Canada blocks foreigners as house prices boom

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By Leith van Onselen

January’s house price results, released yesterday by Teranet, revealed that Canadian house values continued their upward march, posting a new all-time high after registering 0.4% growth in January, with prices also up 4.5% over the year and 31% above their April 2009 trough:

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In real terms, Canadian house prices also hit a new peak, with prices 21% above their April 2009 trough:

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Price performance across the major markets was mixed, however, with solid growth recorded in Vancouver (+1.1%) and Toronto (+0.5%), whereas values in Montreal rose by only 0.2%. Price momentum is also strongest in Vancouver, whereas Montreal is relatively weak (see next chart).

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For a number of years now, Canada’s housing market has been the strongest performing developed market, which has also made it the world’s most overvalued according to the Economist, the OECD, and Deusche Bank (see below table).

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One of the reasons for the stronger price growth in Canada is that it is very open to foreign investors, which has led to a rush of “hot Asian money” (HAM) into markets like Vancouver and Toronto. According to Zero hedge:

“Canada, for example, is very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market far more easily than in Japan, with its closed system. “

Now the Canadian Government looks to be removing this pillar of support to the Canadian housing market, announcing that it will scrap its controversial investor visa scheme, which has allowed waves of rich foreigners (mostly Asians) to immigrate to Canada. According to the South China Morning Post:

Tens of thousands of Chinese millionaires in the queue will have their applications scrapped and their application fees returned..

The surprise announcement was made in Finance Minister Jim Flaherty’s budget, which was delivered to parliament in Ottawa on Tuesday afternoon local time.

…the scheme spun out of control when Canada’s Hong Kong consulate was overwhelmed by a massive influx of applications from mainland millionaires…

“For decades, [the scheme] has significantly undervalued Canadian permanent residence, providing a pathway to Canadian citizenship in exchange for a guaranteed loan that is significantly less than our peer countries require”…

All told, 59,000 investor applicants and 7,000 entrepreneurs will have their applications returned, the budget papers said. Seventy per cent of the backlog, as of last January, was Chinese, suggesting more than 46,000 mainlanders will be affected by yesterday’s announcements.

Household debt in Canada recently hit an all-time high of 164% of disposable incomes and the country’s unemployment rate is stuck at a stubbornly high 7% – above the United States. And with this crackdown on HAM, the odds of a Canadian housing market correction have increased.

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    • I’m currently in Canada and would say the Chinese effect is limited to very very specific areas ie Vancouver.

      40 minutes inland from Vancouver, in an area popular with retirees for its moderate climate and skiing, property prices have dropped back to 1999 prices. Many holiday properties are listed as foreclosure sales and ski chalets that sold for $550k in 2009 are now in the $350-$$450k bracket.

      Talking to a very successful business man here was an eye opener. He says the high Canadian dollar and taxes are killing the country. Many people who live within an hour of the US border drive to the States to do their weekly shopping, buy beer, clothes for their kids and fill their gas tank.

      Canada, to use an old Chinese curse, is in for interesting times.

  1. Frederic Bastiat

    This will just drive more Chinese buyers in our direction…while our politico-housing complex stays the course!

      • We are in bed with the Yanks, never more so since we allowed them to get a footprint in the top end of the NT.

        That makes us the enemy to China if the biggest exporters of war the US decide to rattle China’s cage. it’s not hard to see on a map that America is circling Iran and Asia.

        When this goes bad we will find ourselves staring into the headlights of the Asian war machine. Next thing you know there will be US nukes in the north.

      • Muzzer, let’s see if the Chinese can get their first island chain doctrine underway first. They may have some good tech (emphasis on the may), but without the boats and the army there is little to worry about in the next 20 years.

      • Dear Muzzer018,

        The US presence in Australia and as our ally is a big comfort to my family and friends in Australia.

        While I do not have the expertise to comment on Communist China’s technological ability,we should not be complacent.

        Let us remain informed about the way they treat their own people/their large poverty level, the prevalence of female infanticide in China, accompanying female suicide and the way they treat the Tibetans and Uighurs, to name only a few. There’s ample evidence that they are not a kind authoritarian regime, they certainly do not share our values and we should remain vigilant.

        They might be an export destination for now but these things always change and our obligation in this regard is to deliver product of the standard that we have promised and honour our contractual obligations. A trading relationships is a commercial relationship that suits both parties, nothing more, nothing less – we do not know how they will project their military should they gain the capability to go far beyond their own shores and beyond the defenceless peoples such as the Tibetans.

        Understanding a little about the way authoritarian regimes operate, we ought to also consider:

        1. Are the wealthy not confident in their own country?
        what do their wealthy understand about China that we don’t, given their manic desire to get assets out of their own country, Australian property as an example, and what sort of people are these?

        2. Why has China started to act more aggressively? What is there to cover up and why is it trying to distract its people with actions that can easily be interpreted as provocative by its neighbours.

        3. Middle class earns less than $10,000
        China’s middle class earns less than $10,000 per annum, hundreds of millions are still poorer – these people can’t afford to buy property in Canada, the US or Australia. Let’s make no mistake, the ones that are buying property here are not the middle class, they are very wealthy by global standards, let alone those of their own country. We need to consider the security risks we might be creating, particularly since there are reports that wealth in China is intricately linked to association with their communist party, and it would take more than one generation to get to a comfortable place of shared values.

        Property price inflation is one risk of foreign investment in housing, although reports suggest it has thus far impacted only some parts of the market and many root causes have been written about in Macro Business.

        There’s the equity issue when local average Aussies are competing with wealthy foreigners.

        What about the security and other risks that are just as worthy of consideration.

        The world has always changed, it will continue to do so and if an important export country like China expresses bullying tactics because Australia maintains a strong and long standing relationships with kindred country’s like the US, then they have really just shown the world their true nature, intentions and we should be thankful that they have done so early in their game.

    • Pish…

      A lot more concerned with the overt attempts to turn the South China Sea into the South China Lake.

      History has thought us that there is no accommodating this.

      So the question is, when push comes to shove, do we want to send the Navy into harms way in a dozen SSNs or 2-3 locally built, thinly disguised coffins masquerading as SSKs for the same cost, Our shiny and very expensive new LHDs will last about 2-3 days before ending up at the bottom of the briny deep.

    • Ortega, those exercises were probably more valuable to us than the Chinese, but how else will they figure out blue water ops?

      One thing we have going for us is that any action north of Darwin bigger than a leaky refugee boat should be detected courtesy of JINDALEE, one of the nation’s biggest defense achievements.

  2. Let them in.
    They can buy as many new-builds as they want with a one-off 5% infrastructure levy and an annual 1% LVT attached.
    Housing supply solved.
    Infrastructure funding solved.

    • Yeah right, if anyhing the Chinese are extremely financially savvy. If they see value in existing property they’ll come in under as many arrangements as necessary (trusts, family, etc.) to bypass the FIRB laws, if they so choose.

  3. So the light has turned to red in Canada.
    No probs.
    Aus light system is permanently stuck on green – come on over. We are ‘open’ for business.
    Want to run a red light to entry here, nearly impossible – just ask Chodley Wontok
    What we are witnessing is the virtual Sinofication of select residential areas with inflation caused spilling into the wider property market. As many homes as can be put up for sale are going to mainly foreign buyers and local investors/groups.
    Now we need investors – the alternative being that every person who enters the workplace must buy a home straight away – that is unrealistic and a fun-killer for those just starting out in life.
    But how about just local investors of residential property only, with a tax system less skewed in their favour?
    The funny thing is the Liberal party thinks it can control what is happening.
    @MC, as long as the seller drops the ‘stupid’ tag in their sales pitch, it should be easy sale.

  4. So i guess this means these “Tens of thousands of Chinese millionaires in the queue will have their applications scrapped and their application fees returned..”

    will all now be heading here

    great. Thank you so much Mr Krudd. Thank you so much for being a huge dick with all your property interests benefiting from your decision to open the flood gates.

    And thank to our current ideologically constrained govt not giving a toss and wanting the money, therefore no interest in closing the gate.

    Thank you so much to successive Australia govt selling out the interests of the citizens of this country.

    I curse you all, but you Mr KRUDD most of all and if i ever see you in the flesh i will spit on you

  5. using historical average in Japan. Does this include 1990’s mega-bubble whent the emperor’s garden was worth more than california?

    Net rent to price compared to 10 year bonds over time, or median income to median house price might be more relevant.