Mystery solved? This analysis indicates foreign buying now the primary driver of Vancouver housing bubble.

5-year-change-2015, big numbersThis analysis below is appears to give compelling evidence of a real estate market in Vancouver now driven by a massive influx of foreign wealth. There is still a lot of denial when it comes to this topic. Is it an inconvenient truth? Read and see what you think. The article is from the North American Economics blog (“Discussing economic related issues in the US and Canada”), is reprinted here with permission. The writer, Michael Wilson, is a real estate investor, ex-engineer and occasional blogger.

Mr. Wilson writes, “In my opinion, the difference has been foreign buying — mostly from Mainland China…. after years of listening to claims that foreign buying is too insignificant to drive a market as big as Vancouver, I think I’ve found definitive proof….The only plausible reason I have been able to come up with is that foreign buying is now the primary driver of the Vancouver housing bubble.”

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MYSTERY SOLVED?
http://northamericaneconomics.com/2015/05/08/mystery-solved/

In my previous post from June 2012, I noted that the Vancouver housing market was stalling and mortgage rules had been tightened. I fully expected a housing correction to follow — possibly a major one. What followed was a minor seven month correction of -5.0%, followed by a subsequent gain of 14.9% in the Teranet House Price Index.

Teranet HPI March 2015

Considering Vancouver had already been rated the second-least affordable housing market byDemographia, this recovery was hard to understand. As I continued to watch the market, I tried to look for an explanation. Other than the usual housing bubble rationalizations — everyone wants to live here, we’re running out of land, etc. — the conventional wisdom for recent gains seemed to be low interest rates. But even with historically low rates, housing affordability was already near record lows. It doesn’t seem plausible that already-strained households have been able to keep the party going for so long.

RBC_Mar2015_AffordA market driven by low mortgage rates should look more like this:

RBC_Calgary_AffordI also noticed a clear disconnect between the first phase of the bubble (2002-2008) and the second phase (2009-present). During the first phase, all of the Canadian bubble markets increased in a similar fashion. As an example, compare the price history of Victoria and Vancouver.

Vancouver Vs VictoriaThe first peak occurred in mid-2008. Up until then, both markets moved together. But after the initial recovery in 2009, Vancouver began to behave differently than Victoria and other Canadian markets. Over the last 5-6 years, something very different has been going on here. In my opinion, the difference has been foreign buying — mostly from Mainland China. Unfortunately, there is no hard data on the amount of foreign ownership, so I’ve had to base my opinion on the excellent work of Ian Young, Andy Yan and others.

But after years of listening to claims that foreign buying is too insignificant to drive a market as big as Vancouver, I think I’ve found definitive proof. When housing markets are driven by easy financing and low mortgage rates, appreciation is higher for low-end, entry-level homes than it is for more expensive homes. Entry-level buyers are much more likely to max-out on debt than older, wealthier homeowners. This was the case in US bubble markets. For example, look at San Diego. Low-priced homes increased much more than high-priced properties.

SD_Graph

This was also true during the first phase of the Vancouver bubble. Here is a scatter-plot generated from the April 2009 REBGV Stats Package, showing 5-year appreciation by price. It’s clear that lower priced properties appreciated more.

5 Year Change 2009

I then created the same plot using data from the most recent Stats Package, and the results are pretty startling. High-priced homes have appreciated much more than less expensive properties over the last 5 years.

5-year-change-2015, big numbers

I can’t think of any realistic scenario where local Vancouverites were able to send this bubble into overdrive with the help of lower mortgage rates — especially when you consider CMHC no longer insures mortgages on homes sold for more than $1 million. The only plausible reason I have been able to come up with is that foreign buying is now the primary driver of the Vancouver housing bubble.

3 thoughts on “Mystery solved? This analysis indicates foreign buying now the primary driver of Vancouver housing bubble.

  1. The data appears to confirm the hypothesis that foreign investment causes higher rates of price escalation in high priced homes. But the question then becomes: how does that impact affordability for those who are trying to enter the market? The very graph which the author employs to confirm his theory also disproves the theory that foreign investment is impacting the entry-level market, as it shows that lower priced units had the lowest increase in value.

    If, indeed, foreign investment is driving up the cost of housing, the percentage increases would be level line, or even, like the “first phase of the bubble” example, downward sloping. This would clearly indicate that the current series of price escalation (the “second phase of the bubble”), supposedly driven by foreign investment, is having a detrimental impact upon lower-priced units. This, however, is not the case.

    The data suggests that foreign investment has an appetite for the top of the market, leaving entry-level properties alone.

    • David Ley of UBC has indicated that his research shows the top of the market drives everything below it. Perhaps it is like a cascade effect. People cash out when they sell their homes in the high value category, then downside and move eastward in Vancouver. Everyone below is affected. Worthy of further coverage here and in media, plus the public narrative on these topics.

    • It’s true that entry-level homes haven’t appreciated very much, but those buyers are still affected in several ways:

      1. Without the flood of foreign capital entering the market, the overall market would likely have corrected like Victoria did.
      2. Professionals that would normally buy a single-family home have to settle for a condo or a long commute.
      3. Move-up buyers have a harder time, since the price gap between condo and SFH has increased.

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