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Canadian Real Estate Prices To Be Impacted By OSFI More Than Foreign Buying Taxes, Says Top Chinese CEO

Canadian Real Estate Prices To Be Impacted By OSFI More Than Foreign Buying Taxes, Says Top Chinese CEO

Enough about them, let’s talk about us. Foreign money plays an undeniable role in Canadian real estate, but are non-residents being scapegoated for our mania? Carrie Law, the CEO of Juwai, China’s largest overseas real estate portal, thinks so. Law, who is one of the most influential people in global real estate, believes that places like Vancouver will face downward pressure on real estate prices soon.

However, she doesn’t believe the pressure will come from expanded non-resident taxes. Mainland Chinese demand for Vancouver real estate peaked in 2015, and is declining. Instead, she says the problem is cheap and easy credit. This was addressed by the Office of the Superintendent of Financial Institutions (OSFI) in October. More interesting though, when we dig through the Bank of Canada’s notes, it seems like they would agree.

Chinese Demand Has Been Tapering

Law explains Chinese demand has been tapering, but prices have continued to accelerate. “Our data shows that Chinese buying interest in Vancouver peaked in 2015,” she explains. “The overpriced market and lack of inventory has restrained Chinese demand since that time.” An interesting point, that may actually be reflected in our numbers when looked at closer.

Source: BC MoF, Better Dwelling. The massive first data point is most likely due to the “warning” non-resident buyers received. This likely forced a number of non-resident buyers to accellerate purchases likely to have been later, into a smaller window. The number of sales in December 2017, actually sits pretty lose to the median number of all sales. 

Metro Vancouver property transfers to non-resident buyers are up according to the Ministry of Finance. There were 190 non-resident property transfers in December 2017, up 13.09% compared to the year before. However, it’s important to remember how these sales are recorded. Condo pre-sales aren’t recorded as a transfer, until the building is completed.

This means transfers may have been demand from pre-sales. Pre-sales registering today, would have been initiated years ago. If 2015, was a scorching hot year for foreign buyers (it most certainly was), then these completions would be getting recorded now. This of course assumes these buyers are holding the properties through completion, and not flipping them before registration. Assignment flipping would not really be done through Juwai. Typically a developer has a special relationship with bulk buyers of assignments, whether domestic or international.

Did The Bank of Canada Know They Were Creating A Bubble?

Law instead suggests the Bank of Canada is to blame. “Vancouver’s housing boom was born in the halls of the Bank of Canada, where interest rates are set, rather than the streets of Beijing,” she explains. “When rates are low and credit flows, prices go up. It’s the first thing every university student learns about the housing market, and it has nothing to do with foreign buyers.”

“Vancouver’s housing boom was born in the halls of the Bank of Canada, where interest rates are set, rather than the streets of Beijing”

— Carrie Law, CEO of Juwai

The Bank of Canada has actually echoed this statement… a few times. In 2010, former Bank of Canada governor Mark Carney stated “Experience suggests that prolonged periods of unusually low rates can cloud assessments of financial risks, induce a search for yield, and delay balance sheet adjustments.” You only need the first two parts for today, which means people will chase returns with excessive leverage.

Fun fact: Carney repeats a nearly identical statement to the UK Treasury Committee, before being appointed Governor of the Bank of England in 2013.

Just a few months later, former Governor Carney addressed the Vancouver Board of Trade, sharing his observations. “Cheap credit has been used to bid up the price of Canadian houses, a non-tradable good, rather than invest in expanding the productive capacity and export competitiveness of our businesses.” The implication here, is that Canada has used cheap credit to take out mortgages. The Bank of Canada was hoping it would be used by businesses to expand. Whoopsie!

Regulating Cheap Credit Will Have Bigger Impact Than Taxing

If the Bank of Canada thinks cheap credit is to blame, then reducing access would be the most effective measure, right? That’s the same page Law is on. “In Juwai’s view, the most important policy decision with respect to the BC housing market was made in Ottawa last October,” she explains. “The decision by the OSFI to hold Canadian mortgage applicants to higher standards will get to the heart of the cause of the property boom, which is cheap and easy credit — especially for investors.”

The new OSFI B-20 Guidelines she refers to does exactly that, reduces a borrower’s maximum credit capacity. Stress testing broadly rolled out at all Federally Regulated Financial Institutions (FRFI), reduces the maximum mortgage size by around 20%. This drops the supply of credit, making it harder to absorb home price increases.

In addition, it pushes banks to adopt better risk controls, including borrower income verification. Canadian banks had questionable income verification controls for both those with domestic or foreign income sources prior to B-20. This is no longer being debated, but acknowledged by international credit agencies.

These new B-20 Guidelines solve a foreign income problem, that a non-resident buyer tax can’t solve. Increasingly, newly immigrated families have been buying property, where the income source hasn’t been clear. Vancouver-based journalist Douglas Todd noted this in a 2015 piece, where he highlights the phenomenon of poverty level incomes being declared by some of Vancouver’s newly minted mansion owners. The reason is widely believed that those earning income overseas, just aren’t declaring their incomes locally.

Many of these are not technically foreign buyers, but are Canadian immigrants. They are exempt from foreign buying taxes, could still qualify for a mortgage using foreign sourced income, and many were not declaring any income in Canada. Post B-20, that’s not allowed. CIBC gave us some insights on the adoption of the new guidelines.

Income sources used to qualify for a mortgage, should now be verifiable and legal. Notifying the CRA of your cash pool, and paying any outstanding taxes is now a needed to get a local mortgage. This won’t stop those that have already bought, but will slow down people thinking about doing this in the future.

Yes, the Province of British Columbia did roll out a speculator tax to address those already in the country. However, would you rather pay 2% of the value of your house, or the ~40% of the value of the income required to pay for the house? I’m guessing quite a few people will prefer the speculator tax over the required local income taxes.

The role foreign money plays in Canada’s housing market can’t be discounted. Non-resident speculators undeniably play a role, but how and why that money is here is an important question to be asked. Even if non-residents were 25% of the market, that’s still 75% of the domestic market readily absorbing the price increases. Speculators, whether international or domestic, can’t make money unless they can sell. Usually you need to sell to those with local incomes… or at least a local ability to absorb the increase through credit.

Canada’s banking system has until now, focused on making homeownership attainable by expanding the credit supply. Rather than curbing and containing higher home prices, we enabled them. Now that B-20 and climbing interest rates are curbing that supply, speculators will see less opportunity to sell for a profit. Both foreign and domestic.

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42 Comments

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  • CM 9 months ago

    Basic math. You can’t reduce the amount of money people have by 20%, and expect prices to continue to rise. The Liberals in Ontario are going to take credit for bringing prices down, but people literally just can’t borrow enough to make the payments.

  • Ban Foreign Ownership 9 months ago

    BAN FOREIGN OWNERSHIP. There’s absolutely no reason to allow foreign ownership of property in Canada. There’s more than enough locals, this is about corrupt politicians allowing our country to be used as a washing machine.

    • Jon Jay 9 months ago

      I’m quite curious about this. New Zealand is planning on rolling this out. It’s an interesting idea in such a globalized world where dirty money is looking for safe and stable holding spots (e.g., real estate).

      I’m a free market guy so it’s hard to think about foreign controls but given that it’s housing, it’s an intriguing proposition.

      However, I’d argue that easing zoning laws would be a better place to start.

      • MH 9 months ago

        No, it’s not. First, you have to turn it back into a housing market, then you can tweak the zoning laws, etc. As it stands now it’s not a housing market anymore, it’s a commodity market with global participation (including all the required attributes for speculative trading such as derivatives/assignments). Until you make it a housing marking again all your housing market measures are going to fail.

        Before you all RE agents / flippers are going to get too excited, check out how wild commodity markets are. An how cyclical.

        • Jon Jay 9 months ago

          I get your premise. I agree that our housing market has become a commodity market. But don’t forget the main perpetrators are Canadians. Foreigners started the initial wave and then greedy locals took it over.

          The real issue is that our decision makers are politicians who are in the business of staying in power. We need them to make decisions for the future benefit of Canadians HOWEVER, any major policy changes will destroy millions and potentially billions of dollars in home equity values in the country. Now, for people who purchased 10 years ago, they’ll be fine. They’ll lose some gains but they were illusory anyway. The young couples and people who purchased in the 2-4 years will be creamed. They’ll be debt slaves for a generation. That is politically devastating to whoever made the policy changes.

          So while I agree that change is required. Good luck getting it. I think the combination of B20, rising rates and a potential NAFTA-driven recession will cause our housing market to drop 10-20% easy. We’ve already dropped 9% on SFHs. Condos are next.

          FYI – I’m a renter and I don’t own any RE. I have been on the sidelines watching this $hit show. Should’ve speculated like everyone else but such is life. Now, I’m just waiting for the house of cards to tumble so I can make some opportunistic acquisitions.

          • MH 9 months ago

            Of course the bulk of speculation is local, my wild guess is that the ratio roughly follows the 80/20 rule. The big mistake would be to claim that 20% of foreign speculation is insignificant. It’s a huge number more than capable of driving the market in any direction in the short term.

            This market is coming down crashing no matter what. The question is, if Canada wants to have a housing market – a foundational pillar of any healthy economy, or it wants to have a commodity RE market instead of economy.

          • Jon Jay 9 months ago

            I agree that foreigners get the ball rolling, up or down. I also agree that they’re significant.

            “This market is coming down crashing no matter what” – how do you have so much confidence? What do you think will drive this crash? Unlike the US we didn’t have NINJA loans. I’m not saying that our market is due for a correction/downturn, but what is the catalyst?

            The US had rapidly rising rates. We don’t have that. They had massive job losses, which we haven’t had. So it’s hard to see how we would see a rush of defaults. UNLESS, rates shoot up quickly. Then all bets are off.

            If we somehow returned to 5-6% mortgages, it’s game over. But I doubt we’ll see that.

          • MH 9 months ago

            Debt will bring it down crashing. The highest household debt-to-GDP ratio among the top 35 developed and developing countries.

            It is also the answer to all those “we don’t have NINJA loans here” arguments so readily presented by the RE industry.

          • Jon Jay 9 months ago

            I hope you’re right. However, as long as people are able to service their debt payments we’re fine. So that’s why I think we need to have rapidly increasing int rates and/or a deep recession in order to have cascading defaults.

            We’re not talking about a 10-20% correction here. I assumed when you say coming down, you’re expecting a 40-50% crash. If not, I totally agree that we’ll see 10-20% declines.

      • Grizzly Gus 9 months ago

        If we’re gonna go full free market then CMHC, and any first time buyers assistant programs need to be tossed out as well. If lenders were fully liable for their loans I don’t think we would be where we are today. That’s being said, we are where we are today and I believe intervention is warranted

        • Jon Jay 9 months ago

          This is the 100% true. Eliminate CMHC and this game is over. We don’t even need it anymore. It was first created to allow returning soldiers to buy homes and start their lives. Now we have 70% ownership, why do we need it? Oh that’s right, we need to protect our banker friends lol.

    • Jim 9 months ago

      Agreed. We don’t need more corrupt money from China. The failed Immigrant INvestor sham allowed over 20,000 Chinese millionaires to come to BC. Mostly, they did nothing for the province except drive up the cost of real estate. Trudeau needs to stand up and take care of Canadians. The housing situation in our largest cities is a national disgrace. Christy Clark and her corrupt Liberals buried a report about money laundering in Casinos in the Lower Mainland, and allowed the sham to continue. She should be held accountable.

      • Jon Jay 9 months ago

        I tend to agree with you but it’s a bit shortsighted. When that shady money came in, they had to buy the land/properties from locals. So that money was then circulated into the greater Canadian economy. Those sellers could’ve started businesses, invested in businesses, etc.

        So we can’t say it didn’t help. One could even argue that the huge RE related economic gains helped us weather the last 8 years.

        I would rather that our housing markets return to markets for locals but I think that ship has sailed. It is what it is and I don’t think government will directly save us.

  • Justin Thyme 9 months ago

    ‘I’m guessing quite a few people will prefer the speculator tax over the required local income taxes.’

    It’s entirely within the abilities of the CRA to ‘assume’ an income, and apply income taxes on that assumed income.

    Anyone paying a mortgage on a mansion, without declaring supporting income on that mortgage payment, can be taxed at a rate that assumes an income sufficient to pay the mortgage.

    If CRA were to apply the policies it is legally entitled to apply, the problem would be solved.

  • Justin Thyme 9 months ago

    ‘Non-resident speculators undeniably play a role, but how and why that money is here is an important question to be asked.’

    Apply a non-resident withholding tax of, say, 25% on the sale of a foreign-owned property (total price, not just capital gains) in lieu of domestic income taxes, would go a long way to curb foreign speculation.

    • Mica 9 months ago

      Taxing assignments at distribution would also have a huge impact on foreign flippers. Although I’m sure that would help us find local flippers skipping taxes as well.

  • Mmr 9 months ago

    If you can’t afford Toronto just don’t live there….move to other city….some part of Toronto like waterfront or downtown core prices might not crash but other area outside down town core I think storm is coming…I don’t know why ppl buy house in Gta for 700k or 800k should be 350k.

    • Grizzly Gus 9 months ago

      It will all crash. The narrative and justification this time last year for explosive pricing growth in Toronto and the surrounding GTA was that there was a huge shortage of supply, everyone dreams of that single detached home to raise a family, and a two hour commute to work each day is the sacrifice one makes to have that dream come true. You even have big name players like Brad “the Condo King” Lamb stating that “Hamilton is Toronto’s Brooklyn”. Buy Buy Buy.

      Now that the freehold home sales have lost momentum, inventory has jumped big time, and prices are down, the narrative has changed to how the new generation prefers the condo lifestyle and are more than willing to forgo larger properties and space for faster commute times and the care free condo lifestyle. Now there are even articles about how condo life can be perfect for raising children.

      When the surrounding GTA falls back to $350k a home, won’t that old narrative have to come back on some level? IE Today a home in pickering vs a 2 bedroom condo downtown cost about the same but I could buy a 4 bedroom single detached home in Pickering for 400K with a 1 hour commute to work, or a two bedroom condo for 700k (assuming condos don’t fall) what would be my decision? DT condo i would have a higher mortgage as well as maintenance fees.

      The condo market today is the last pillar holding up our economy, once the cracks emerge look out below. Also, when Toronto had its crash in the early 90s, the downtown condo market took the biggest hit falling over 50% in value.

      • bluetheimpala 9 months ago

        Word is born.

        • Mmr 9 months ago

          Time will tell. But again when I bought real estate in Toronto downtown in 2009 I heard same thing it will crash any time in mean time price is 200 percent higher compare to 2009….most people who bought 10 years ago and who are not flippers really don’t care…But if you are in to real estate for making quick money then you are in trouble…

          • Saab 9 months ago

            People that were saying that are idiots, because prices didn’t recover in real terms until 2007. From 2010 to 2016 however, even the CMHC says the price gains are unexplainable, which is basically just emotionally driven premiums.

            Once we see the credit supply tightens, we’ll see emotional premiums disappear, and it will come back down to reality. You’ll still have made money of course, buying just at a point that would be considered a “breakout” of prices out of the historical norm. You just won’t be able to retain all of your gains.

            I do agree that buying as a short term profit maker is dangerous. You need to be very careful, and it should be left mostly to professionals that do this for a living. They typically understand value adding, and liquidity. When you start overhearing people on the streetcar, coming home from their office jobs, talking about flipping assignments. It’s overheated.

          • Grizzly Gus 9 months ago

            Well a few things that have happened during this time include;
            – BOC rates dropping from about 4% in 2009 down to .5% before the recent hikes began
            -$trillion dollars fleeing China in the span of two years,
            -40 year mortagages
            -a 20-30% drop in the value of the Canadian dollar (discount to foreigners)
            an oil price collapse that may have caused a lot of people to move their money into Canada’s other main industry (Real Estate).
            I have red a few analysis that believe part of the US housing bubble growth was due to the fact the dot com bubble blew.

            As a result, the mean price has increased 200% over the past decade as you pointed out.

            I agree that anyone who bought in 2009 will be fine. I think you will be ok if you bought up until early 2014 provided you have not been remortgaging and/or taking out HELOCS.

            That being said, the market is not only made up of recent buyers and or recent speculators. I think the biggest X factor is how the baby boomers react to falling prices. Most of them have huge capital gains right now, and their could be a rush to the exit for those that need their home equity for retirement or for those that were planning to sell or downsize in the next few years.

        • Carlton 9 months ago

          True dat!

          • Mmr 9 months ago

            I don’t think most baby boomers will sell just because they have capital gain…lot of them actually have zero mortgage…people raise there family there it has emotional attachment to sell your only house …..I am not from that generation I just bought it in on my early 20’s and that was good decision…point is buy a real estate and keep it for many many years price up and then down don’t matter you buy it to raise a family and live there…house are not for investment…any one want to make quick money invest in stock…

          • Grizzly Gus 9 months ago

            I think we agree on 90% of the points here. The emotional attachment thing could prove to be very strong. Its why I said “x factor” it could go either way.

            Only thing is though, part of the RE industry narrative today surrounding condos and why their prices will continue to see gains (despite “potentially” “cooling” freehold prices) is a combination of “only thing affordable” “”Lack of supply” “Millennial’s have huge demand and prefer the condo lifestyle” combined with……………………………..”Huge demand from downsizing seniors”.

            If you accept that condo prices are also being driven up by downsizing seniors then that does somewhat call into question the emotional attachment theory. Boomers are almost all in senior/ retirement zone. A freehold home owner today could see $300-600k wiped off their net worth if prices were to fall by 30%. Guess the decision will come down to fear and greed vs sentimental attachment.

            Anyway this really just brings us full circle back to my original point which is that I believe downtown condo prices will fall just as hard as everything else

          • bluetheimpala 9 months ago

            No one I speak to can give me a valid/educated response as to why this isn’t the real elephant in the room. They are the biggest purchasers of this asset class who have seen values increase 5-15X over just the last 15 years and, in many cases, were slaughtered by the 2008 meltdown. Plus there will be a recession in the next year; it is inevitable so boomers will have even more pressure . Toss in a global conflict or a ‘ah sheet we’re fucked/NAFT dead/trade war’ event and/or a terrorist attack in a major urban center (read: Toronto) and the reality is housing could take, by the estimates I’ve seen factoring in a number of variables, 15-25 years to come back up to 2017 levels. This is uber bearish IMO and I DO NOT believe this but there are models that support this.
            Tell a 65 year old that his house could tank 40-60% and he has to wait 15 years to get his money out and see if he takes a 30% haircut TODAY on his $1.2M (bought in 1990 for $200K) ‘commuter’s paradise’ in Erin, Ontario (population: who gives a fuck, it’s Erin Ontario).

          • Grizzly Gus 9 months ago

            Exactly Blue. Also wonder how many of them may have taken out HELOCs. The “bank of mom and dad” is a buzz term the RE industry loves to throw around. How many of such “lenders” really have a couple hundred k in cash to lend their kids

  • Goobs 9 months ago

    Canadians have gone crazy. They want world class cities, and to have million dollar homes, but they don’t want foreign money, or immigrants that actually create industry.

    • bluetheimpala 9 months ago

      You’re crazy baby! we have hundreds of thousands of immigrants who build businesses and generate value. But thanks for playing.

    • Grizzly Gus 9 months ago

      Canadians have gone crazy – a lot of us have (anyone who bought a home in the last two years for example)

      They want world class cities – Part of the hoopla that RE industry uses to justify insane price gains is that we are still cheap compared to Manhattan Paris London ETC. We have some nice cities but we are not on the level of these guys

      Want million dollar homes but they don’t want foreign money or immigrants – I think most of us (at least speaking for myself) are very open to foreign investment and immigration, just not deep pocketed foreign speculation into an asset class that is so integral to the well being of Canadian workers and families. I think what we really want is 500k homes, and see putting restrictions on speculation (foreign and domestic) as a way of achieving that.

  • bluetheimpala 9 months ago

    “Our data shows that Chinese buying interest in Vancouver peaked in 2015,” she explains.
    This is bad news or she is lying (which could be the case for a gov’t proxy).
    Assuming she is not full of shit, and the unidentified ‘peak’ means end of 2015, the massive gains seen in 2016/2017 were a combination of late overseas money, offloading to local Chinese in Canada who got in on it and others/Canadians who wanted to build a life. Pure FOMO by a number of cohorts. Oh and the usual money launderers and drug dealers a la the Globe Article. a couple of weeks back. Thinking about when New Zealand and Australia started to heat up, it does seem like Mainland Chinese $$$ moved on by 2016 and had a new target (both of which clamped down immediately). I suspect this is the same with the GTA or close to it.
    Vancouver saw the biggest gains and, in my opinion, will see the biggest losses. Vs GTA GDP, and I am being blunt, the GVA isn’t even in the conversation. Wine and soft wood lumber are about it. Tourism. And chinese money. Now if one of those leave town….
    And for those who feel there is all of this demand and once prices come down more than 20% money will all pile in and we’ll keep trending up for another few year; we sucked most of that forward over 2 years of freaking out and doing whatever to get into the market.
    Pray.For.Mojo.

  • vnm 9 months ago

    <>

    Arithmetically yes, but with a vacancy rate of 1%, all foreign ownership would need to be is a few percent to elevate prices.
    There is absolutely no justification for non-resident buyers making any profit whatsoever from local residential housing. What’s next … water …. the air?

    BTW, one might say the same with the effect of unemployment. In the Great Depression, it was 25%, but 75% of people still had jobs, the vast majority, so no big deal?

  • Skeptimist 9 months ago

    I can imagine the return of vendor take-back mortgages to inspire a sale.

    • Realtard Pro 9 months ago

      Already seeing some VTBs in downtown Toronto. Very strange to see with rates these low tbh.

      • Grizzly Gus 9 months ago

        With stress test you lose about 20-25% of your borrowing power. VTBs can bridge some of the difference.

    • bluetheimpala 9 months ago

      WTF…didn’t know what a VTB was…asked my boy Guggle…it seems like tacking on private lending so the buyer can actually afford the property? Is this not the epitome of a broken system; the only way you can sell your property is to loan money to the buyer? This seems like some sort of ponzi scheme….

      • Skeptimist 9 months ago

        VTB mortgages were very normal in the past when the RE market was normal.

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