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Canada Mortgage and Housing Corporation (CMHC) is reporting strong overall evidence of problematic housing market conditions nationally for the second consecutive quarter due to overvaluation and price acceleration in Canada’s housing markets. This assessment largely accounts for market conditions in Vancouver and Toronto where strong price growth has been spreading to neighbouring centres such as Hamilton and Victoria.

Canada saw house prices grow by 7 per cent year-over-year at the end of the third quarter of 2016 after adjusting for inflation. However, removing Ontario from the calculation would have seen house prices remain flat through to the third quarter.

This analysis is the result of insight from CMHC’s quarterly Housing Market Assessment (HMA). The HMA serves as an early warning system, alerting Canadians to areas of concern developing in our housing markets so that they may take action in a way that promotes market stability.

Report Highlights

• Overvaluation and overbuilding remain the most prevalent problematic conditions observed across the 15 centres covered by the HMA.
• Overvaluation and overbuilding are detected in 8 centres.
• Evidence of problematic conditions has increased in Victoria since the previous assessment due to moderate evidence of price acceleration and overvaluation.
• Evidence of problematic conditions has decreased in Calgary since the previous assessment as some housing markets in oil-dependent centres are now rebalancing.
• Strong evidence of problematic conditions continue to be detected in Vancouver, Toronto, Regina, Saskatoon and Hamilton.
• Evidence of problematic conditions in Ottawa and Atlantic Canada remains weak.

CMHC defines evidence of problematic conditions as imbalances in the housing market. Imbalances occur when overbuilding, overvaluation, overheating and price acceleration, or combinations thereof depart significantly from historical averages. For examples, please consult the Overview section of the national report.

The complete HMA, including national, regional and CMA insight and analysis, is available on our website. To access future CMHC market analysis reports, subscribe to Housing Observer Online.

As Canada’s authority on housing, CMHC contributes to the stability of the housing market and financial system, provides support for Canadians in housing need, and offers objective housing research and information to Canadian governments, consumers and the housing industry.

The Bank of Canada announced on January 18^th, 2017 that it was keeping its trend-setting target overnight lending rate at 0.5 per cent.

The announcement was accompanied by the Bank’s Monetary Policy Report (MPR), which indicated that the Canadian economy and job market remains slack. Both the Bank’s policy interest rate announcement and MPR keyed in on headwinds and uncertainties facing the Canadian economy. Moreover, it expects Canadian housing activity to weaken in the face of “previously announced changes to housing finance rules and by mortgage rates that have risen in response to higher bond yields.”

Government spending was singled out as one of few strengthening sources of economic support. However, Bank’s views on balance suggest that Canadian economic growth will remain lacklustre over the next couple of years.

In its economic forecast, the Bank stressed that its projections “needs to be viewed in the context of elevated policy uncertainty at the global level,” and stated that global uncertainty was undiminished, “particularly with respect to policies in the United States.” Should U.S. trade policy become more restrictive under a Trump administration, the Bank may lower its economic projections.

The announcement and its forecast both strongly suggest that the Bank is in no hurry to raise its trend-setting overnight lending rate. That said, higher bond yields in Canada and recent regulatory increases in capital requirements for lenders means Canadian homebuyers will likely be facing higher mortgage rates in 2017.

As of January 18^th, 2017, the advertised five-year lending rate stood at 4.64 per cent, unchanged from both the previous Bank rate announcement on December 7^th and one year ago.

The next interest rate announcement will be on March 1^st, 2017. The next release of the Monetary Policy Report, which will update the Bank economic forecast, will be on April 12^th, 2017.

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

Uncertainty about the global outlook is undiminished, particularly with respect to policies in the United States. The Bank has made initial assumptions about prospective tax policies only, resulting in a modest upward revision to its US growth outlook. Overall, the global economy is strengthening largely as expected and prices of some commodities, including oil, have risen. The rapid back-up in global bond yields, partly reflecting market anticipation of US fiscal expansion, has pulled up Canadian yields relative to the October Monetary Policy Report (MPR).

In contrast to the United States, Canada’s economy continues to operate with material excess capacity. While employment growth has remained firm, indicators still point to significant slack in the labour market. The resource sector’s adjustment to past commodity price declines appears to be largely complete, but negative wealth and income effects will persist. Meanwhile, the Canadian dollar has strengthened along with the US dollar against other currencies, exacerbating ongoing competitiveness challenges and muting the outlook for exports.

Consumption is expected to remain solid, while residential investment will be tempered by previously announced changes to housing finance rules and by mortgage rates that have risen in response to higher bond yields. Federal and provincial fiscal measures are still expected to support growth in 2017.

Bearing in mind the important assumptions embedded in its forecast, the Bank projects that Canada’s real GDP will grow by 2.1 per cent in both 2017 and 2018. This implies a return to full capacity around mid-2018, in line with October’s projection.

Inflation in Canada has been lower than anticipated since October, mainly because of declines in food prices. Measures of core inflation are below 2 per cent, reflecting material excess capacity in the economy. As consumer energy prices rise and the impact of lower food prices dissipates, inflation is expected to move close to the 2 per cent target in the months ahead and remain there throughout the projection horizon while excess capacity is being absorbed.

In the context of a projection that is largely unchanged, the Bank’s Governing Council judges that the current stance of monetary policy is still appropriate and maintains the target for the overnight rate at 1/2 per cent. Governing Council will continue to assess the impact of ongoing developments, mindful of the significant uncertainties weighing on the outlook.

Information note:
The next scheduled date for announcing the overnight rate target is 1 March 2017. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 12 April 2017.

CMHC is increasing its homeowner mortgage loan insurance premiums effective March 17, 2017. For the average CMHC-insured homebuyer, the higher premium will result in an increase of approximately $5 to their monthly mortgage payment.

“We do not expect the higher premiums to have a significant impact on the ability of Canadians to buy a home,” said Steven Mennill, Senior Vice-President, Insurance. “Overall, the changes will preserve competition in the mortgage loan insurance industry and contribute to financial stability.”

Capital requirements are an important factor in determining mortgage insurance premiums. The changes reflect OSFI's new capital requirements that came into effect on January 1^st of this year that require mortgage insurers to hold additional capital. Capital holdings create a buffer against potential losses, helping to ensure the long term stability of the financial system.

During the first nine months of 2016:

• The average CMHC-insured loan was approximately $245,000.
• The average down payment was approximately 8%.
• The average gross debt service ratio (GDS) was 25.6%. To qualify for CMHC insurance, a homebuyer’s GDS should not exceed 32% of their total monthly household income.

Based on a 5 year term @ 2.94% and a 25 year amortization

*Premiums in Manitoba, Ontario and Quebec are subject to provincial sales tax — the sales tax cannot be added to the loan amount.

Premiums are calculated based on the loan-to-value ratio of the mortgage being insured. The premium can be paid in a single lump sum but more frequently is added to the mortgage principal and repaid over the life of the mortgage as part of regular mortgage payments. Additional details and scenarios are included in the backgrounder below.

CMHC regularly reviews its premiums and sets them at a level to cover related claims and expenses while also reflecting the regulatory capital requirements.

CMHC is Canada’s most experienced mortgage loan insurer. Our mortgage loan insurance enables Canadians to buy a home with a minimum down payment starting at 5%. As a Crown corporation, CMHC is the only mortgage insurer whose proceeds benefit all Canadians.

As Canada’s authority on housing, CMHC contributes to the stability of the housing market and financial system, provides support for Canadians in housing need and offers objective housing research and information to Canadian governments, consumers and the housing industry.

According to statistics released today by The Canadian Real Estate Association (CREA), national home sales were up on a month-over-month basis in December 2016.

Highlights:

• National home sales rose 2.2% from November to December.
• Actual (not seasonally adjusted) activity in December was down 5.0% from a year earlier.
• The number of newly listed homes dropped 3.0% from November to December.
• The MLS^® Home Price Index (HPI) in December was up 14.2% year-over-year (y-o-y).
• The national average sale price climbed 3.5% y-o-y in December.

The number of homes trading hands via Canadian MLS^® Systems rose 2.2 % month-over-month in December 2016. The rebound recovered less than half of the drop in activity from October to November, when it posted the biggest monthly retreat in more than four years after tightened mortgage regulations came into effect.

Activity was up on a month-over-month basis in about 60% of all local markets, led by Calgary and Edmonton where sales rallied following large declines in November.

Actual (not seasonally adjusted) sales activity was down 5.0% in December from a year ago, when it reached the highest level ever for the month. The number of homes changing hands in 2016 was up by 6.3% annually, reflecting strong sales activity in the first half of the year that has softened since.

“Sales set a new annual record last year,” said CREA President Cliff Iverson. “However, tightened mortgage regulations are expected to contribute to lower sales activity this year, though the extent to which they will weigh on housing markets across Canada will vary. All real estate is local, and REALTORS^® remain your best source for information about sales and listings where you live or might like to in the future.”

“Home sales are unlikely to benefit the Canadian economy as much in 2017 as they did in 2016,” said Gregory Klump, CREA’s Chief Economist. “New regulations mean that in order to qualify for a mortgage, home buyers will either have to save longer for a bigger down payment or purchase a lower priced home. In urban centres where the latter are in short supply, that’s likely to translate into fewer sales.”

The number of newly listed homes fell 3.0% in December 2016 compared to November. New listings were down in about 60% of all local markets, with sizeable declines in B.C.’s Lower Mainland, Calgary and the Greater Toronto Area (GTA).

With sales up and new listings down, the national sales-to-new listings ratio rose to 63.5% in December compared to 60.3% in November.

A sales-to-new listings ratio between 40% and 60% is generally consistent with balanced housing market conditions, with readings below and above this range indicating buyers’ and sellers’ markets respectively.

The ratio was above 60% in more than half of all local housing markets in December, the vast majority of which are located in British Columbia, in and around the GTA and across Southwestern Ontario.

The number of months of inventory is another important measure of the balance between housing supply and demand. It represents how long it would take to completely liquidate current inventories at the current rate of sales activity.

There were 4.6 months of inventory on a national basis at the end of December 2016 – down from 4.8 months in November.

The tight balance between housing supply and demand in Ontario’s Greater Golden Horseshoe region is without precedent (the region includes the GTA, Hamilton-Burlington, Oakville-Milton, Guelph, Kitchener-Waterloo, Cambridge, Brantford, the Niagara Region, Barrie and nearby cottage country). The number of months of inventory in December ranged between one and two months in many of these housing markets, and stood below one month in the Durham Region, Orangeville, Oakville-Milton, Kitchener-Waterloo, Brantford and Cambridge.

The Aggregate Composite MLS^® HPI rose by 14.2% y-o-y in December 2016. The increase has diminished in recent months (14.4% y-o-y in November; 14.6% y-o-y in October) due to softening price trends for single family homes in B.C.’s Lower Mainland.

Price gains remained strongest for two-storey single family homes and townhouse/row units (16.1% y-o-y and 15.4% y-o-y respectively), followed closely by one-storey single family homes (13.3% y-o-y) and apartment units (12.0% y-o-y).

While benchmark home prices were up from year-ago levels in 9 of 11 housing markets tracked by the MLS^® HPI, trends continued to vary widely by location.

In the Fraser Valley and Greater Vancouver, prices continued to recede from their peaks reached in August 2016 but remained above year-ago levels (+27.0% y-o-y and +17.8% y-o-y respectively). Meanwhile, benchmark prices climbed to new heights in Victoria and elsewhere on Vancouver Island, and in the GTA.

By comparison, home prices were down 3.7% y-o-y in Calgary and edged lower by 1.6% y-o-y in Saskatoon, continuing their retreat from peaks reached in 2015.

Home prices were up modestly from year-ago levels in Regina (+5.2%), Ottawa (+4.0%), Greater Montreal (+3.3%) and Greater Moncton (+1.9%). Monthly trends suggest that prices have begun to stabilize in all of these markets except Greater Montreal, where values continue to rise modestly.

The MLS^® Home Price Index (MLS^® HPI) provides the best way of gauging price trends because average price trends are prone to being strongly distorted by changes in the mix of sales activity from one month to the next.

The actual (not seasonally adjusted) national average price for homes sold in December 2016 was $470,661, up 3.5% from where it stood one year earlier. This marks the smallest y-o-y increase in nearly two years.

The national average price continues to be pulled upward by sales activity in Greater Vancouver and the GTA, which remain two of Canada’s tightest, most active and expensive housing markets.

That said, Greater Vancouver’s share of national sales activity has diminished considerably over the last year, giving it less upward influence on the national average price. The average price is reduced by almost $120,000 to $352,513 if Greater Vancouver and GTA sales are excluded from calculations.

The Canadian Real Estate Association (CREA) is one of Canada’s largest single-industry trade associations, representing more than 115,000 REALTORS^® working through some 90 real estate Boards and Associations.

The British Columbia Real Estate Association (BCREA) reports that a record 112,209 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in 2016, an increase of 9.5 per cent from the previous year. Total sales dollar volume was a record $77.6 billion, up 18.8 per cent from 2015. The average MLS® residential price in the province climbed 8.6 per cent to $691,144 on an annual basis in 2016.

“Broad-based consumer demand driven by strong economic conditions, employment growth, consumer confidence, and an expanding population base pushed home sales to record levels in many BC regions last year,” said Cameron Muir, BCREA Chief Economist. “However, home sales have fallen back from their lofty peaks early last year.” The seasonally adjusted annual rate of sales activity was approximately 92,000 units in December.

A total of 4,721 residential unit sales were recorded by the MLS® in December, down 28.4 per cent from the same month last year. Total sales dollar volume was $3.1 billion last month, a decline of 33.1 per cent compared to the same month the previous year. The average MLS® residential price in the province was $654,699 in December, a 6.6 per cent decline from December 2015.

BCREA is the professional association for over 20,000 REALTORS® in BC, focusing on provincial issues that impact real estate. Working with the province’s 11 real estate boards, BCREA provides continuing professional education, advocacy, economic research and standard forms to help Realtors provide value for their clients.

The trend measure of housing starts in Canada was 198,053 units in December compared to 200,105 in November, according to Canada Mortgage and Housing Corporation (CMHC). The trend is a six-month moving average of the monthly seasonally adjusted annual rates (SAAR) of housing starts.

“December saw multi-unit construction slow for the third consecutive month in Canada, leading housing starts to trend down,” said Bob Dugan, CMHC Chief Economist. “However, 2016 still counted more home starts than 2015.

Increased demand for single-detached homes more than offset the decline we’re seeing in multi-unit construction – a decline that’s in response to efforts to manage current inventories.”

CMHC uses the trend measure as a complement to the monthly SAAR of housing starts to account for considerable swings in monthly estimates and obtain a more complete picture of the state of Canada’s housing market. In some situations analyzing only SAAR data can be misleading, as they are largely driven by the multi-unit segment of the market which can vary significantly from one month to the next.

The standalone monthly SAAR for all areas in Canada was 207,041 units in December, up from 187,273 units in November. The SAAR of urban starts increased by 11.8 per cent in December to 187,621 units. Multiple urban starts increased by 13.9 per cent to 120,750 units in December and single-detached urban starts increased by 8.1 per cent, to 66,871 units.

In December, the seasonally adjusted annual rate of urban starts increased in Ontario, Quebec and the Prairies, but decreased in British Columbia and in Atlantic Canada.

Rural starts were estimated at a seasonally adjusted annual rate of 19,420 units.

As Canada’s authority on housing, CMHC contributes to the stability of the housing market and financial system, provides support for Canadians in housing need, and offers objective housing research and information to Canadian governments, consumers and the housing industry.

Turns out 2017 might be the year when B.C. home buyers will finally get a break. But don’t bother throwing a party, yet.

Price drop is due to a lack of supply 

The Canadian Real Estate Association (CREA) predicts prices will drop by about 7.8% in 2017 in B.C., primarily due to a lack of supply of higher-priced single family homes in the Lower Mainland and Vancouver areas.

CREA’s Chief Economist, Gregory Klump, likens this forecasted price decline as the equivalent of removing the basketball team from a Grade 8 class. “Throw in the basketball team and the average height shoots up. The same applies to markets with higher-end homes.” He continues by saying that, “The forecasted drop in B.C. home prices largely reflects an anticipated decline in single family home sales activity at the higher end of the market—particularly in the Lower Mainland,” says Klump.

New tax certainly helped

This trend of declining of home sales in B.C.’s Lower Mainland was confirmed by data collected by Zoocasa, a full-service national brokerage. According to Zoocasa Managing Editor, Penelope Graham, Vancouver “experienced a major deceleration in 2016.” While the decline started before the 15% tax for foreign buyers was quickly introduced by the B.C. government in early August 2016, the tax prompted homes sales activity to plunge 26% by September, according to the Real Estate Board of Greater Vancouver.

“Sales have been trending downward in Metro Vancouver for a few months. The new foreign buyer tax appears to have added to this trend by reducing foreign buyer activity and causing some uncertainty amongst local home buyers and sellers,” REBGV stated.

These declines in both sales volume and house prices will continue into 2017.

Just don’t expect cheaper homes

“Home prices had gotten so out of whack with the growth in the underlying wages and salaries that there had to be a correction—and it’ll happen in 2017,” said Royal LePage CEO Phil Soper. But don’t expect home prices to get much cheaper, says Soper. The dramatic appreciation over the last few years means that a massive correction would have to take place in order to see some real devaluation in housing prices. For instance, even if homes were to fall in value by 10%, prices would still remain near March 2016 levels—or 20 times the average income of the region, Soper explained to Zoocasa.com.

B.C. buyers will get a temporary break

Price declines won’t be uniform across all markets and all price points. Then there’s the added pressure of the spring buyer rush. This year’s rush could be even more pronounced now that the B.C. government has announced a new Home Owner Mortgage and Equity Partnership (HOME) loan, which goes into effect starting this February 2017.

In case you missed it: The B.C government will offer a subsidized loan to any first-time home buyer that can match the interest-free loan (for the first five years), up to maximum of $37,500 or 5% of the home’s purchase price. To qualify for the program, buyers must have lived in B.C. for at least a year (and been a Canadian citizen or permanent resident for at least five years). The household income must be below $150,000 per year, plus each household must prove that they’ve filed their tax return and paid taxes for the last two years. The loan will be amortized over 25 years, with interest set at prime plus 0.5% after five years.

Right or wrong, this extra loan might just be the right incentive for first-time buyers to get into the B.C. real estate market in 2017 (for more, read my post on the Smart way to use the new HOME loan).

By Romana King

Referenced at: http://www.moneysense.ca/spend/real-estate/buying/bc-real-estate-market-forecast-for-2017/

While real estate might be a product of local markets, probably the single biggest reason for the potential nation-wide real estate slowdown in 2017 are macroprudential measures introduced in late 2015 and throughout 2016 (and possibly stretching into this year, should banks be required to cover a portion of mortgage default losses). 

What are macroprudential measures?

Macroprudential is a term used to describe financial policies that are aimed at minimizing or eliminating risks to the financial system as a whole — think of it like a blanket, nation-wide policy that’s used to eliminate or reduce systemic risk within our country’s economy.

In Canada, these macroprudential measures included the increase to minimum down payments required for home purchases over $500,000 and the requirement of all high loan-to-value borrowers (and those who chose amortizations over 25 years) to qualify based on posted mortgage rates, rather than discounted mortgage rates.

In the U.S. these measures included stricter underwriting standards for mortgages (implemented after the 2007/2008 credit crunch and housing crash), and increased margin and capital requirements for banks and lenders.

Impact of these measures

The impact of these measures, both in Canada and in the U.S., has been significant.

According to analysis by Genworth Canada, the largest private mortgage insurance provider, over a third of home buyers would not have qualified for a mortgage on their current home had they applied after the new mortgage rules were introduced in 2016. Additional analysis suggests that another 8 per cent to 10 per cent of current homeowners would be unable to absorb even a $200 increase in monthly expenses — the equivalent of a 0.75 per cent increase above currently low rates. 

Then there’s the impact tighter mortgage regulations had on lending institutions in 2016. Higher capital requirements — this is the money banks and lenders must keep within their coffers in order to cover worst-case scenario losses — and the threat of having to shoulder the responsibility of defaulted loans has meant small, incremental increases in both fixed and variable mortgage rates. Not enough to establish rising rates, but just enough to knock out those buyers struggling the most to get into the real estate market.

And now rates are poised to rise in 2017.

Don’t discount Trumpflation

But attempts to keep our nation’s economy strong and stable aren’t the only factors that will impact Canada’s varied real estate markets in 2017. This year must also contend with the very real possibility of inflationary economic policy under the newly elected President Donald Trump.

Trump campaigned on a plan to stimulate the slowly-but-steadily-growing U.S. economy by spending big on infrastructure. This deficit-style spending still worries global financial markets (albeit with a lot less impact than when his presidency was first announced). Still any movement towards massive infrastructure spending and tax cuts will lead to inflationary pressures on the U.S. economy and this could mean additional rate increases by Federal Reserve Chair, Janet Yellen. 

While Federal Finance Minister Bill Morneau and the Bank of Canada have stood their ground — committing to the 2 per cent inflation target, as opposed to following the U.S. Federal Reserve’s lead — it’s only a matter of time before the Canadian economy is forced to respond to U.S. economic pressures.

As a result, we could see additional increases in both fixed and variable rate mortgages in 2017 — and any rate hike will impact demand side of the real estate equation, and translate into further market slowdowns and eventual price cuts.

Then there are the foreign buyers

Finally, there’s the elephant in the room: Foreign buyers.

While the impact of foreign buyers is not uniform across the country, the hottest markets — Vancouver, Victoria, Toronto and Montreal — certainly benefitted from non-resident foreign money.

One of the biggest influencers, particularly on the west coast, has been the influx of Chinese money. In an effort to capture their new-found wealth, many Chinese home buyers sought out foreign jurisdictions to park their coin. The result was increased demand on residential and commercial real estate in sought after cities, such as Sydney, Australia and Vancouver, Canada.  

A few national and provincial governments, including Canada, responded to this influx of foreign cash. In October 2016, the federal Liberals opted to close a loophole that helped foreign buyers, as well as real estate speculators. Starting in 2017, the sale of all real property must be reported on each person’s annual income tax returns. (This means any property sold in 2016 must be reported on the T1 General tax form for 2016, which is due in April 2017.) While the rules can get complex, the general gist is that anyone who has purchased and sold a property must report it; if the property doesn’t qualify for the principal residence exemption, the seller must pay capital gains tax. Now, in order to qualify for the principal residence tax exemption, the homeowner or the spouse of the homeowner must “ordinarily reside” in the property. Now, no one is foolish enough to assume that this will eliminate all the foreign buyers from the Canadian market, but those who want to avoid paying tax on the sale of the property that they do not live in, may end up looking elsewhere to park their money.

Then there was the B.C. foreign buyers’ tax — a 15 per cent surtax introduced in August 2016. “This tax only exacerbated a market slowdown that had just begun after six months of robust activity,” explains Adil Dinani, real estate agent with Royal LePage.

Yet, while it can’t be denied that B.C.’s new tax had a big part to play in slowing down sales activity in B.C.’s Lower Mainland markets, credit must also be given to the Chinese government.

Due to increasing pressure on the renminbi (China’s currency) Beijing took steps to stop money flowing out of the country. As a result, by mid-2016 Chinese banks started to apply stricter rules on international money transfers and one Chinese bank want as far as obtaining a B.C. court order to freeze the assets of a businessman that they accused of “fleeing China and buying ‘luxury’ Lower Mainland homes [using] a defaulted $10 million loan.” To put this in perspective, the court order was issued in June 2016 — the same month sales dramatically slowed in B.C.’s Lower Mainland.

Right now, many buyers, sellers and those who work in real estate are watching and waiting to see how the spring selling market unfolds. If there are no other regulation changes and if supply continues to be constrained, there will be little movement in prices in the hotter Canadian property markets. However, unless there are dramatic changes, most Canadian markets can expect a shift towards a more balanced real estate market — and this will mean a slight drop in prices for most markets.

Romana King

MoneySense

Referenced at: http://www.moneysense.ca/spend/real-estate/real-estate-market-slowing-down-2017/

Strict new government scrutiny on Chinese people who want to convert their money into other currencies threatens to slow the rush of foreign property buying that has stoked sky-high home prices in Canada and around the world.

For months, China has sought to dam the flood of money pouring out of its borders, which has rapidly diminished its stockpile of foreign reserves.

It has raised new barriers to companies buying abroad and moving money out of the country.

Now, authorities in China are taking new steps to bar individuals from putting their cash into overseas markets to buy homes and other investments, a change with important implications for cities such as Vancouver and Toronto where Chinese buyers had contributed to frenzied property trading.

Under the new regime, the number of buyers will “drop sharply,” said Andy Xie, a China economist formerly with Morgan Stanley.

Those selling homes to Chinese buyers should brace for their “business to shrink dramatically,” he warned.

The Vancouver region’s real estate market has already been cooling off for months, after sales volume and prices peaked last spring.

In February, the B.C. government slapped a tax on the portion of a property sale above $2-million and then implemented a 15-per-cent tax on foreign home buyers in Metro Vancouver in August.

In the seven weeks leading up to the tax’s implementation in the Vancouver area, foreign purchasers (including those from China) accounted for 13.2 per cent of the region’s total.

Since then, the influx of foreign buyers has slowed to a relative trickle, according to the B.C. government.

In October, Ottawa tightened mortgage rules in general and closed tax loopholes used by some purchasers who are not Canadian citizens or permanent residents.

Real estate industry officials said Wednesday it will take many months for the impact of various government measures in Canada and restrictions in China to play out. “There are so many factors in the housing market,” said Dan Morrison, president of the Real Estate Board of Greater Vancouver. “Vancouver is not a homogeneous market. Some people want to point to one easy problem or one easy solution, and there is no such thing.”

People in China, who can normally only convert $50,000 (U.S.) a year in foreign currency, have long been technically barred from buying property overseas, but those rules have not been rigorously enforced.

At the outset of 2017, however, China imposed a series of new documentation requirements on currency transactions and punishments for using money in ways the rules don’t allow.

Before, changing yuan into loonies could be done with the tap of a smartphone screen. Now, banks have begun requiring paperwork that entails submitting for approval the reason a person wants to obtain foreign currency and when it will be used. A new rule then holds people liable for what they do with that money – and could bar them from exchanging money for up to three years if they are found to have used it improperly, such as for the purchase of a home.

The rich, with corporate assets and access to sophisticated market tools for stealthily routing money around the world, are unlikely to feel much difference from the change.

But for the middle class, which has become an important force in property markets in places such as Canada, the United States and Australia, “it will have a big impact,” Mr. Xie said.

Families that once bundled together converted currency to buy condominiums and modest houses abroad will face new inspection of their currency conversions and new risks to falling afoul of the rules.

Mr. Xie expects many to simply abandon the idea, particularly since the rules also give banks much more latitude to simply deny transactions. He expects authorities to give banks quotas, in a bid to keep the country’s foreign reserves from dipping below $3-trillion, a line Beijing does not want to cross, he said. In November, China’s foreign reserves stood just $50-billion from that mark.

“China is trying to defend the line,” he said, a shift that has created anger among Chinese citizens, which spilled out on social media.

“Why can companies use vast amounts of foreign currency to buy mines or contracts for soccer stars, but citizens can’t buy houses abroad?” one person complained.

Another posted a mock bank application, saying the reason for needing foreign currency was that “I have lung disease and need to breathe fresh air in Canada,” and, “if I don’t go to a country with a better environment, I will have to use this money to buy a tomb in Beijing.”

Those in the property industry, however, say they aren’t worried Chinese buying will stop. In the first few days under the new policy, clients have asked questions, but, “I haven’t seen any anecdotal reasons to believe that there will be a drop in inquiry levels from a year earlier,” Charles Pittar, chief executive officer of Juwai.com, the top international property website for Chinese buyers, said in an e-mailed statement.

Rather than dry up, he expects Chinese home acquisitions to grow alongside rising domestic wealth and an appetite for overseas property.

“There is no doubt that Chinese buyers will set new records for international property purchase in the years to come,” Mr. Pittar said.

Indeed, crackdowns inside China often have the opposite effect. Many cities have rolled out policies to tame real estate markets in recent years only to find the announcement of the new rules “turned out to be a starting gun for even more house buying,” said Li Zhanjun, director of the Shanghai Yiju Real Estate Research Institute.

“Don’t imagine that once the government announces something, it will always reach its intended outcome.”

The new currency rules could even motivate more Chinese buying by making “people more worried about the security of their assets and more eager to move them overseas,” said Anne Stevenson-Yang, co-founder of investment advisory J Capital Research.

Chinese investors tend to be nimble in finding ways around new rules, too. “It takes about a month before people find the next channel,” Ms. Stevenson-Yang said.

Still, the Chinese determination to choke cash outflows appears to be serious, and could have implications that extend far beyond property and into other sectors whose payrolls and future plans are increasingly dependent on Chinese money, such as universities and tourism operators.

What China is doing with capital controls is similar to its successful management of the Internet. Access to censored websites “is not impossible from China, but it’s just a big hassle, and because it’s a hassle, very few people manage to do it on a regular basis,” said Victor Shih, who specializes in Chinese fiscal policy at the University of California, San Diego.

The goal with currency conversion restrictions “is exactly the same – to create enough friction to deter the vast majority of people from converting sizable amounts of money,” he said.

China could do much more, Dr. Shih said. Every month, Chinese people spend between $15-billion and $20-billion abroad on services such as tourism and education. It’s a huge cash drain, and one that China could pare back by restricting the number of people who can travel and study abroad.

“I really think this is where it’s all heading – dialling back the clock to the early eighties, when all flows, including visits, were tightly regulated by the government,” Dr. Shih said.

“The leadership would like a certain combination of outcomes – stable growth, and also currency stability, and also no financial risk,” he said. “In order to accomplish that, you just have to control more and more stuff.”

Nathan VanderKlippe

Globe & Mail

Referenced at :

http://www.theglobeandmail.com/real-estate/china-canada-foreign-buyers/article33485996/