Jury out on Chinese investment in real estate
A research paper by the University of Alberta is calling for more information on foreign — in particular Chinese — investment in Canadian housing and raises the possibility that money laundering may be part of the residential real estate market.
The paper from Kerry Sun, a research associate at the China Institute, an Edmonton-based think-tank that is part of the University of Alberta, also looks at how other jurisdictions have dealt with the issue of foreign investment in property.
“It seems to be a hot topic,” said Sun, in an interview. “Right now, because of this lack of data, one of the reasons it is such a controversial topic is there is no way to verify claims. People get into contentious arguments and perception has become as influential as reality.”
On the money laundering front, Sun said it is hard to tell how much activity there is because there is no hard evidence.
“Observers have questioned how Chinese investors are able to purchase residential properties overseas, given that the capital and foreign exchange controls are imposed in China,” Sun wrote in his paper.
The author does note that while Canada might not have direct statistics, Chinese outward real estate investment has increased more than 200-fold since 2008, and was $33.7 US billion by mid-2014.
Sun said the overall “low prevalence” of foreign money laundering probably means it has not been a major factor behind the appreciation of housing prices, even as the public and media speculate about the issue.
Many of Canada’s leading economists have called for more data on the extent of foreign investment in the housing market and even Evan Siddall, the chief executive of the Canada Mortgage and Housing Corp., the Crown corporation responsible for housing policy, said we need more information.
CMHC has responded with a study of the condominium market, which found that only about 2.4 per cent of the Toronto market was purchased by foreign residents. The Crown corporation continues to study the issue and has promised more detailed analysis.
Like others, Sun has suggested foreign investors may be more likely to engage in real estate speculation, but he also notes that their presence may increase the housing stock by encouraging property development.
“Nevertheless, it is difficult to determine the actual impact of foreign investment in Canadian real estate markets with the data currently available,” he said.
In his report, Sun notes that other jurisdictions require foreign purchases to be reviewed.
In Australia, for example, a government body must approve all foreign acquisitions of real estate although outside investors are permitted to purchase vacant residential land new residential property.
Foreigners can only buy established residential properties for the purpose of redevelopment.
In China itself, foreign individuals can only purchase one residence on the mainland for personal use. Foreign investors purchasing on the mainland face a tax of 1.2 per cent on the sale of real estate and an 18 per cent tax on rental income from a house.
Other jurisdictions, like the United States, allow foreign investment with restrictions unless the purchase affects national security. Income from rent or the sale of property may be subject to a withholding tax.
In the long run, Chinese investment in Canadian real estate doesn’t appear to be going away. Sun notes that China created a new program in May that allows individuals with one million renminbi to invest directly in overseas financial assets and real estate.
“Some have said because of the number of millionaires in China it could result in an influx of foreign investment. It is hard to say until the program has operated for awhile,” Sun said.