two fundamental reasons. First, the level of foreign owner investment is not sufficient to explain the steep climb in prices; and second, his argument fails to appreciate a dislocation within the type of supply coming on stream and what the market really wants. 

In terms of the first, reliable data on the level of foreign owner investment, most agree, is not currently available although there are many best estimates from multiple sources.  As recently as February 2017, the Globe’s Mike Hager reported,  “Despite fears that foreign speculators are juicing the [Toronto] Region’s already-booming real estate market, it is impossible to know what impact international capital is having because no official data are being collected.” Myers reports the Toronto Real Estate Board’s surveys suggest foreign owner investment about only 4.1% in the GTA.

Average house price-to-income ratio

Average house price-to-income ratio

In Vancouver, estimates from CMHC, realtors and some banks vary between 5% and 10%.  While there can be a ripple effect down the residential food chain as foreigners purchase high-end houses, he says, “to have a big impact the value of the residences they were buying would have to be significantly high.” In fact, reported the BC government in 2016, average prices paid by foreign investors were only marginally higher than domestic buyers.  The same report found foreign purchases/value were 9.7% and 10.0% respectively; but in Richmond it was 18.2%/19.1% and in Burnaby, 17.7%/15.0%. Post Foreign Investment Tax figures from five weeks of data collected by the government indicated a much higher 20% rate for the region, a figure disputed as unreliable by the real estate industry.

When it comes to advocating the importance of the supply shortage, the debate becomes sharper. “Fundamental demand,” Frank Clayton tells me, is a given.  A faculty member of Ryerson University’s Centre for Urban Research and Land Development and co-author with David Amborski of Countering Myths about Ground-related Housing Prices in the GTA: New Supply Really Matters, he does accept that low interest rates, high in-migration and government growth policies create vigorous but valid demand.

The problem with Gordon’s analysis suggesting appropriate supply, however, is he does not disaggregate into ground-based and apartments. “The problem in Toronto is not a unit problem; 40,000 units are needed and that is what we were building; it was the mix that was the problem.” While a 2005 study forecast a future demand profile ratio of 68/42 for ground-based to apartments, in line with pre-Ontario Growth Plan ratios, the actual for 2011-16 was 46/54. And people just do not want to move from ground-based to apartment living which in large part explains both the sluggish rise in condo prices (until the last year when a “fear of missing out” led to a domestic investor/flipper surge) and the growing gap between high-rise approvals and starts. 

For the 2001-2011 decade, the Hemson (2005) forecast that about 70 percent of new housing should be ground-related and about 30 percent apartments and although 68% was achieved most took place before the 2006 Growth Plan.  The 2011-2021 emerging diverge, says Clayton and Amborski, falls squarely on the shoulders of municipal planners and the provincial Places to Grow plan. They write:

Under the Growth Plan providing sites for apartments became the priority for the regions to the disadvantage of land for ground-related housing, especially single-detached houses. The Growth Plan encumbered an already dysfunctional municipal urban land-use planning system and delays in the extension of trunk servicing infrastructure, like sewer and water, thus hampered the provision of serviced sites for ground-related housing.

The supply side consensus appears to be that the provincial government has artificially limited the supply of available land and, in conjunction with municipal governments, failed to expedite the all-important servicing of land. NIMBYism’s impact on density goals and underinvestment in transit, always get a mention as well. To make things worse, in April the provincial government released amendments to the plan that increases density requirements for new greenfield developments.

But is there a Shortage?

This has led to a second hotly contested debate around the actual supply of land.  While a few extremists in the development sector want the Greenbelt opened up, the central debate has been over calls to expedite servicing of “whitefield,” areas sitting between greenfield lands currently slated in the Plan to accommodate development up to 2031 and the greenbelt.  While land-law lawyer Quinto Annibale, citing Getting The Growth Plan Right by Malone Given Parsons Ltd. (MGP 2017), argue the lack of land created by the Plan is the root cause of the affordability crisis, others maintain this is just not the case.  In 2016, the NEPTIS foundation, which has been monitoring supply since 2000, reported there was enough serviced land to accommodate even ground-based housing to 2031 while also pointing to reports by both CIBC and TD on hoarding by landowners. 

In its March 2017 update report, NEPTIS broke out numbers for the entire Golden Horseshoe area. Subsequently, a May statement penned by its executive Director Marcia Burchfield, responded sharply to “egregious errors” in Annibale’s Globe op-ed piece. She outlined how NEPTIS’ estimates were consistent with those of MGP.  In an interview, she tells me the MGP study argues with some merit against the proposed increased Greenfield density requirements in the revised Growth Plan. This said, MGP also lists other constraints including cumbersome planning processes, municipal phasing policies, charges, resistance to change and lack of financial capacity as well as lack of servicing, traffic capacity and transit funding.

In May the government fought back against arguments of inept public planning. Using data provided by the government, the Globe’s Jeff Gray outlined a different scenario in which 56,762 ground-based units are ready or almost ready to go within Greenfield lands, which is 3.85 years of supply, better than the required 3.5 years.

Vancouver is a different situation.  Gordon points out that Vancouver essentially reached zero land for ground-based housing in 2001.  With 65% of Vancouver designated primarily for single family homes according to the Urban Development Institute – and already built out – intensification is both mandatory and difficult.  The other key element, similar to the GTA’s greenbelt, is the 25% of land that has been designated agriculture reserve since 1972. While developers would love to see at least some of this land opened up, the reserves remain strongly entrenched within the region’s sense of place psyche.

As a result of the inelasticity of land supply, condo prices, unlike in the GTA, have generally kept pace with those of land-based units.  But, Gordon points out, dramatic increases of prices did not emerge with the zero land moment but only into the new millennium as foreign capital flowed in.

But Isn’t Foreign Owner Investment Just a Drop in the Bucket?

Up to this point, we have seen the tennis ball loped by the demand siders over the net to the supply siders only to have it slammed back. But with a deft backhand the play continues with the demand siders responding “yes, but.”  Even if we concede foreign owner investment is only 5-10%, they argue, this fails to include foreign money invested through Canadian residents or landed immigrants.  And that, they say is significant.  “The discussion around … the share of foreign investment has been totally skewed by the focus on foreign citizen buying; foreign money is a much more substantial than foreign citizen buying,” says Gordon. He quotes Benjamin Tai’s (CIBC’s Deputy Chief Economist) recent talk where he estimated the market share of foreign money in Vancouver was greater than 25% and as much as 35% in Vancouver north.  Others, such as Bob Rennie, Gordon continues, “estimate that 60-70% of the money in the west side of Vancouver is tied to China and that is a consistent estimate.” 

A controversial study by urban planner Andy Yan, working with NDP MLA for Point Grey David Eby, looked at six months of sales in West Vancouver and found 70% of buyers (88% for houses above $5M) had non-anglicized Chinese names. Myers, although he sees many positive economic implications from the inflow of external investment, agrees. “I have always said that it is foreign capital and not foreign owners. There are lots of recent immigrants here that have family and business associates who are comfortable investing in real estate. So it is not a non-resident who has their name on the purchase agreement.”  In the end, Gordon argues, the supply side issue certainly is part of the problem, but it cannot come close to explaining the price increases since 2010.  Myers agrees in part suggesting in his report that foreign investment explains “something less than 50% of gains,” certainly not an insignificant amount.

Where there does appear to be some agreement is that huge price increases over the last year, including for Toronto condos, has been in part a function of “panic buying” as domestic investors, watching steady price increases have jumped into the market.  The 2-3 year gap between reserving and paying for a new condo has also contributes to greater “flipper” investment. “We have this speculative kind of psychology out there,” says Clayton.

Intricacies of the New Foreign Owner Tax              

At first glance, the impact of the foreign owner taxes imposed by BC in August and Ontario this April suggests it is game, set, match in favour of the demand siders.  By February, a steep decline in sales and even a 4% price decline were reported in Vancouver, although figures released by the Greater Vancouver Real Estate Board in April suggest this may have been more a pause than long term stabilization.  A recent report in the Toronto Star quotes realtor John Pasalis as estimating all homes sales dropped 61% and ground-level home sales 26% between April 20 and May 20, immediately following the province’s Fair Housing Plan.  At the beginning of June, appraiser Claudio Polito told the Financial Post prices in the GTA had dropped between 5-15% over the last 30 days. Pasalis also reported a dip in sq. ft. costs for condos of 1%.

Ontario Housing start

Ontario Housing start

Surprisingly, however, both sides see the tax impact as primarily psychological rather than a direct influence on levels of foreign owner investment. “By putting in that tax you got domestic buyers saying, “maybe I don’t have to buy now…” says Clayton while Gordon concurs, “The foreign tax was so potent because it shocked the market by changing expectations.”  The real impact was on domestic buyers, whether investor/flippers or first time home buyers. Another factor was CMHC’s government-ordered tightening of insurance eligibility which by May of this year had caused a spectacular drop in both individual and institutional approvals. Additionally, the much publicized problems with sub-prime lender Home Capital sharpened the focus on a possible bubble burst.  This said, most do not see a long term impact; and here the divide re-emerges between the demand siders and the supply siders with the latter continuing to see supply as the solution.

Instead, demand siders like Gordon argue one problem is the BC Government’s February backsliding on the tax, but more importantly is the exclusion of domestic-owned but foreign capital-based investment. Complicating BC’s future, however, is its recent election with the NDP government-in-waiting proposing a possible doubling of the tax, instituting a 2% tax on non-resident owners who purchased prior to the tax and closing loopholes exempting foundations.  Most importantly, says Gordon, there is a need for a broader progressive property surtax that would kick in at a certain value but which could then be offset by income taxes paid, thus impacting primarily all foreign-based capital. Ontario Finance Minister Charles Sousa has gone further, reported the Star’s Sam Reiss, by asking the feds for a 50% capital gains tax on non-principal residences while even ScotiaBank economist Francois Perrault has suggested a graduated tax system to curb domestic “flippers” who he sees as a greater problem. 

Too Little, Too Late and Missing the Point

All sides agree, reliable data on the sources of residential market investment is lacking.  This said, there is a strong argument that foreign-sourced capital has had a major impact on price increases in recent years. Equally, the current measures implemented by the federal, BC and Ontario governments may slow or even halt for at least a period price increases; but, these actions are currently too little to guarantee long term stabilization. Equally, in terms of affordability, it is a classic case of closing the barn door long after the horses have bolted.  Even if governments could crash the housing market, the economic impact of forcing prices back to an affordable 5-1 income/price ratio in Great Vancouver and the GTA would in all probability also crash the economy.

And this is perhaps the most pernicious outcome of this debate: it diverts attention away from the very difficult but necessary discussion on adapting both our urban/region form and our residential culture.  Yes, Lack of supply is less an issue than a zero ground-based land reality in Vancouver, unless the agriculture reserves are developed.  In GTA (or even in the huge reserves within the Golden Horseshoe outside the greenbelt) there may be considerable potential land for ground-based development but the attached implications within the current urban framework makes it development untenable as a solution. Environmental impact/sustainability, impossible commutes, crippling public costs of sprawl and the level/time to implement of transit infrastructure means urban form must change.

Burchfield and others on both sides, keep coming back to the issue of employment centres and the need to create a diffusion of highly livable centres with clusters of well-paying jobs.  The overpowering dominance of Toronto’s shoreline core as the centre for the creative economy will constitute an untenable alternative.  It also explains why older established urban centres like Hamilton, Guelph and Waterloo Region are emerging as new urban leaders ahead of older suburban centres.

The second and most hotly debated issue, as Clayton likes to hammer home, is our preferred residential culture in favour of ground-based housing.  But part of this stems from the development industry’s imposed polarity: houses vs 25-80 storey towers that are environmentally poor as well as expensive to construct and maintain according to research published by the City of Vancouver. Not to mention, they are family averse with their compact 650-800 sq. ft. units preferred by investors. Vancouver is already placing limits on towers outside the core, requiring instead a mix of mid- and low-rise units.  Hamilton’s proposed Pier 7 & 8 redevelopment is just such an example of an alternative urban residential culture. And, as outspoken Vancouver urban planner Bren Toderian – and others – argue, we will only move the needle on NIMBYism when the N is replaced with Q for quality.  Even if the original 2006 Ontario Growth Plan, as Clayton says, claimed a “shared approach to future growth that just did not exist,” the Ontario government’s just-released revisions to the plan make it clear the Liberals are in no mood to open up endless land for continued sprawl.

The clear, if certainly tough requirement, is first to intensify taxes and other controls on both domestic and foreign investors to stabilize long term prices and second, to forge a new consensus on urban form and our residential culture.                    


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