Black swans and bellwethers

Canadian real estate in the globalized economy


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Picture yourself walking through a newly constructed city: residential towers, high-rise business skyscrapers, shopping malls, an entire mini-metropolis. But it is virtually empty, the buildings collecting dust like antiques, your footsteps echoing off the pavement of what should be a bustling, crowded street.

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Hey there, time traveller!
This article was published 07/02/2015 (2853 days ago), so information in it may no longer be current.

Picture yourself walking through a newly constructed city: residential towers, high-rise business skyscrapers, shopping malls, an entire mini-metropolis. But it is virtually empty, the buildings collecting dust like antiques, your footsteps echoing off the pavement of what should be a bustling, crowded street.

Bloomberg News photo by Sim Chi Yin The Conch Bay development is across the river from the Manhattan-inspired Yujiapu financial district in Tianjin. Yujiapu typifies the costly large-scale projects undertaken by local governments.

Welcome to China’s ghost cities, part of the country’s long-standing real estate construction boom. These projects are constructed in record time, however fail to find tenants, and are artificially inflating the country’s Gross Domestic Product. Forecasters are now asking serious questions: can a country build property simply for sake of building property? Is this a sign of another massive housing bubble?

A huge part of the 2008 economic downturn involved the U.S. housing crisis. Between 1998 and 2006, the price of the typical American house increased by 124 per cent, leading to a monumental crash that forced many homeowners into foreclosure. China’s ghost cities are bought largely by its burgeoning middle-class who are told real estate is a safe and sound investment. In a country of 1.3 billion people, a staggering amount of China’s household wealth (65 per cent) now sits in real estate, and almost 90 per cent of Chinese households already own homes.

Annual investment growth in China’s real estate sector slowed to a five-year low at the end of 2014, and overall economic growth was the lowest it’s been in 24 years. What does this hold for China’s future? Can we draw any parallels to the U.S. collapse? Does this mean another crisis is somewhere on the horizon? The only certainty is capitalism operates on a boom-bust cycle, and as per the 2008 U.S. downturn; real estate can not only play a part, but be one of the driving factors. There’s never been an instance where a modern economy anywhere near the size of the state-controlled capitalist China, which has gone through such a prolonged state of expansion, without experiencing some type of correction.

Bloomberg News photo by Sim Chi Yin A scale model shows the skyline of the Manhattan-inspired Yujiapu financial district. To build Yujiapu, Tianjin officials are piling onto borrowing that is already at least almost half a trillion yuan, or $79 billion.

For decades, the country’s economic growth hovered around 10 per cent, and has now dropped three full percentage points in a matter of years. While this is still high, it appears China’s rise has found its roof, and the question is now where it goes from here. The first market showing signs of weakness has been real estate, and as the market cools the main question remains: does this bubble burst, or is there a soft landing in store?

Even with China’s 4.5 per cent drop in housing prices in 2014, the first in 20 years, the fall of the country’s overbuilt real estate market has only just begun. More than 60 million apartments are sitting empty, awaiting buyers that will probably never show. The residential housing market is also dead in the water as people flock to cities as the country undergoes a planned urbanization push. Estimates put China’s real estate sector between 25 per cent and 30 per cent of its overall GDP if you include deeply connected manufacturing markets like steel and cement. However they only way to entice buyers again is for prices to go down, and that doesn’t happen without destroying the country’s growth rate, the backbone of China’s ascent to global economic super-powerdom.

In Yujiapu, the planned financial district of the Chinese city of Tianjin, the government spent billions of dollars building a virtual replica of Manhattan that remains incomplete and empty. There’s even a replica of New York’s Wall Street — the epicentre of the U.S. financial sector’s massive collapse some six years ago. It seems odd, or if you’re more of an alarmist, fittingly prophetic the Chinese would build a carbon copy of a financial district but have it collect dust while the world whips up frothy fears over its own potential downturn.

However, the Chinese still have tons of money to spend, and they love real estate. It appears they’ve given up on their own country’s housing market, so where exactly are they spending all their hard-earned cash?




A few weeks before New Year’s Eve I was in Coal Harbour — a tony enclave of downtown Vancouver — at a party in a high-end residential tower called Three Harbour Green. Overlooking the Lions Gate Bridge, North Vancouver and Stanley Park, the 3,320-square-foot corner penthouse on the 30th floor has a breathtaking panoramic view and is valued around $8 million. When I went out onto the patio, it was eerie looking into the other buildings in the area. I counted multiple unlit units that had nothing in them. The ghost-like feel of the towers was something I’d expect to see in a place like China, not here in one of the world’s most desirables cities.

Ward Perrin / Vancouver Sun Blue skies over Coal Harbour in Vancouver.

In Coal Harbour, about one in four condos are “non-resident occupied” according to the research division of Bing Thom Architects. However Canada’s relationship with China goes a lot deeper than vacant properties. In August, MacDonald Realty revealed more than one-third of single-family detached home sales in Vancouver were going to people with direct ties to China or Hong Kong.

A recent Canadian Mortgage and Housing Corporation flew in the face of the MacDonald Realty study. Foreign investment, according to the CMHC, was well below MacDonald’s estimate. Toronto was the highest at 2.4 per cent, with Vancouver next at 2.3 per cent and Winnipeg at 0.1 per cent. How could two studies be so far off from one another? Real estate is a sector built on number crunching, so why such a blatant discrepancy?

When you stroll along West Georgia Street in downtown Vancouver, passing high-end boutiques like Louis Vuitton and Gucci, the commercial ‘For Sale’ signs in between are tough to ignore. Businesses rely on population statistics to gauge areas’ economic viability, and it appears there’s a gap somewhere in these numbers as well. Locally owned and operated businesses without ties to major international chains are being pushed out by rising rental fees. Forced to find other commercial space outside of the city’s core, their absence gives downtown Vancouver a scattered, high-end shopping mall feel along the sidewalks.

Many renters and potential home buyers in Vancouver are crying foul, as the average price for a single-family detached home in the city sits at $1.36 million.

Many renters and potential home buyers are also crying foul, as the average price for a single-family detached home in Vancouver sits at a record high of $1.36-million. People say they can’t compete with foreign buyers or even afford to rent, and are forced to the suburbs where life is more affordable. A recent study has Vancouver home prices as some of the highest in the world, and the only place you can find more expensive square footage is in Asia’s own financial hub — Hong Kong.

The federal government is obviously taking notice of all the rich foreign interest in our country, however their intentions remain unclear. They recently announced a new pilot program to give permanent residency to approximately 50 millionaire immigrant investors beginning this year. Under the Immigrant Investor Venture Capital program, each investor will be required to make a non-guaranteed investment of $2 million over 15 years and have a net worth of at least $10 million.

The new program subsequently scrapped two old programs — the Immigrant Investor Program and the Entrepreneur Program — wiping out a backlog of thousands of applicants, mostly from China or Hong Kong. These dismissed investors banded together and took their battle to the Supreme Court, but subsequently lost. From the looks of this, they’re looking for the richest of the rich, instead of just the rich. Whether or not this tweaking is good for Canada remains to be seen.

DARRYL DYCK / The Canadian Press A man jogs through the Millennium Water development which was the athletes' village during the 2010 Winter Olympics in Vancouver, B.C.

Launched in 1986, the IIP offered visas to business people with a net worth of at least $1.6 million willing to lend $800,000 to the government for a five-year term. Between 2005-12, according to Stats Canada, 37,000 Chinese millionaires arrived in B.C. alone as permanent residents under the now-defunct IIP.

However the extent of foreign influence on Canadian real estate appears to be a phantom statistic, somehow unobtainable in today’s statistically overloaded culture. While tracking immigrants is relatively easy, tracking foreign investment appears impossible, or maybe there are other elements at play.

“That’s the $10,000 question,” said Gregory Klump, the Canadian Real Estate Association’s chief economist.

Klump said he’s not sure of the extent, or even the country that makes up the majority of foreign real estate buyers in Vancouver, or any city in Canada for that matter.

“Nobody really has a good handle on that. So I’m in the camp of I don’t know what effect foreign buyers have had on prices.”

When you look at immigration statistics from the past few years, they appear to point to potential foreign real estate hot spots. Canada’s adding somewhere around 250,000 immigrants to its population each year, with close to half of those people moving to either Toronto or Vancouver. However investors don’t need to become citizens to buy property, they simply need to have enough cash. Major banks such as the Royal Bank of Canada offer immigrant specific programs to aid in mortgage approvals. And if you’re a foreign multi-millionaire looking to park some cash in a safe place, right now there’s no better stock than Canadian real estate.

Adrian Wyld / The Canadian Press Bank of Canada Governor Stephen Poloz

In December, the Bank of Canada’s Stephen Poloz tackled another aspect of the Canadian housing market in its Financial Systems Review concerning potential overvaluation, which may also be tied to high foreign investment.

Although there is considerable uncertainty around this question, various approaches suggest there is some risk the housing market is overvalued, and estimates fall in the 10 to 30 per cent range.

We experienced housing corrections in the early 1980s and the early 1990s, after periods when prices became overvalued to a similar extent. But both of those episodes were preceded by a much faster run-up in prices amid rising inflation expectations. In both cases, interest rates rose as monetary policy leaned against inflation, and a recession ensued.

None of those conditions is present today. The rise in house prices has been much more gradual and, in the context of a broadening recovery, the unwinding of household imbalances should be gradual as well. That is why we continue to expect a soft landing in the housing market, but it is conditional on continued strengthening in the economy.

Pundits scrambled to read between the lines of the release, which many called unprecedented due to its gloomy undertones. Were Poloz’s comments meant to possibly deter buyers, helping bring about that very “soft landing” he was eluding to? Why throw out such a large range, 10 to 30 per cent seems like you could drive a truck through it?

Ward Perrin / Vancouver Sun Blue skies over Coal Harbour, Vancouver.

After weeks of speculation by Canada’s economic forecasters stating they thought the Bank of Canada would increase interest rates sometime in the third quarter of 2015, using Poloz’s comments as a prophetic marker, the central bank shocked everyone and dropped the benchmark overnight interest rate by a quarter of a percentage point, citing low oil prices.

Of course the banks soon followed suit, cutting fixed-rate mortgages, and now it appears our housing boom is about to get another injection of buyers at what might be a rather misplaced point in time. Allowing buyers who couldn’t normally enter the market a chance to do so with a drop in rates does not bode well knowing that sooner or later rates will go back up.

A five-year fixed rate mortgage is just that, five years at this price point. The question remains, where will these new rookie homeowners be financially in half a decade when it comes time to renew their mortgages?

When faced with all this information, it’s no wonder confusion is the new normal. While the drop in oil is bad for Alberta, hurting Canada’s GDP, cheap gas leads to increased spending, meaning a boost for manufacturing provinces like Ontario. And our paltry dollar, well that’s great for a rebounding American economy with increased consumer confidence, which is in turn great for provinces such as B.C. and Quebec.

What this means is capitalism in a globalized economy has given each country’s economy — especially ours – multiple entry points and various internal and external factors of weight and scale. In a vacuum, Canada’s tiny population of 35 million and puny GDP of $1.5 trillion shouldn’t be able to support such a massively expanding, red-hot real estate market. But in the real world where bigger players like China have their hands in multiple cookie jars, this is the new global reality.




If Vancouver and Toronto represent the storm of Canadian real estate, then Winnipeg would be the eye. In December, the international credit rating company Dominion Bond Rating Service ranked Winnipeg second out of 50 international cities in the U.S., the U.K. and Australia. The ratings were based on established home price indexes in their respective countries and then ranking what the increases were over the past decade. Basically, if you want the best bang for your buck when it comes to real estate, Winnipeg is it. There is a joke going around that Torontonians who are so fed up with high housing costs have bought in Winnipeg and are commuting to Ontario’s capital every day.

Ruth Bonneville / Winnipeg Free Press Street view of newly built condos on Waterfront Drive along Red River in the Exchange District in downtown Winnipeg.

Winnipeg’s high water mark was in 2007 when there were more than 13,000 sales, almost 10,000 of them single-family homes. Winnipeg also weathered the U.S. economic downturn nicely, staying within two per cent of 2007. Last year was the fifth highest sales year on record with 12,838 sales and also set a new dollar volume record of $3.4 billion.

Condominium sales have also picked up since 2009, gaining decent market share from single-family homes. A new record for condominium sales was set last year with 1,798 which represents 14 per cent of all sales. Single-family homes still make up almost three quarters of all transactions, however, with many new condo projects on the horizon, that number might continue to shrink.

Winnipeg’s real estate did soften recently due to various internal and external factors. It appears no one is completely impervious to the drop in oil, the sluggish Canadian dollar and inventory surplus from Canada’s own long-standing real estate boom. Last year numbers ended flat in terms of pricing across the board, and a high amount of property is now sitting on the market waiting for buyers.

However Winnipeg is not China, and chances are the city can expect a soft landing through 2015 — however its construction sector might feel a bit of a pinch.

Dave MacKenzie is the president of the Winnipeg Realtors Association. MacKenzie has been selling in the city for more than 33 years and was a past director of the Canadian Real Estate Association. He said in the past decade, Winnipeg has been one of the most stable places in North America to buy and own property.

“For about eight years we were sort of defying the rest of Canada while other centres had little blips of good markets. We were pretty consistent and the real estate climate was really good. A lot of houses that were competitively priced were selling in a short period of time and we had a lack of inventory.”

Basically, if you want the best bang for your buck when it comes to real estate, Winnipeg is it.

The allure of being able to own a large home, raise a family in a city and not be hampered by massive debt drove Winnipeg’s market. Working families earning middle-class incomes could get great jobs in a multi-faceted economy, live close to downtown but still have a backyard. To do that in Vancouver or Toronto these days you have to be a millionaire — at least.

In Canada, there’s only so much money to go around, meaning other countries with massive populations and a desire to immigrate here looking for a better quality of life are taking advantage in a myriad of ways, MacKenzie added.

“We’re starting to see more of it. Not any one particular group but its quite diversified in terms of the ethnicity of the people. You notice it more in the newer subdivisions, and I don’t know how diplomatically you say it, but colour of skin, they’re mostly dark-skinned professional because they’re buying the $450,000 plus homes.

“But I think in some cases it’s a family and extended family moving in and buying them. So coming into the country they’re buying these houses, but they’re bringing everybody with them and they’re all contributing to the mortgage or the cost.”

Once again, all the evidence when it comes to foreign investment is anecdotal. One could argue realty associations — largely the gatekeepers of this information (on B.C. home sale contracts it’s required for the realtor to verify whether or not the purchaser is a resident of Canada or not) — would rather keep the numbers muddy.

Boris Minkevich / Winnipeg Free Press There is a joke going around that Torontonians who are fed up with high housing costs have bought in Winnipeg and commute to the capital every day.

Foreign buyers are great for business, and a great way to capitalize is to make sure nobody gets up in arms about just how much property in Canada is owned by non-Canadians. Government laws and regulations are also fairly loose. Foreigners who spend less than six months a year in Canada can keep a home without having to apply for residency. If they rent out the property they don’t have to live here at all, but do pay a 25 per cent withholding tax on rental income that unlike for Canadian owners is usually taken off monthly rent.

When you ask a realtor, the best answer you’re going to get about why there hasn’t been hard data collected on foreign investment is a non-answer.

“We do wonder though,” continued MacKenzie about the foreign imprint on Winnipeg’s market.

“Especially in the new subdivisions where these people are coming from because when you look at the census numbers we’re not really growing as fast as it appears from a population standpoint. But yet there’s new subdivision popping up and developers preparing land and that kind of thing. But no I don’t think there’s anything we can do to identify or track new immigrants in terms of the housing market.”

Either way when compared to hot spots east and west of Winnipeg, MacKenzie said he’s OK with the tepid local market and continuing in the eye of the storm.

“We’re plugging along and only reading about things like what’s happening in Vancouver and foreign investment spiking numbers and how local people can’t buy houses because of all this. And with Calgary and the oil and having trouble finding young people to fill jobs at $18 bucks an hour, nobody’s prepared to do it — it’s pretty Even Steven here.

“Boring is good and boring is only good when unfortunately other people are taking big hits. It’s ‘boring is good’ when you hear that there are some big increases knowing what goes up must come down in a lot of these centres.”




Since 2008 everyone wants to predict the next big crash. Which bubble, how big a pop, where and when the house of economic cards will come tumbling down. The U.S. financial crisis perked everyone’s ears, and now everyone wants to be the smartest man in the room, saying ‘I told you so’ as the next bust blows up.

Darren Calabrese / The Canadian Press A real estate agent puts up a "sold" sign in front of a house in Toronto. As a result of steady growth in resale value, about seven in 10 people in Toronto choose to own instead of rent.

However, much like the Bank of Canada’s unexpected interest rate cut, if you search back a few months ago for articles forecasting the drop in world oil prices, there’s next to nothing. Smooth sailing blindsided by an oncoming tsunami. There was minimal press about the Organization of the Petroleum Exporting Countries — a Saudi Arabia-led cartel of 12 Middle East and North Africa oil producing nations — starting a price war to keep market share from an emerging U.S. market with new fields in the Arctic.

From a layman’s perspective, it appears this whole thing started as a bit of a pissing match between two entities looking to get the most long-term bang for their buck. This in turn squeezes smaller oil players like Canada who are slaves to the supply-demand game dictated by the powerhouse countries.

Gas goes up, gas goes down, Alberta thrives, now it starves. By no means the captain of our own ship.

Turns out this new globalized world might best be described as the dawn of a singular economy. Where a butterfly flapping its wings in Africa causes a tornado in Wyoming, it appears one country’s actions on the other side of the planet can have grave consequences in our backyard.

While real estate markets have long been seen as vacuums, with different temperatures for different cities, the new world order might appear to be changing all of that. And the black-swan theory in which unexpected events come as complete surprises with major implications but are subsequently rationalized by everyone and their dog in hindsight might continue to be our modus operandi.

In Toronto, Canada’s financial capital, it’s much like Vancouver. Prices are rising — fuelling a real estate boom that means the average renter is spending close to 50 per cent of their paycheque on housing. Some homeowners are in a similarly tight spot in which extremely high mortgage payments have made them home poor and easily susceptible to potential market corrections.

Brett Gundlock / National Post "“I tend to think of real estate more as a symptom rather than a cause," says Douglas Porter, deputy chief Economist for BMO Capital Markets.

Also, as a result of the steady growth in resale value, more Torontonians own houses than ever before. Approximately two decades ago the number of renters and owners in the area was split down the middle. By 2011, the home ownership portion took over, with about seven in 10 people choosing to own instead of rent.

In the 1990s, there were about 25,000 new households created every year. Since the early 2000s, the average has been closer to 36,000. Also in the 1990s, about 40 per cent of new homes were condo units. By the end of last year, 80 per cent of new households were condos, and half of them built downtown.

Wealth discrepancy is fuelling a large part of this. We are increasingly becoming a world of haves and have-nots. Those who own, own a lot. And those who can’t own are forced to rent if they want to live anywhere near a city centre.

Douglas Porter is the Toronto-based chief economist for BMO Capital Markets. He’s one of Canada’s top financial forecasting minds with over a quarter century of experience as an economist. He noted an upcoming B.C. gain from the drop in oil, further cementing itself as a national economic player alongside Ontario. Also a strong U.S. economy means a sluggish Canadian dollar, and the country as a whole can expect to slog it out through 2015.

“We’re not looking at a banner year for any means,” Porter said. “We think the economy will grind out another year of a little over two per cent growth, which is about what we estimated happening in 2014. We think the unemployment rate will drift down a little bit further in the year ahead and we think government finances will probably stay in a small surplus.”

But this is not news, this is forecasting, and the one thing Porter can’t predict is any upcoming black swans, those unseen events that have extreme consequences. When it comes to the real estate sector, Porter is much in line with Klump when gauging outside influence on the Canadian home sales game.

Pawel Dwulit / The Associated Press A condominium under construction in Toronto. Prices in the city are rising, fuelling a real-estate boom that means the average renter is spending close to half their paycheque on housing -- and leaving some homeowners in precarious "house poor" situations.

“I would say immigration and foreign buying is an important factor across the country and especially in the biggest cities. We certainly see that here in Toronto as well. I don’t want to pin it down to one group in particular, however it is an important factor.

“You can draw a very straight line between the share of immigration to a city and how fast the home prices have risen in the last ten or 20 years — there’s a very direct link. And immigration and foreign investment tends to be very heavily weighted towards Chinese investors, but they’re certainly not the only story determining why real estate prices are so high.”

His ambiguity means educated guesses are all we’ve got when it comes to foreign investment in our real estate sector. However, in the forecaster’s defence, the world’s economy has gone global, meaning predicting the future is getting exponentially trickier.

In the past six months, the three biggest factors on the Canadian economy have been a black swan (drop in oil prices), a knee-jerk reaction to a black swan (Bank of Canada interest rate cuts) and another country’s economic growth (United States). Looking at that information, it appears the Canadian economy, much like its real estate sector, may further be in the hands of non-Canadian influence.

When it comes to tying real estate into the globalized financial system, Porter adopts a specific mindset, possibly downplaying its effect, rather pegging it as more of a bellwether rather than a driving force.

“I tend to think of real estate more as a symptom rather than a cause. In other words if the underlying economic environment is strong, and you’re getting population inflows into a city and you have a lot of confidence and income growth in the people in the city, that’s what drives a strong housing market.”


Patrick Blennerhassett is a Vancouver-based journalist who writes for Business in Vancouver magazine. He is also the author of two fiction novels and is a Jack Webster Fellowship Award winner.


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