Sunday, June 05, 2016

Real estate challenges in Toronto and Vancouver

For some months now, the Canadian media has been full of reports about the overheated and often corrupt real estate market, especially in Vancouver, but also here in Toronto.
Recent figures put the average home price in the Greater Vancouver Area at nearly $1.1 million, and about $740,000 in Greater Toronto (yes, that's right, I did say "average"). The average price of a detached house in Vancouver is now nearly $3 million, and even modest homes in the outskirts top $700,000. These prices are more than double what they were just seven short years ago (by comparison, over the same period, average wages have increased by just 15%). Many millennials and recent immigrants are finding it just impossible to find houses within their budget in the more central areas, leading them to settle for suburban, or even more distant, locations, and often renting out portions of their homes to make ends meet. An increasing number of millennials are moving out of Toronto and Vancouver in favour of cheaper cities like Oshawa, Hamilton and Barrie in Ontario, and Kelowna and the Fraser Valley in BC, thus pushing up prices in those areas too. Many are even making a conscious decision to rent instead of buy, preferring the flexibility and the debt-free lifestyle.
A plethora of Vancouver real estate scandals and questionable practices, such as the Sutton Group-West Coast Realty allegations, the scams of New Coast Realty, and the practice of "shadow flipping", which is particularly rampant in Vancouver, have only made a bad situation worse.
Yes, interest rates are at an all-time low, encouraging people to dip their toes in home ownership that might not otherwise have done so, but a large part of the real estate boom can be tied to an unprecedented influx of foreign money, mainly from China. An estimated $1 trillion in capital flowed out of China in the last year alone, largely in an attempt to preserve wealth in an increasingly risky country, and the weak loonie makes Canada a particularly attractive investment prospect. An estimated 74% of Toronto condos built since 2010 are owned by foreign (mainly Chinese) investors, and foreign buyers now account for an estimated quarter of the luxury home market Canada-wide (that proportion will be much higher in desirable centres like Toronto and Vancouver). Obtaining reliable figures for such transactions is fraught with difficulty, though, and the picture may be even worse than it appears given that it is common for a family member already living in Canada to purchase property, but using offshore cash.
Some commentators, including ScotiaBank CEO Brian Porter and Vancouver Mayor Gregor Robertson, have been calling for protectionist measures like a luxury tax on foreign buyers and speculators, and a tightening of mortgage lending rules for everyone, in the hopes of cooling down these overheated markets and giving young local home buyers a fighting chance at living in our major urban centres. However, it is by no means certain that such measures would be effective, and they may carry with them some unwanted economic repercussions, such as a sweeping reduction in home values and the possible wholesale loss of construction jobs.
Other countries, like Australia, New Zealand and the UK, are also experiencing a similar influx of Chinese money which is distorting their local real estate markets. Australia has moved to limit foreigners to purchases of newly-built houses and apartments; both Britain and New Zealand have raised capital gains taxes to try to address the problem. But the markets there continue to sizzle uncomfortably, and no obvious solution presents itself.

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