Is Vancouver Real Estate Headed for a Bust?
The Vancouver real estate market has been one of the biggest beneficiaries of foreign buyers in the world. The market is going through an absolute boom in recent years, spurred on by international cash injections. In fact, Vancouver ranked as the third most expensive city in the world, according to a new survey.
But that may all be set to change. New regulations are beginning to prohibit the exchange of yuan for real estate, which could shut out those integral Chinese buyers and lead to a slowdown in the price surge. In fact, if the regulations are strictly enforced, the Chinese buyers may even have trouble paying for the property they already purchased. (Source: “China’s Capital Controls Could Crash Vancouver Real Estate,” Better Dwelling, February 1, 2017.)
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One of the issues facing the yuan is that it is not convertible outside of China, making it virtually useless beyond the borders unless you subject yourself to China’s strict currency conversion policy. At the moment, a Chinese citizen is only allowed to convert up to USD$50,000 per year, per person. And that won’t exactly take you far in the Vancouver real estate market. Consider that the average property price in the city was $689,805 as of December 2016. That $50,000 hardly makes a dent. And then you have the Canadian regulations that require 30% up-front as foreign buyers don’t have verifiable incomes, or at least, none the Canadian government can account for.
So how do these foreign buyers gobble up so much land if they can’t even afford the down payment?
Essentially, they run a scheme whereby the large amount of money needed to purchase property is wired over in small sums—sums small enough to avoid the scrutiny of financial regulators.
Buyers use all sorts of intermediaries (family, friends, underground banks, etc.) to transfer the money to separate bank accounts abroad. Then the cash is pooled together and used to pay off the property.
But the People’s Bank of China was not pleased seeing all that yuan leave the mainland. The bank, along with the State Administration of Foreign Exchange (SAFE) added new barriers in 2017.
While the $50,000 limit remains in place, stricter regulations have been set concerning scrutiny of where these funds are going. Under the new rules, banks are mandated to report transfers greater than $29,000, and exchanging currency is now prohibited for buying bonds, “insurance-type” products, and real estate.
Which is bad news for Vancouver real estate.
According to the B.C. Ministry of Finance, 4,515 units were purchased by foreign buyers between June 2016 and November 2016, with an average unit price of USD$776,091.
With the 30% down payment locked in, that leaves $542,757 left on the mortgage. That’s about $30,975 per year at four percent with a 30-year amortization—$1,975 over what a Chinese citizen can convert without facing questions from the bank.
If many of these Chinese property owners can no longer keep up on their mortgage payments, then a massive string of defaults could lead to a meltdown in Vancouver real estate value.
The British Columbian government, for its part, had attempted to curb the increase in international purchasers by imposing a 15% tax on foreign nationals looking to buy real estate. But now, with these new regulations in place, the city may yearn to have its foreign cash flow back before things start to collapse. (Source: “B.C. introduces 15% real estate tax targeting foreign homebuyers,” BNN, July 25, 2016.)
