China’s tighter overseas currency use impacts Canadian real estate landscape

The heavy exodus of the Chinese renminbi from mainland China put pressure on the country’s economy. In an effort to stymie the outflow, the Peoples Bank of China (PBOC) enacted new rules that are meant to help it exert more control over its currency…and that could spell trouble for the Canadian real estate market!

A CANADIAN REAL ESTATE “BUBBLE”

It is well known that the global financial crisis of 2009 was precipitated by a housing “bubble”in the United States. Real estate analysts south of the border, and even some local market watchers here in Canada, have long been predicting a similar bubble of sorts brewing in Canada. However, the Canadian “bubble” seems to have a much different origins.

The Canadian Perspective

It has long been suspected that the booming housing “bubble”, in great Canadian metropolitan cities like Toronto and Vancouver, was partly inflated as a result of foreign buyers. Predominant amongst those foreigners were property buyers and investors from China. Desperate to diversify their investments, and find better use of their capital outside the mainland, Chinese buyers are rumoured to be piling into real estate in large cities like Vancouver and Toronto.

According to industry analysts, home prices in British Columbia increased from 6.6% year-over-year in 2014, to 20.5% in 2016; while Ontario saw increases from 5.2% to 11.6% over that same period. Clearly, by some definitions, this is a bubble in the making.

The Chinese Perspective

Every sovereign nation wants to (in fact must!) have maximum control on its currency, and China is no exception. However, once currency is converted into foreign exchange and sent out of jurisdictions influenced by the country, “control” becomes even more difficult to exert.

The large outflow of currency from China is a concern to the authorities there – and they
decided late last year to do something about it. Among some of the exchange control measures include:

• Making it harder for individuals and institutions to convert renminbi into other currencies
• Enforcing greater restrictions on transferring money from the mainland to other international jurisdictions
• Requiring more transparency on the intent and motivation behind foreign exchange transactions
• Mandating greater punishment for individuals and institutions who run afoul of the new rules

While large Chinese corporations and global real estate players may still be able to skirt around these new regulations, it is expected that a large amount of property investment transactions by individuals could be impacted. As a result, Canada, and especially hot beds like Vancouver and Toronto real estate, should brace for potential fallout.

MORE THAN A CHINA CONNECTION

While China’s new forex rules will definitely put a damper on many Canadian real estate companies business plans, there is more bad news for the industry – largely emanating from within Canada. Both at the federal and provincial levels, governments are concerned about facing similar repercussions as that seen by our southern neighbor because of housing bubbles faced there. As a result:

• In February 2016, the government of British Columbia implemented a new tax rate of 15% for properties sold in excess of $2-million; while also mandating collection of more data on foreign buyers
• At the same time, the BC government also empowered municipalities like Vancouver to tax “empty homes”– mostly foreigner-owned investment properties that are vacant; waiting to be sold at a huge profit
• On October 3, 2016, the federal government imposed more stringent rules for mortgage insurance, raising the barrier for high-ratio borrowers to qualify for loans
• Additionally, through that same legislative move, some loopholes in Canada’s tax code, which were being used for preferential tax treatment by foreign buyers and non-permanent residents, were closed

All of these moves are billed as initiatives that will ultimately make housing more affordable in hot markets like Vancouver and Toronto. However, their impact will be far-reaching in terms of broader impact to the nation’s real estate market.

Early Signs

It is too early yet to tell whether the new regimen will have any impact on Canada’s housing industry. But based on early reports from B.C, it does look like they are having a
cooling effect, at least in the Vancouver area.

Since the new Canadian/B.C rules took effect, there has already been a marked decline in foreign investment recorded in Vancouver. According to the B.C government’s information, foreign purchases in Metro Vancouver, which also includes Chinese purchasers, accounted for roughly 3% of the region’s residential real estate transactions from June 10^th to October 31^st, 2016. This number has dropped well below the 13.2% rate for similar
transactions prior to the new legislation.

WHAT THE FUTURE HOLDS

The end game for China’s new currency export policy is to detract its citizens from annually spending an estimated $15 to $20 billion overseas. But China-analysts seem to think that, even though the country’s new forex laws are tightening the noose around real estate investors who may be contemplating Canadian investments; such transactions will likely not decline substantially – at least not in the immediate future. New ways to get renminbi out of China will evolve within months of old ones being shut down!

Canadian real estate industry analysts however seem to have a different take on the issue. According to Canadian property market watchers, the number of resale homes projected for resale in 2017 across Canada are expected to fall by around 11.5% (compared to 2016); with B.C leading the pack (-23.8%), and Ontario (-10.5) declining by double-digits.

This one-two punch, by federal and provincial jurisdictions, to the real estate market doesn’t bode well for the real estate industry, but especially for property owners. Researchers believe that the collective impact of the new housing regimens – both from China and from within Canada – will contribute to much slower increases to property values.

Researchers forecast that on a national level, the average Canadian home’s resale value will increase by only 1.6% in the New Year, compared to a robust 9.5% increase in 2016. Ontario homes are set to post their weakest rate of increase in over 8 years – at 3%;
while B.C home prices will rise by 1.9% (compared to a staggering 20.5% in 2016).

With not much information available as of yet, about the impact of the policies discussed here, it is hard to predict what impact they are having on the country’s real estate industry. One thing is definite though: None of the steps implemented so far, by both China and various jurisdictions within Canada, seem “investor friendly”.

1. http://www.rbc.com/economics/economic-reports/pdf/canadian-housing/housingforecastNovember2016.pdf

2. http://www.news1130.com/2016/09/14/details-on-the-empty-home-tax-to-be-unveiled/