Will Chinese investors shun the Vancouver real estate market?
A huge new tax on foreign investors coupled with a crackdown on capital outflows is a double whammy discouraging Chinese Nationals from investing in Vancouver.
If governments really want to stop a certain behavior, what must they do to really stop it? Is passing a law good enough? Well, drugs are illegal, and it never did much to discourage drug use. What about changing the financial incentives?
Vancouver real estate is extraordinarily expensive relative to the incomes of local residents largely because Chinese investors buy up Vancouver real estate. The provincial government in British Columbia wanted to discourage foreign investors, so they recently passed a 15% tax on them, specifically to discourage them from investing there and driving up prices for local residents.
Further, Chinese government officials want to hold back the tide of capital fleeing China for safe havens like the United States, Australia, or Canada. To discourage this activity, State Administration of Foreign Exchange said all buyers of foreign exchange must now sign a pledge that they won’t use their $50,000 quotas for offshore property investment. Violators will be added to a government watch list, denied access to foreign currency for three years and subjected to money-laundering investigations, SAFE said.
So now we have both governments trying to stop Chinese Nationals from investing in Vancouver real estate. Yet, it still goes on.
Global real estate markets are breaking a sweat, and Vancouver should be no exception. Those same foreign buyers that sent property values soaring around the world are now a little short on foreign currency. New regulations now prohibit the exchange of yuan for real estate, making it tricky to get currency into foreign markets. Without that sweet yuan converted, Chinese buyers won’t be able to continue driving prices, and could have trouble paying for existing property.
Chinese capital is an unstable source of investment, and it could reverse course in a moment based on policy changes in China. Investment capital from wealthy individuals in China is hot money escaping an unstable market, subject to the policy whims of an unpredictable totalitarian government.
Smurfing is a controversial process where a large amount of money is wired in small sums. These sums are designed to be small enough to avoid the scrutiny of financial regulators. People get family, friends, strangers for a fee, underground banks, etc. to transfer the money to separate bank accounts abroad. Those separate bank accounts are then assembled into a downpayment. The process repeats until you run out of money or the house is yours. It’s a soft-form of money laundering, but the money isn’t necessarily ill-gotten. Since there’s nothing to demonstrate the money is from the proceeds of crime, the Canadian government is more than happy to have the money flow in to Canada.
This all changed January 2, the first business day of 2017. The People’s Bank of China (PBoC) and The State Administration of Foreign Exchange (SAFE) surprised citizens and banks by adding new barriers. Citizens exchanging currency now need to provide a declaration explaining an acceptable use. The US$50,000 limit remains, but banks are now required to report transfers greater than ¥200,000 (US$29,000). Exchanging currency is now prohibited for buying bonds, “insurance-type” products, and real estate.
New penalties were also rolled out if you’re caught lying, or lending your allowance. Violators of the policies are now subject to a 3 year ban, and an investigation for money laundering. Keep in mind, money laundering in China is getting money out of the country without an approved use. So it’s not the supervillain laundering crime money that comes to mind when you hear the term. For the most part, these are just regular families looking to move their money abroad.
That makes it a crime in China to buy US, Australian, or Vancouver real estate.
How Does This Impact Vancouver Real Estate?
This will impact real estate around the world, but Vancouver is a particularly popular place for Chinese buyers. Using the foreign buyer data from the B.C. Ministry of Finance, we can see 4,515 units bought between June 2016 (the first month tracked) to November 2016 (last point available). The average price of units during those periods is CA$1,012,372 (US$776,091), around 14x the median household income of a BC family. Not exactly chump change that can be absorbed domestically.
Fortunately, this is one area where the US is not like Vancouver. The price-to-income ratios are elevated due to low interest rates, but not that elevated. Instead of four-times income, it’s currently about five and one-half times income — elevated, but not nearly as bubbly as the fourteen times income of Vancouver.
B.C. has only been tracking foreign buyers for 6 months, and Vancouver has been a popular destination for Chinese buyers for much longer. The number of foreign homeowners that need to evade capital controls is likely much higher, and will be subject to the same barriers. So unless someone is working on an Uber for money laundering, Vancouver’s going to see a fire sale.
Still skeptical this will impact Vancouver real estate? There’s currently 1,777 listings in the Greater Vancouver Region for sale. January saw 179 price reductions, roughly 1 in 10 in properties. Although I’m sure somewhere a Realtor is saying it’s a Chinese New Year sale.
We will see over the next several months if these new capital controls will impact the US real estate market. Perhaps the Vancouver tax will prompt those Chinese buyers willing to risk the new edicts to invest here in the US. Or perhaps a resurgent US economy will pick up the slack as Chinese investment wanes.
It will be an interesting spring selling season.