When foreign buyers abandon Canadian housing: Don Pittis

There is little doubt that overseas money has had an impact on the high cost of Canadian real estate.

Even theCanada Mortgage and Housing Corporation appears to haveconcededthe fact. In a speech this week, CMHCpresident EvanSiddallsaidthatdespite having poor data on foreign ownership, it was likely pushing up the price of Canadianhousing.

There are two things that are less clear that may be crucial to the value of your home.The firstis the size and distribution of the effect. The second is what will happen when foreign ownership dries up or withdraws.

• CMHC says foreign buyers may be pushing up luxury housing prices
• Canada's housing market faces a looming demographic bubble

The fact that Canada does not have a good official estimate of how much foreign money is invested in Canadian housing is a scandal. Other countries assemblethe information as a matter of course.

Anecdotal evidence

In Canada, even the head of the CMHC admits he is dependent on anecdotal information, partly because without making it a legal requirement, buyers may be unwilling to divulge their ownership status.

"Most of the available information is anecdotal. And the problem is that many foreign investors may prefer to hide their ownership," Siddallsaid in his speechthis week.

Without an official way of gathering the data, private studies can be based on uncertain methods. They may fail to distinguish betweeninvestment by foreigners andpurchases by new Canadians.

Whether based on anecdote or private research, the conclusions are often unreliable or controversial.Most recently, a study using non-AnglicisedChinese names as an indicator of foreign money in the market was pilloried as racist.

• Vancouver foreign ownership research prompts cries of racism in hot housing market
• Toronto's 'Condo King'says 50% of condos are foreign owned

The impact of Chinese investment in Vancouver's red hot marketis whatmost people imagine when theythink of non-Canadianinvestment in domestic housing. Certainly the effect is clear in countries where they do collect that kind of data.

But anecdotal tales of foreign buyers purchasing blocks of condos means that overseas investors, especially those with family members in the country, would not necessarily restrict themselves to luxury homes, nor to the biggest cities.

Taking a stake

In principle, there is absolutely nothing wrong with foreign money taking a stake in the Canadian real estate market. Domesticinvestors do the same thing.It helps support the construction sector. It provides homes for Canadians without investment capital and homes forthose whose mobile lifestyle is better suited to renting.

But as Siddall said, the exact nature of that investment makes a big difference.

"While both domestic and foreign investment activity can be speculative, foreign investment may be more mobile and subject to capital flight," Siddall said. "This would increase volatility in domestic housing markets."

Even if thepercentage of overseas investors is small, what economists call the "marginal effect" can be large.

As economistJohn Maynard Keynes said, "Everything happens at the margin." A simplifiedway of thinking of the principle is that if peoplewantjust a little more of something, the price goes up;if they want just a little less, the price goes down.

As Siddall says, foreign speculative investment, sometimes called "hot money," can definitely drivereal estate prices up as it pushes its way into the market. And as author and portfolio manager Hilliard Macbeth told me earlier this week when I was interviewing him for another story, hot money can also have the opposite effect.

Macbeth says internationalhot money has the choice of any real estatemarket in the world. While Canada may have been the prime destination for that cash for the last several years, there is no guarantee the investmentwill continue.

Best to worst

"You could go from the best place to put yourreal estate money to the worse place, literally overnight," Macbeth says. "They wouldn't probably be able to sell, but they wouldn't be putting any new money in."

In the domestic real estate market, most of the buying and selling isamongpeople trading one house for another, says Macbeth. Price rises,he says, happenat the margin, consistingofnew Canadian(usually young)buyers entering the market and foreign investors bringing new money from overseas.

We seem to be in another one of those periods when everyone, including the CMHC, is worrying about overpriced Canadian real estate. Such worries have come and gone before without hurting the speculative value of Canadian houses.

It's not yet clear what the trigger might be for aturn from rising prices to decline.It could be risinginterest rates.It could be the effect of ouraging population. It could be an anticipation of those things as potential investors think they see the writing on the wall.

But just as when markets were rising,the hot money effect of overseas investors willaccentuate the fall.And without reliable statistics on how big that sector is, we have no idea how greatthe effect will be.

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More analysisby Don Pittis