By JOSH GORDON, Special to The Globe and Mail (Published
Toronto-based commentators have been eager to weigh in on the recent foreign-home-buyer tax in Vancouver. Unfortunately, many of them have been confused about the issue, perhaps due to the novelty of the debate there.
The issue deserves better consideration in Toronto. There is ample evidence of foreign capital’s influence in Canada’s largest city. Not getting it right with policy on this issue could leave it in Vancouver’s unenviable position, where only a substantial price correction will get the city back to affordability, leaving many first-time home buyers underwater on their mortgages.
So it should be helpful to alert Torontonians to a host of bad arguments they will hear about why they shouldn’t address the influx of foreign capital in the real estate market.
Concern about foreign capital is xenophobic or racist: Ninety per cent of Vancouverites support the recent foreign-buyer tax. Unless you think 90 per cent of Vancouverites are xenophobic or racist, then you’ll realize that this claim is silly. The issue is that the local housing market has become disconnected from the local labour market, largely due to the influence of foreign capital, and people don’t like that. That concern cuts across all groups – the concern is with the foreign money, not the foreign people. And yes, there are straightforward policies to address the impact of capital, without targeting people.
Rising prices are all about low interest rates: Interest rates are low across the developed world, but only in a small minority of cities do we see housing prices galloping ahead of income levels on a long-term basis. What matters are house prices relative to incomes, not just price growth. In this respect, Toronto and Vancouver are by far the least affordable cities in Canada; other cities remain fairly affordable despite historically low interest rates. Also, prices surged in 2015-16, about seven years after interest rates were reduced to very low levels – and that coincides with a roughly $1-trillion (U.S.) exodus of capital from China.
There is no data: While precise data are indeed lacking, we can infer the influence of foreign money in reliable ways. We have academic and government studies of the now-defunct Immigrant Investor Program showing that Toronto and Vancouver were by far the most popular destinations for wealth-based migration in Canada – and remain so, due to Quebec’s insistence on continuing its own program.
Australia and the United States also keep track of foreign buyers and they’ve seen a recent surge in buyers from China coinciding with rapid price appreciation in affected cities. Canada is just as enticing a target, if not more so, so it’s reasonable to assume that the same has happened in “attractive” cities here.
And while the B.C. government’s recent data collection confirms that foreign buying is substantial – around 10 per cent of transactions in Vancouver – it is actually a major underestimate: What matters is the primary source of income or wealth for a purchase, not buyer nationality. It is when income or wealth is generated outside of the local labour market that local incomes and housing prices can become “decoupled,” as we have seen in Vancouver. By this more accurate measure, much more than 10 per cent would be deemed “foreign.”
The problem is all about supply: Some in the real estate industry will proclaim that Toronto needs to build its way out of the problem and open up land for development in the greenbelt around the city. However, supply of new housing in Toronto has kept up with population growth and the recent price surge can’t primarily be explained with reference to supply issues, such as excessive regulatory hurdles. While the supply of new single detached houses is slowing, and will eventually stop if the greenbelt regulations continue to be enforced, this is ultimately a good thing: Toronto already suffers from snarled traffic and if Canada is to ever tackle climate change, we will need to have densely populated cities. Besides, there is little evidence that restricting land in this manner has been the main cause of escalating prices, as I documented in a recent report.
We want foreign “investment”: This isn’t productive “investment,” this is buying houses. There are no productivity gains from residential real estate spending – for all of its foreign “investment,” incomes in Vancouver remain among the lowest in urban Canada.
That’s a preliminary list. There will undoubtedly be much more obfuscation from those with a vested interest in the status quo. They have money at stake and will throw it around to have the provincial government listen. And they will be persistent, repeating endlessly the same misleading or disproved claims.
Yet, 82 per cent of Vancouverites say the foreign-buyer tax was long overdue. Don’t let the Ontario government lead you into the same crisis Vancouver now faces.