We promise we’re not drunk publishing. Despite the whopping 78% benchmark return you would have received on Vancouver real estate over the past 10 years, a yuan based buyer would not be so lucky. In fact, if you’re a Chinese buyer purchasing in yuan, your return likely didn’t keep up with inflation.
The Return Sucked
Over the past ten years, the benchmark return would be around 2.6% annualized – that’s right, less than the 2.7% average rate of inflation experienced in China over the past 10 years. That’s also before a realtor takes their cut. To contrast that, an investment in a Shanghai Stock Exchange 180 index fund could have netted them ~210% in profit over the same time – that’s roughly a 12% compound annual growth rate.
China’s Capital Flight
One of the most common misconceptions is that Chinese and Canadian governments are being duped by these foreign buyers that are trying to smuggle in money using Canadian homes. More than a few news outlets have been running stories claiming China is hemorrhaging capital, and is trying to desperately stop the flight. Or the money is being snuck in and the Canadian government isn’t keeping track of it.
Don’t get us wrong, we’re not saying those things aren’t happening. There is definitely money being smurfed into Canada from China, and we absolutely think the Canadian government keeps less than perfect books. However in reality, China and Canada established a $30 billion swap line between their central banks to make it easier for yuan to land in Canada. Additionally a yuan clearing house has been established in Toronto so transactions could be done faster.
It’s pretty clear that China does know there’s quite a bit of money leaving their country as they’ve set up a bank to help make the process become more efficient. It’s also highly unlikely that the Canadian government doesn’t have the slightest clue why the Industrial and Commercial Bank of China operates a clearing on Bay Street. Although are you surprised that a country like China, that filters and censors the internet in real-time, knows exactly how much capital is leaving?
Why Do it?
That’s the $1.7 million question. While there’s a lot of speculation on why there’s so many overseas buyers from China, a phenomenal rate of appreciation can probably be ruled out. After all, people wealthy enough to be purchasing $1.7 million second home are probably pretty good at understanding the rate of return they’re getting.
While this tidbit of information brings more questions than it answers, it does pour water on the “Vancouver real estate is a great investment” argument. Also, since we know that both governments are building facilities to make the transactions occur faster, it’s likely not just a case of smuggling money out of China against their government’s wishes. It’s also becoming more apparent that a $500k study from StatsCan isn’t going to uncover much, we’ll likely need something more like the extra $444 million the CRA is being given to crack down on tax compliance schemes.
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