Offshore Dive

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

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increase in M1—the most liquid portion of the money supply, which includes physical currency, deposits that can be withdrawn at any time, traveller’s cheques and interest-earning chequing accounts—and further hiked debt relative to GDP.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.