Loonie can help cool overseas demand
Canadian real estate became more expensive for foreign investors over the past week, but the loonie probably needs to keep moving higher if it’s really going to cool off overseas demand.
The stable Canadian political climate has made the property market here a lure for investors looking for both commercial and residential property, but even a 15-per-cent surtax on residential property in Vancouver and Toronto probably isn’t enough to wipe out demand, say many watching the market. “I’m not so sure that price is everything and that potential buyers are so price-sensitive,” said Doug Porter, chief economist with Bank of Montreal, who thinks the loonie would have to move closer to par with the U.S. dollar before it would truly affect foreign demand in real estate. “We’d need something akin to $100 a barrel for oil to get back to par. It’s not impossible but (unlikely).”
The so-called currency “deal” on Canada has been eroding for weeks. On May 4, one U.S. dollar bought foreign investors $1.3749 Canadian, but late Friday that was trending down to $1.26 — a significant drop for buyers, including the Chinese, who tend to hold their cash in U.S. currency.
Lennon Sweeting, head of trading and chief market strategist at HiFX, says a strong Canadian dollar is going to deter some foreign investment, but it comes down to the degree. “I do think there is still quite a bit of untapped upside in the Canadian housing market that’s probably going to outweigh any of the hesitance that a foreign investor might have to enter the market at the current foreign exchange levels,” he said.
The surge in demand for property and the rising prices occurred as the loonie was falling, although tracking of foreign purchases on the residential side of the real estate market was limited until recently. One U.S. dollar was as high as $1.46 Canadian in January 2016, as prices continued to surge for Toronto homes.
“I think, for most people, it’s the Canadian-U.S. dollar exchange they are watching, even when they are coming from China. By the time the money has gotten out of China, it has probably already been converted to U.S. dollars,” said Sweeting.
In Metro Vancouver, the share of sales involving foreign buyers was 16.5 per cent in June 2016, before its 15-per-cent tax was introduced, but was down to four per cent by January 2017.
Ontario just started tracking data in April, after it implemented its own tax on offshore buyers in the Greater Golden Horseshoe, which includes Toronto. It found in the months following the change in tax rules, 4.7 per cent of purchasers were foreign buyers for the whole GGH, but in the city of Toronto it was 7.2 per cent.
Edmond Luke, a Vancouverbased partner with Fasken Martineau and head of the firm’s China practice, said the currency factors into the pricing of Canadian assets.
“The ability to predict what the currency trend is, is also an important factor,” said Luke, adding investors are looking at their ongoing “return” and that includes currency gains and losses.
“I think the 15-per-cent tax had its impact but, at some point, the currency takes over ...”
On the commercial side, foreign buyers continue to be a major force in the marketplace. Of the $34.7 billion in sales in Canada in 2016, CBRE Canada said $5.6 billion went to foreign interests.
“From a currency standpoint, Asian investors have viewed it as an opportunistic time to invest in Canada and are more concerned about their currency depreciating than the Canadian dollar appreciating. They also have a lot of capital to invest so aren’t overly sensitive to modest interest rate increases,” said Brian Kriter, an executive managing director with Cushman and Wakefield.