Canada Says Property Bubble “Not Great” For Locals, Good For Foreign Investors

A Canadian official in charge of housing policy confirmed the current market is not an accident. Instead, it’s a conscious decision where the government picked the winners and losers. TVO aired an interview with MP Adam Vaughan yesterday, discussing housing policy. In the interview, Vaughan, who helps oversee the CMHC, said price drops are not an option. The minister also said the market doesn’t work for locals, but is great for foreign investors. He also implied the strategy they might use to fix the market is one they were warned against. It was some interview. Here are the key market takeaways.

Canada Will Not Let Home Prices Drop By 10%

The government refuses to let prices drop, and will support inefficiencies. When Vaughan was asked if he would allow home prices to fall 10%, he tried to explain how hard it would be on homeowners.

When discussing a price drop, the minister said “I can understand why that is seen as a positive thing for people who are trying to get into the market, but hands up if you’d like to see 10 percent of the equity in your home suddenly disappear overnight.” 

He then implied Canadian homes are financial instruments, not necessarily for housing. “We know that Canadians rely on homeownership to secure their place in the economy now. But also as they retire we have to be very careful that whatever steps we take to protect the investments Canadians have made in their homes at the same time.” 

Canadian Real Estate Developments Vulnerable If Prices Drop

The minister was asked why a 10% drop would matter with prices rising “30 to 40 percent” over the past year. Apparently, without last year’s absurd gains, people would be underwater. “you know it’s a situation where you don’t want people to be underwater with their mortgages.”

He adds this is really an issue to save the real estate development industry in Canada. “You don’t people who’ve made deposits on properties suddenly find themselves underwater if they close the deal. Because they’ll start walking away from projects and that collapse will have impacts on the development industry so you’ve got to be very careful about this.” 

Vaughan is a minister in the Greater Toronto region, which recently experienced this. When the “foreign buyer mini-bubble” popped in 2017, rapid price growth abruptly turned. Some projects and homes were left with appraisals undervalue. This left buyers scrambling for even more cash, or risk losing their deposit

Canada Is “Not Great” For Locals, But Safe For Foreign Investment

Canada doesn’t think it has a foreign investment problem, because they see it as a good thing. While discussing sprawl, Vaughan made an unprompted jump to foreign investment. He said, “we have a very good system for foreign investment creating a lot of new housing in Canada as we have immigrants as we grow the population.”

A few seconds later, he admits the market is safe for foreign investment, but not so much for locals. “… we are a very safe market for foreign investment but we’re not a great market for Canadians looking to make choices around housing and so we’ve got to make a number of decisions that address the 2 sides of this coin.” 

I know what you’re thinking — what foreign investment? They said that died down years ago. It’s likely a reference to new home pre-sales and permanent residents that are buying. Some argue new home pre-sale assignments are faster funded when foreign investors are involved. This is faster than waiting for your broke-ass to put together a downpayment. Non-resident investors then try to sell it before occupancy, avoiding a tax hit. As a bonus, they aren’t usually recorded as a non-resident buyer anywhere.

As for immigrants, Canada has long been a great place to live — just not a place to earn income. SCMP found more than 40% of millionaire migrants exit the country soon after arriving, but their family remains. These are commonly known as “astronaut families, and it’s been around in Canada for a while. It’s common in developing countries, with underdeveloped job markets. While these households are technically local, their money is “foreign” in source. Hence foreign investment, but not non-resident buying. 

Canada May Do What It Was Warned Not To With Real Estate

Canada was warned by everyone, from the IMF to big banks, not to give first-time buyers incentives. The general consensus is by helping first-time homebuyers, the government will extend inefficiencies. By doing so, they’ll create a large gap for inequality in the near term and city failure long-term. So what are they going to do? It appears exactly what they were warned against doing.

The minister said, “we need to dampen the inflation, and build those bridges to homeownership.” In other words, they want to slow price growth — not have it reverse in any capacity. The only way left to “build those bridges” would be credit extension or wage inflation. Extending credit to home buyers is literally what they were warned against. The kind of wage inflation needed, would result in higher rates and lower budgets — crushing home prices anyway.

The takeaway from the interview, to put it bluntly, is Canada’s housing crisis is far from an accident. The government has a firm belief they are in charge of home prices and will prevent them from falling. If they truly believe they can be in control of prices, that indicates the 40% increase in prices was no accident. It was intentional, as was the fallout to younger generations. 

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