Could we be in the midst of a Vancouver real estate crash? The government of the People’s Republic of China put in place currency exchange regulations which are meant to curtail skyrocketing investment in overseas markets, which has caused the astronomical price of real estate in Vancouver.
The new regulations were a surprise to Chinese citizens when they were introduced on Jan. 2. Citizens now need to provide a declaration explaining an acceptable use and prohibits the purchasing of bonds, “insurance-type” products and overseas real estate. Ultimately, the regulations are meant to make it difficult to wire currency to foreign markets, which in turn makes it hard for Chinese citizens to pay for property they already own overseas.
The Chinese government has capital controls, which means they can restrict conversion of the national currency – the yuan. The yuan is essentially a “Monopoly money” currency and has little to no value in overseas markets since it cannot be converted. Chinese citizens are allowed to convert up to $50,000 USD each year, with any transfer over $29,000 USD required to be reported by the financial institution to the Chinese government.
In order to bypass the Chinese government’s currency control, foreign buyers use a practice known as smurfing, which is typically used by terrorists and drug dealers. It involves wiring large amounts in small sums, enough to evade financial regulators. Smurfing is essentially a soft form of money laundering as those seeking to purchase a home in Canada will use friends, family, hire strangers and underground banks to transfer funds to separate bank accounts, then pooled to make a down payment on a property. However, the Canadian government has yet to make a crackdown on the practice because so far they have been open to letting the money flow into the country so the properties can be taxed since the proceeds are not from crime.
Vancouver is one of the most popular markets for Chinese foreign investors because of its mild weather compared to the rest of Canada as well as its proximity to esteemed institutions like the University of British Columbia. According to the B.C. Ministry of Finance, 4,515 units were bought between June 2016 and Nov. 2016, for an average price of $1,012,372 – 14 times the median income of B.C. families.
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If a foreign buyer provides a 30 percent down payment (on a $1,012,372 property), that leaves $708,000 on the mortgage. With four per cent on a 30-year amortization, that’s $3,369/month before taxes. This results in payments of $40,428/year, which is 13,000 yuan over the exchange limit in order to not be reported by the financial institution.
Although it’s unlikely that all Chinese foreign investors will default on the mortgage of property they already own in Vancouver, it does signal an imminent boost in the city’s vacancy rate.
Adding to the cool down of the Vancouver real estate market was the introduction in July 2016 of a 15-per-cent levy on properties over $500,000 for international buyers, it has shifted focus towards Toronto – the second hottest market and one of the best job market in Canada. Education has long been the primary motive for Chinese foreign buyers, not investing, according to figures released on Feb. 28 by Chinese site Juwai.com in partnership with Sotheby’s International Realty Canada.
Brett Henderson, president at Sotheby’s International Realty Canada, believes the figures show there is a serious misunderstanding when it comes to why Chinese homebuyers look to Canada.
“I really think a lot of perception that people have around foreign buyers and specific buyers from mainland China are informed by more anecdotal information and not statistics,” Henderson told the CBC.
Surprisingly, the figures show the average Chinese property search for Canadian homes was below $655,050, proving Chinese interest is not limited to high-end homes. In fact, the second most motivator for Chinese buyers is “own use,” which can be a second or third home where the child can live while they attend postsecondary. It also implies that conventional real estate dominates demand.
Knightsbridge Foreign Exchange has based the opinions expressed herein on information generally available to the public. Knightsbridge Foreign Exchange makes no warranty concerning the accuracy of this information and specifically disclaims any liability for trading decisions based on the opinions expressed and information contained herein. Such information and opinions are for general information only and are not intended to present advice with respect to matters reviewed and commented upon.
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