Housing Price Lunacy Moves East

Mohit Chawla -

The Affordability Crisis that Started in Vancouver Has Now Enveloped Toronto- Guest Post by Josh Gordon

Josh Gordon is Assistant Professor in the School of Public Policy at Simon Fraser University in Vancouver. He has written extensively on housing price issues, including “Lunacy in Lotusland: Vancouver’s Housing Affordability Crisis” in the Summer/Fall 2016 issue of Inroads. Here’s his latest post House Price Lunacy Moves East

What started in Vancouver, Canada’s scenic outpost in the west, has now enveloped Toronto. Housing affordability crises of historic proportions now plague both cities.

The warning signs were all there, even for casual observers. To their credit, certain mainstream media outlets saw this unfolding, and posted sentries to report back to central Canada – Kathy Tomlinson of the Globe and Mail comes to mind. But political leaders in the heart of Canada remained either unaware or craven and timid in their reaction. Worse, some political authorities from the “centre” tried to silence the obvious alarm bells ringing in Vancouver – insinuating in various ways that West Coasters were just a bunch of xenophobes or racists.1

But the concerns of Vancouverites were not a figment of their imagination. They were all too real. A wave of capital from abroad, primarily from China, was entering the Vancouver real estate market and driving prices skywards. And so now Toronto has joined the housing bubble club, as Vancouver put up a flimsy shield only to see some of that foreign capital bounce off it and ricochet east – and towards Seattle and Victoria.

Naturally, this dramatic development has sparked a massive debate in Toronto. Thirty per cent price gains year over year are hard to ignore, and tend to concentrate the mind of policymakers. For Vancouverites, what is striking in the Toronto debate is how eerie the parallels are to what transpired out west. The same bad arguments are being tossed around, and the same predictable obfuscation has emerged from real estate industry representatives and their apologists in academia and partisan politics.2

To call what is happening in Toronto a “debate” is to mislead somewhat. Differing perspectives are offered up, but the idea that many in the debate are interested in a search for “the truth” is questionable. As in Vancouver, the industry line in Toronto is that only “supply, supply, supply” can solve the problem. This has been debunked countless times, but it shuffles along unperturbed.3 It is a classic “zombie idea,” as Paul Krugman would say. That’s because there is simply too much money at stake for powerful people to ever allow the idea to die.

Indeed, those espousing the supply-side position in the housing debate haven’t even attempted a careful rebuttal to the demand-side perspective, despite ample resources to enlist academic hired guns. For the most part, in the media debate at least, the “rebuttal” amounts simply to “argument by assertion and repetition.” The few attempts to advance a slightly more careful supply-side case amount to the claim that some supply-side issues exist in the two cities, which few deny.4 But the idea that demand-side factors are the dominant force at work, including a large role for foreign capital, has never been effectively challenged. Very simply, supply-side issues on their own cannot get you anywhere near an average house-price-to-income ratio of 11 or 12, where it now sits in both cities. A surge in demand – from abroad, or due to dodgy lending practices, or both – is needed. Properly understood, supply issues constitute a small fraction – no more than 15 to 25 per cent by my estimations – of the high relative prices seen in Toronto and Vancouver.

The interested or sceptical reader is encouraged to check out the critique of the supply view advanced more carefully elsewhere.5 But prima facie, we can dispense with the supply-side case. Prices are surging to record levels in several major cities around the developed world, particularly those on the Pacific coast, far outstripping local income gains. This has happened in the past few years, several years after interest rates plunged to near zero. The supply case asks you to believe that all these cities simultaneously ran into major supply issues by imposing new onerous regulations and running into land constraints at nearly the same time. This is highly implausible, especially when we have an obvious alternative explanation: a massive wave of capital leaving China, combined with record low interest rates.

Despite the transparent implausibility of the supply case, the charade of a debate continues, given the media’s continued inclination – in Toronto at least – to predominantly interview real estate representatives.

In this article I revisit and refresh the debate around “but, data!”, discuss the ethics of foreign ownership and claims of “xenophobia,” puncture the delusions of “free market” arguments and, finally, sum up some of the political developments in the past year and what they portend moving forward.

Dude, where’s my data?

The absurdity of the housing debate is perhaps nowhere more evident than in the question of “data” and foreign ownership.

There is very little good, government-collected data on the question of foreign ownership. No one disagrees on this point. This is to the discredit of federal and provincial authorities, who for years resisted gathering rigorous data, even though Mark Carney, then governor of the Bank of Canada, warned quite clearly in 2011 that the Vancouver real estate market was being affected by money from East Asia.

The fact that five or six years could pass without any effort to collect data is stunning and can’t help but stimulate a tinge of conspiratorial thinking. Perhaps for the first time in Canadian history, there was a protest for data collection in Vancouver in May 2015.

The events of the summer of 2016, a full year after that protest, might indicate why it took so long for governments to do their jobs. Within five weeks of gathering data on the question, as the evidence arrived, the British Columbia government was pressured to introduce a stiff foreign buyer tax. It’s hard to avoid the conclusion that governments failed to gather data because they didn’t want to do anything about the issue. Why collect data that might be embarrassing? This gets to the politics of the field, discussed below.

With limited data, those who had their eyes open often had to rely on anecdote. But inconveniently for the real estate lobby, the inferential, and no longer just anecdotal, case was growing stronger and stronger. The report I wrote last year on Vancouver, for instance, which made the case that foreign capital was playing a major role, did not rely on a single anecdote. All the data it presented were carefully gathered, some of them by Canadian governments. But the evidence had to be pieced together to get a clearer grasp of the issue – including by eliminating other alleged, but ultimately insufficient, causal contributors.

When the B.C. government finally collected data, then, it was no surprise that the amount of “foreign citizen buying,” about 13 per cent, in Vancouver was much more than the 3 to 5 per cent estimated by the real estate industry. Nor was it surprising that 90 per cent of the foreign buying was from China. This was predictable, based on the strong inferential case.

The inferential case has only grown stronger since last year. Figures 1 through 5 tell important elements of the main story.

Figure 1 shows the broad outline of the two-track Canadian housing market, where Toronto and Vancouver have been red-hot in recent years while cities in the rest of the country have seen modest price growth or even price declines. Indeed, except for their “adjacent” or “spillover” cities, Hamilton and Victoria, there aren’t major housing affordability issues outside of Toronto and Vancouver, despite record low interest rates everywhere – and an alleged Canada-wide culture of “house horniness.” Something unique is happening in Toronto and Vancouver. It is not primarily a “big city thing,” a “lots of immigrants thing” or a “hard to build thing” – if it were, Montreal would be red hot too. 


Screenshot 2017-05-08 11.32.59

Source: Teranet. Hamilton and Victoria (not shown) largely track the major markets closest to them, Toronto and Vancouver respectively 



What do Toronto and Vancouver have in common that is unique? Strong interest from buyers with access to substantial money abroad, at present principally from China.6 This is evident from surveys of elite Chinese citizens about preferred destinations of real estate investment, from the sordid history of the federal Business Immigration Program, and from patterns of real estate interest on Juwai, a website that caters to real estate buyers in China.7 In a 2014 survey, for example, Toronto was sixth and Vancouver third as destinations for international real estate buying for Chinese elites.

Unlike Canadian governments, organizations in Australia and the United States have gathered at least rudimentary data on foreign buying. Figure 2 shows the amount of money spent by citizens from China in the residential real estate markets of those two countries from 2011 to 2015.

There has been a near trebling of buying since 2013 or so, as money fled China. We have good data about broader capital flight from China, and it shows an escalating amount of money exiting the country in this period.8 The sums in figure 2 are substantial; Chinese citizens were by some margin the largest segment of foreign buyers in these two countries in recent years. In the United States, the buying is concentrated in California (32 per cent of all purchases), where the most unaffordable markets (San Francisco, Los Angeles, San Diego) just happen to be. In Australia, the buying is concentrated in Melbourne and Sydney, again by far the most expensive markets in the country.


 Screenshot 2017-05-08 11.33.07

Source: Foreign Investment Review Board (Australia), various years; National Association of Realtors (U.S.), 2016. Figures for Australia straddle calendar years (“2015” is actually late 2014 and early 2015).


There is little reason to think that Canada is any different. If anything, Canada might be a more enticing target, as I explain below, and a falling exchange rate since 2015 has helped that along. But some may remain unconvinced. If only there was some proxy for money arriving from China…

As luck would have it, the Vancouver airport keeps a record of the amount of undeclared money being seized. In 2013, $2.8 million was seized from Chinese citizens. In 2014, the figure was $4.3 million, and in 2015 it was $6.4 million.9 This pattern of 50 per cent year-over-year increases from 2013 to 2015 fits the pattern in figure 2 nearly exactly. Data from Canadian banks on the total amount of foreign currency and deposits also tell the same story – a sharp escalation from 2013 onward.10

Fine, money is arriving, says the sceptic, but do we have any evidence that it’s affecting housing markets? Here again we need to assemble the evidence in unorthodox ways. Figure 3 shows rates of investment or speculative buying of detached houses in Toronto from 2012 to 2016. These data were collected by John Pasalis and his team at Realosophy, a brokerage in Toronto.11 They used Multiple Listing Service data – the realtor listings database – to see what proportion of properties in that segment were bought and then listed for rent on MLS within a year of purchase. This indicates buying for investment purposes. As Pasalis notes, the data systematically undercount the amount of investment buying, because investors may rent properties through services other than MLS, leave properties unoccupied or move into the new property and rent out their old home. On the basis of this logic, Pasalis estimates that the amount of investment/speculative buying is potentially double or triple the rate he calculates given his methodology.


Screenshot 2017-05-08 11.33.22Source: John Pasalis, Freeholds on Fire: How Investor Demand is Driving Up Prices in the Greater Toronto Area (Toronto: Realosophy, March 2017).



The pattern revealed in figure 3 clearly aligns with the data from figure 2: relative stability from 2012 to 2013, a small jump in 2014 and a big jump in 2015 (and 2016). Moreover, the areas where the most investor buying is taking place are areas with large Chinese diasporas. On the other hand, Brampton, with a large South Asian diaspora, has been largely unaffected until recently. What we see with the data from Oshawa and other outlying areas (not shown) is a big jump in 2015 and 2016 as locals get on board and get into the speculative groove. 

Doesn’t all of this happen because there’s a shortage of supply? No, or at least not as the supply-siders portray it. As I’ve documented elsewhere, housing completions have been strong in recent years, relative to population growth and otherwise.12 Detached house building is down modestly, but not dramatically. What has happened instead, as figure 4 shows, is that sales have surged (solid line, left-side axis) as investor buying has emerged. This has sharply drawn down “inventory” (dash line, right-side axis) as new listings stay stable (dotted line, right-side axis). Consequently, the appearance of scarcity emerges.


Screenshot 2017-05-08 11.33.30 Source: Toronto Real Estate Board. December is simply a representative month to illustrate trends over time.




There should be no confusion: a sharp increase in sales is a surge in demand. A low rate of active listings is, in this case, a product of surging (record) demand, not weak (built) supply. Yet you’ll never hear Ontario realtor representative Tim Hudak or any other industry apologist admit that. Their line is that all we need is “supply, supply, supply,” as if you can build enough homes for a population caught up in a real estate frenzy who want to buy second, third or fourth properties. Trying to satisfy speculative demand is lunacy.

The evidence in figure 3 is especially problematic for the supply-side case. Why did speculative buying and total sales suddenly pick up in 2014–15 after a few years of stability? The obvious explanation is that capital flight from China acted as a catalyst. Some supply-siders might claim that inadequate new housing fostered broad speculative activity. But there is little evidence of a supply shift that would do this, given the data on construction and new listings. And, if the problem is inadequate housing supply in Toronto, why would the speculative activity be so geographically varied? The supply-siders have no answer for this.

Figure 5 is a modified version of figure 4 for the Greater Vancouver market, this time using a 12-month rolling average technique to smooth out seasonal fluctuations (and using monthly, not yearly, sales totals). As in Toronto, the same surge in demand (red dash line, right side) has drawn down inventory (solid line, left side) and created tight market conditions – which first drove prices up rapidly, and then stabilized prices as new listings began to fall in line with the sales decline in early 2017.


Screenshot 2017-05-08 11.33.39


Source: REBGV. Monthly new listings are higher than monthly sales, without causing active listings to perpetually rise, because some properties get listed multiple times.


The data and the foreign buyer tax

It is important to make explicit what figure 5 means for how we interpret the present debate around the foreign buyer tax. First, a surge in demand due to capital flight from China led to rising prices. Second, the demand cooled leading up to and especially following the introduction of the foreign buyer tax in July 2016 – the same month as the inflection point in the monthly sales data.13 Third, inventory started to inch up – but then new listings fell in early 2017, so that it has remained largely constant. What this means is that the foreign buyer tax has sharply curtailed demand, yet since it did not set off a run for the exits – a sharp rise in new listings – prices haven’t fallen much because inventory is still so tight.

In summary, the foreign buyer tax was not enough to break speculative expectations. This should be no surprise. The foreign buyer tax doesn’t apply retroactively, and unless sellers think the tax is going to make the market fall off a cliff – which they don’t – they have no strong urge to rush their property onto the market. In fact, the provincial government has given inconsistent signals. It imposed the foreign buyer tax in July 2016, but in December it offered loans to first-time buyers and this January it created larger loopholes in the foreign buyer tax. There are indications that if the Liberals are reelected in the B.C. election on May 9, the provincial government will further prop up the market and potentially rescind the foreign buyer tax. These inconsistent signals provide an incentive to hold off listing, which is what we see in early 2017. A fall in new listings has kept the market tight, and so for the moment Vancouver prices remain stable, and in some segments are rising.

While both the B.C. and Ontario governments are now collecting data on foreign buyers, they inevitably present a misleading picture. The existing efforts rely mainly on asking buyers whether or not they are foreign citizens. However, the issue in Toronto and Vancouver is about the source of the money for purchases, not citizenship. “Foreign ownership” is ownership primarily on the basis of foreign income or wealth. Citizenship can be a useful proxy for that, but it is incomplete 

Foreign citizen buyers are only one way that foreign capital can arrive in a market: wealthy recent immigrants, long-time residents with continued sources of income overseas and proxy buyers are all alternative channels.14 So the current government data capture only a fraction of foreign capital flows – the idea that the current Vancouver market is almost all “local” after the foreign buyer tax is complete fiction.15 This is why the chief economist at CIBC, Benjamin Tal, recently estimated instead that over 25 per cent of the Toronto market, and over 35 per cent of the Vancouver market, was foreign money.16

This weakness in the data collection effort has long been known, but governments have gone ahead with this strategy anyway. What this has done, probably intentionally, is make foreign ownership seem much less prevalent than it really is. And apologists for foreign capital have been only too happy to play on the confusion – yet another indication that we are not having a sincere debate.

Moving forward, to get a clearer picture, governments simply need to compare declared incomes in the period preceding a house purchase, in terms of both the duration of reported income and its level, with the purchase price. Where there is a substantial mismatch, governments will be able to conclude, after appropriate qualifications, that outside wealth or income is at play. Damningly, this doesn’t even require data collection – all it requires is data communication between Canadian governments.

A recent report from Richard Wozny is telling in this respect. It documented that house prices and average incomes, when disaggregated to the municipal level, were in fact negatively related in Metro Vancouver; some of the municipalities with the lowest incomes had the highest house prices, and vice versa.17 This has generated stunning statistics: in Vancouver and West Vancouver, long known to be top destinations for foreign capital, the average ratio of detached house prices to household income in 2016 was 37 (!). In Richmond and Burnaby, middle-class suburban municipalities but also top destinations for foreign capital, these same figures were 28 and 23 respectively.

Read those figures again. And realize that a bank is unlikely to grant you a mortgage much more than five times your household income, even with record low interest rates.

Yet the “debate” shuffles along.

“Xenophobia” and the ethics of foreign ownership

Another constraint on honest discussion about Vancouver and Toronto real estate has been concern that to criticize foreign ownership is “xenophobic” or even racist. In Canadian society, these are potent charges.

There are undoubtedly xenophobes and racists who oppose foreign ownership, but that doesn’t mean all such concern is motivated by these sentiments. In fact, there are strong ethical grounds for being concerned with foreign ownership.

Foreign ownership of residential property entails two main ethical problems. The first is that foreign buyers have access to sources of wealth or income that locals do not. This means that locals are potentially put into disadvantageous competition with foreign money for property where they reside. The second is that those who own based on foreign income or wealth may not have paid the taxes that have made the property so valuable in the first place. Since public investments in physical infrastructure, social services and legal institutions are not primarily made through property taxes, the value uplift they provide to residential property is effectively given to such “foreign” owners for free. In the case of Toronto and Vancouver, this means that local taxpayers are in effect subsidizing millionaires.

This injustice also has a generational component. Those who already own, who often bought when there wasn’t competition from massive amounts of offshore money, will see equity gains, while younger generations must either deliver those (tax-free) equity windfalls through highly leveraged buying or else be shut out from an attractive source of wealth accumulation and personal stability.

One way of looking at the present situation is that policymakers have turned Canadian real estate, especially in the large cities, into a highly attractive global asset class. Canadian governments do not effectively enforce money laundering rules, we have relatively low property taxes (or “carrying costs”) and the enforcement of capital gains taxes on nonprincipal residences has been lax. Add to this the nearly free public services that we provide to wealthy migrants and their families, if they choose not to work, and it is no wonder that the country has seen an influx of foreign capital. Frankly, as a wealthy individual in a capricious authoritarian regime, you’d be foolish not to avail yourself of the Canadian red carpet offer.

Ultimately, the problem is that while this policy framework benefits the real estate industry and homeowner equity and boosts short-term debt-based economic growth, it generates highly unaffordable housing markets, precarious levels of private debt and tremendous intergenerational and class inequity.

To put it bluntly, in return for subsidizing wealthy foreign owners and fostering an intergenerational wealth transfer, we have ripped apart the meritocratic social contract. Among the primary determinants of personal wealth in Toronto and Vancouver today are your date of birth, whether your parents own (or owned) and whether you have siblings. Working hard, getting trained and playing by the rules doesn’t get you very far any more, absent a gift from parents. No wonder younger people are furious – wealth is being transferred to those who have already hit the equity jackpot, while debt and stress are transferred to them. Not by coincidence, Vancouver had the lowest level of reported life satisfaction among all Canadian urban areas in a recent survey. The current framework is terrible public policy, and socially toxic.

Since these younger people are the kids of those with rising equity, at least the transparent unfairness of the situation is apparent to many in the older generation too. That is why overwhelming majorities in the two cities – near 80 per cent or more – are in favour of curtailing or taxing foreign ownership in various ways.

I made this very case in the Globe and Mail in April 2017.18 The response from the real estate lobby was silence. There is no compelling ethical case to be made for the current policy framework. It is indefensible, so no one tries to defend it.

But to point all of this out is somehow to be xenophobic or racist. Never mind that the concern is with foreign money and its effects, not foreign people. Never mind that there are straightforward policies that can address the effects of foreign capital without targeting individuals who wish to come to Canada and join the labour market.19

The status quo will not work out well. Many young people are being pushed out of their childhood cities, or pressured into massive debt, while being called “xenophobes” for asking for sensible policy reform. Housing bubbles of historic proportions are emerging, foreshadowing deep economic crises. And public authorities are concealing data and failing to enforce basic regulations. What could go wrong? Who is guilty of ethical lapses?

Appeals to the “free market”

The final arrow in the quiver of the apologist’s case is the claim that we should just “let the free market do its thing.” This is remarkably misguided in several ways.

First, the housing market is already thoroughly regulated. Indeed, it may be the most regulated sector of the entire economy. From zoning rules to building regulations to property taxes to strata rules to social housing initiatives to tenancy law to capital gains law to mortgage regulations and insurance, there are hundreds if not thousands of regulations and policies that currently address the market and its operation. The idea that a few new regulations or taxes on foreign capital will take us from the realm of a “free market” to a “state-regulated market” is laughable.

Second, housing markets are regulated for very good reasons. Human beings often make poor decisions when it comes to debt and potentially speculative assets, especially when they endow those assets with deep meaning. And the decisions some make have clear externalities on others. If I build a condo tower next to your house, you might have some issues with a “free market” in housing.

In short, have we really forgotten about the American housing crash already? All Canadians are ultimately underwriting what is happening in Toronto and Vancouver. If those housing markets go bust, the cleanup costs will fall on all Canadians, including possibly bailing out the Canada Mortgage and Housing Corporation, which has implicit taxpayer backing. Asking for macroprudential policy is sensible, not statist.

Finally, much of the foreign money arriving in Toronto and Vancouver is from societies that are far from free markets. To talk about the “free market” in such a context is as ironic as it is meaningless.

The politics of housing insanity

Contemporary discussions among policymakers have been mostly about how to “calm” or stabilize housing markets in both cities. But a “calm” market at historically unaffordable levels is not an adequate long-term goal.

In part, politicians’ timidity is driven by their wariness about threatening the equity of baby boomers, the most powerful electoral bloc in Canadian society. Their timidity is also due to an understandable fear of causing a housing crash.

 Yet this is precisely why policymakers should have never allowed the situation to get to this point. The most blame should be reserved for those who had the chance to tackle the issue earlier and did not. This includes politicians at all three levels of government, but especially provincial leaders, who had the most important and nimble levers of power to address the situation. That the Ontario government watched the Vancouver situation unfold and yet still took no action – nor collected data for almost a year – is particularly damning.

When the discussion does get around to restoring affordability, the common refrain is that the situation is “very complicated” and that “there are no silver bullets.” Pundits stroke their chins and say these things with an air of gravitas. To use another Krugmanism, this is the “very serious people” phenomenon.

Yet there is a remarkably powerful policy measure sitting right under the noses of policymakers: a property surtax that can be offset against income taxes paid, while exempting seniors with sustained Canada Pension Plan contribution records. What this would do, as I’ve explained elsewhere, is reconnect the housing market to the local labour market.21 No longer would real estate in these places be an easy, subsidized place to park money from abroad. As a result, the marginal buyers would once again be primarily local income earners. This would, in turn, affect speculative and “fear of missing out” behaviour, and rebalance the market as those who had bought on the basis of foreign income or wealth, but who have no interest in working in Canada or paying their fair share of taxes, listed their properties. The “supply shortage” would sort itself out in a hurry. 

So far, politicians have not been willing to implement such a surtax. Incumbent governments are too tied to real estate industry donations, and their strategies of economic growth too dependent on the patently unfair policy framework of pampering foreign owners.

Think about that: Canadian governments are unwilling to introduce policies that would ensure that many wealthy homeowners paid their fair share of taxes. Significant parts of the economies of Toronto and Vancouver are premised on tax avoidance or evasion – and the dangerous debt leveraging that ensues. And yet these incumbent politicians brag about being solid economic managers, and people believe them. Remarkable.

None of this is written in stone. Policy can be changed. The surtax policy will not solve every housing affordability issue, but it will deal with a substantial part of it. It may just require new political leadership.

Absent a major policy change, housing affordability will have to wait on rising interest rates or some macroeconomic shock, such as the collapse of the epic housing bubble in China. Figure 6 shows (real) national land prices in China increasing at a compound annual rate of roughly 17 per cent over a period of 12 years – or 575 per cent in total real terms. Economic growth in China has been impressive over that span, but not enough to justify such price gains. Price-to-income ratios in the biggest Chinese cities are therefore more than double those in Toronto and Vancouver, by some estimates, and the country has an estimated 50 million vacant homes.22

Leaving our fates to global forces is not a good strategy. Better to get our policy frameworks in order so that as foreign capital arrives in Canada, at least the benefits are shared more broadly, and housing markets regain some sanity.


Screenshot 2017-05-08 11.35.07Source: Yongheng Deng, Joseph Gyourko and Jing Wu, Wharton/NUS/Tsinghua Chinese Residential Land Price Indexes (CRLPI) Updated to the Second Quarter of 2016 (2016q2), retrieved from 

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