Off­shore Dive

With for­eign buy­ers de­sert­ing the B.C. real es­tate mar­ket, are we in for a debt hang­over?

BC Business Magazine - - The Informer - By Steve Saret­sky

Real es­tate mar­kets are no longer about lo­ca­tion, lo­ca­tion, lo­ca­tion. Rather, from Canada to the U.K. to Aus­tralia, they’ve be­come about global liq­uid­ity and, in par­tic­u­lar, Chi­nese liq­uid­ity.

Af­ter record cap­i­tal out­flows of more than US$500 bil­lion in 2015, ac­cord­ing to the Wash­ing­ton-based In­sti­tute of In­ter­na­tional Fi­nance, China’s credit binge stim­u­lated the na­tion’s econ­omy the fol­low­ing year with a 25-per­cent in­crease in M1—the most liq­uid por­tion of the money sup­ply, which in­cludes phys­i­cal cur­rency, de­posits that can be with­drawn at any time, trav­eller’s cheques and in­ter­est-earn­ing chequing ac­counts—and fur­ther hiked debt rel­a­tive to GDP. (China’s debt-to- GDP ra­tio now tops 250 per­cent.)

This helped to in­flate house prices world­wide—in­clud­ing in B.C., es­pe­cially in the city of Van­cou­ver.

Here and across the coun­try, for­eign cap­i­tal boosted credit cre­ation and lever­age as lo­cal buy­ers rushed to keep pace with ris­ing prop­erty prices. That dy­namic pushed up Canada’s pri­vate debt–toGDP ra­tio, which has grown nearly 20 per­cent over the past five years, the Swis­shead­quar­tered Bank for In­ter­na­tional Set­tle­ments re­ports, the fastest pace among ad­vanced economies.

But with Bei­jing’s credit stim­u­lus wear­ing off and global liq­uid­ity tight­en­ing, hous­ing mar­kets are be­gin­ning to roll over.

That’s left B.C. vul­ner­a­ble to a debt hang­over, at least ac­cord­ing to pro­vin­cial govern­ment data. Al­though the num­bers prob­a­bly don’t cap­ture the full ex­tent of the mad­ness, be­cause they ex­clude off­shore cap­i­tal that ar­rived via Cana­dian per­ma­nent res­i­dents and fam­ily mem­bers with cit­i­zen­ship, land ti­tle reg­is­tra­tions for July show that for­eign­ers ac­counted for just 1.49 per­cent of all res­i­den­tial prop­erty pur­chases. The last time they were this scarce was in Au­gust 2016, right af­ter B.C. in­tro­duced its for­eign buyer tax.

As the pro­por­tion of deals from for­eign buy­ers de­clined, so did dol­lar vol­ume. Of the $9.9 bil­lion spent on res­i­den­tial real es­tate through the prov­ince this July, for­eign pur­chasers ac­counted for a mere $201 mil­lion, BC Stats re­ports, a 50-per­cent plunge over the same month in 2017.

Just look at Van­cou­ver, where de­tached home sales are at a 27-year low and Au­gust rent prices were flat year-overyear, as shown by lo­cal data sci­en­tist Louie Dinh. For July, ac­cord­ing to BC Stats, to­tal res­i­den­tial trans­ac­tions in­volv­ing for­eign buy­ers trick­led in at just 1.83 per­cent.

With China con­tin­u­ing its ef­forts to sta­bi­lize for­eign ex­change re­serves by man­dat­ing stricter cap­i­tal con­trols, and a global credit cy­cle near­ing its end, the im­pact is rip­pling across prop­erty mar­kets. Slow­downs have been doc­u­mented in places like Lon­don, New York, Seat­tle and Syd­ney. In China, house prices in tier 1 cities have turned neg­a­tive in re­cent months.

As for­eign bids shrink, Cana­dian banks haven’t com­pen­sated for the with­drawal of off­shore cap­i­tal. In­stead, they’ve tight­ened lo­cal credit, too, push­ing mort­gage growth to its low­est level in 18 years, the Bank of Canada notes. For an as­set now de­pen­dent on ever-greater lever­age to sup­port higher val­u­a­tions, that isn’t a good combo. B.C.’S real es­tate debt headache could be just start­ing.

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