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Why Vancouver's housing market isn't about to crash

Some real estate observers believe new rules for Chinese investors will cause the bubble to burst

Vancouver housing market is not going to crash

There’s a very interesting piece of commentary on Vancouver’s real estate market making the internet rounds. Written by the co-founder of real estate blog Better Dwelling, it argues that new rules imposed by the Chinese government that restrict how much money can be taken out of China to invest abroad will ultimately cause a housing crash in Vancouver.

Let’s break that argument down. Current regulations allow Chinese nationals a foreign exchange quota of USD$50,000, which basically means that if you’re a Chinese citizen looking to transfer money abroad you’re capped at fifty grand.

But earlier this year, China’s foreign exchange regulator pledged to step up scrutiny on just how many Chinese nationals are buying foreign property, and whether any of that money flowing out of the country is illegal. In fact, starting July 2017, all financial institutions in China will have to report domestic and overseas cash transactions of over 50,000 yuan (roughly $7,000). That move was implemented by China’s Central Bank purely to deter Chinese citizens from moving money overseas.

Essentially, if you assume that Vancouver’s home prices (which currently average at approximately $1.5 million for a single detached home) are driven primarily by Chinese buyers, you can perhaps logically draw the conclusion that less Chinese money flowing out of China, means fewer Chinese buying foreign property.

If a big source of demand (Chinese buyers) for Vancouver real estate diminishes, this will lead to dramatically lower home prices, and a housing crash, argues Better Dwelling’s Stephen Punwasi.

But there’s a bit of a hole in that thesis. Vancouver’s real estate market has been cooling for quite some time now, even before the Chinese government imposed restrictions on the amount of money flowing out of China. Some industry observers boil that down to market forces — home prices just reached a point where they were simply too high for what buyers were willing to pay.

According to data from the Real Estate Board of Greater Vancouver, average home prices in the Greater Vancouver Area began to decline back in March 2016. Home prices, have pretty much leveled out, dropping almost 1 percent each month since August 2016, when the B.C. government imposed a 15 percent tax on home purchases made by foreign nationals.

It’s also worth noting that the idea that Canadian real estate is on a tear because of Chinese buyers is a vast exaggeration. In the months of August and September 2016, the value of purchases involving foreign buyers was $318 million, only 1.8 percent of the overall value of purchases in the Metro Vancouver area. In the seven weeks leading up to the B.C. government’s imposition of the foreign buyers tax, purchases by foreign nationals peaked — even then, they was only 13.2 percent of overall property transactions.

Statistics from Juwai.com, the biggest online property website for Chinese buyers looking for homes abroad, shows that the largest change in buyer inquiries for Vancouver property took place in July 2016, where there was an 80 percent drop in the number of Chinese interested in Vancouver real estate, compared to a year earlier.

“In Canada, we agree with those who believe it is domestic investors looking for cash-producing investments in this low interest rate environment who have driven up prices by the greatest amount,” Juwai.com CEO Charles Pittar told VICE Money.

Indeed, it is likely the case that stricter regulation on Chinese capital outflows will have some effect on housing markets that have traditionally been exposed to Chinese money.

There may be a continued decline in home prices, perhaps at a slightly quicker pace, but there has to be proof of a significant investment of foreign money in Vancouver’s real estate market to make the argument for any kind of actual crash to take place. Speculation is difficult, because the province has only been accumulating data on foreign buyers for the last eight months.

“For most people it’s just too easy to blame an easily identifiable group like offshore buyers when prices get hot,” says Pittar.

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