Introduction
Understanding the Vancouver housing crisis is a confusing and difficult task. Concrete answers as to what is responsible for the rising prices is rigorously disputed which slows the progress of policy makers to remediate the issue. In order to dispel misconceptions about who is to blame for Vancouver’s real estate bubble we will explore the current state of the market, a brief history of Canadian immigration and how the Investor Immigrant Program allowed wealthier foreign investors into the Canadian real estate market to fully demonstrate that the blame for the Vancouver real estate bubble lies in the Canadian government’s poorly formulated immigration policies.
Current Crisis and Misconceptions
As most Canadians are aware, the Vancouver’s real estate market is currently over inflated. In 2015, Vancouver had been titled as having the most unaffordable housing market in the world, second only to Hong Kong [1]. The prices of Vancouver’s houses are much higher than the average Canadian can afford. As of February 2018, the average price for a detached home in Metro Vancouver was $1,602,000 [2] and the price for single homes, semi-detached homes and townhouses had appreciated by 9.0% since February 2017 [3]. Through simple calculations, one can deduce that for a house of this price you would need a $320,000 down payment and yearly payments of roughly $76,000 dollars to pay off your house in thirty years. The reported yearly median household income in Vancouver in 2015 was $79,930 and had only increased by around $3,000 a year for the past 4 years [4]. If we extrapolate the trend for the increase of familial income into the year 2018, we can see that even with a median income of around $89,000, paying off the mortgage of the average Vancouver household would still be financially stressful, if not impossible. In addition, Naturally, these numbers would outrage the newer generation of locals who were unable to afford housing in their own hometown. As a result, many locals looked for someone to blame for these prices. To the untrained eye, it seemed like local Vancouver residents had become “second class citizens in their own country” [5]. Most Vancouverites looked towards foreign immigration as the reason behind the inflated real estate market. This shift in blame was quite understandable. There were many visible examples that showed an influx of immigration into Vancouver. One of the most notable was when in 2016 the city of Richmond, a city outside Vancouver, saw a shift in population majority. It had become 52.2 percent ethnic Chinese; a huge shift from 1991 where Caucasians were the majority at 66 percent [6]. This shift was one indication that more and more foreign immigrants had begun to reside in Canada. Over 6.8 million immigrants moved to Canada in 2011 [7]. Only 13.5% of these immigrants decided to live in Vancouver [7]. Blaming these immigrants for the increased real estate prices, however, is divisive and wrong. With median incomes of $31,000 as opposed to $71,700, the median income of local families of two or more, most of these immigrants were middle class citizens with lower earning potential than the average Canadian [8][9]. These immigrants posed no threat to the Canadian real estate market because they didn’t have the money to push bids on real estate higher by buying more expensive houses that local residents couldn’t afford. The real perpetrator of the high real estate prices in Vancouver was Canada’s Immigrant Investor Program which allowed wealthy foreign investors to buy into the Canadian real estate market without restriction.
Vancouver’s housing market can be most accurately described as an asset bubble. An asset bubble occurs when marginal buyers bid up the price of assets beyond their sustainable value. They are generally caused by low interest rates on investments, demand-pull inflation due to the popularity of an asset and a supply shortage of said asset [10]. As described by Adam Taggart in his article “The Marginal Buyer Holds The Pin that Pops Every Asset Bubble”, “[a bubble’s prices] are set by two things: the upper limit that the marginal buyer is willing to pay, and how intensely the competition from other buyers pushes him towards that limit [11].” In the case of Vancouver, the marginal buyers are the foreign investors. Vancouver’s real estate bubble was created by the increase of foreign investors influencing the real estate market. This is directly related to the Canadian foreign policies that made investments in real estate more popular and desirable for foreign investors.
History of Canadian Foreign Policy
The history of Canadian foreign policy demonstrates how the Investor Immigrant Program was created and shows its original purpose. Canada is a large geographical country with a small population. As of 2016, Canada had reached its record population of a little over 36 million. In comparison, the U.S state of California, a much smaller land mass, had a total population of 38.8 million people [12]. Like any new developing country, Canada has always looked to fill its borders with people. One of the main solutions was to encourage immigration. In the early 1900’s, Canada looked for hardy pioneers and farmers from Europe who had the practical life skills to stay alive in its harsh and unforgiving wilderness [13]. As Canada grew, however, it’s governments realised that to progress as a country economically they needed to move away from the immigration model based around settlement of the country. Canada deduced that in order for it to become a more prominent and independent global power it needed to import wealthier, professionally talented immigrants to supplement it’s working class population. In 1921, Canada adjusted its Income Tax Act [14] to make Canada more appealing to wealthy British settlers. This encouragement of wealthy immigration has taken many forms since but the most infamous is the Investor Immigrant Program put into place in 1986 [14].
The Investor Immigrant Program (IIP)
Like the adjustment to the income tax act in 1921, the Investor Immigrant Program was intended to target wealthy investors and encourage them to move to and invest in Canada [15]. The program did so by offering Canadian citizenship in exchange for monetary investment in the Canadian economy in ways that promoted job creation and business development. The prerequisites for investors to be a part of the program were net personal assets worth over $500,000 and the ability to invest a total of $150,000 or $250,000 (depending on the province they intended to immigrate to) in the Canadian economy over the course of three years [5]. In addition, the investor needs to prove that they have been the director or organizer for their own business venture [14]. The prerequisites seem simple but there are many steps of the investment process that don’t pertain to the investor that need to come into play as well. The investment process begins by a Canadian business pitching an investment opportunity to their provincial government. If the government deems the business venture beneficial for the Canadian economy and that it creates jobs it will use “government-sanctioned investment syndicates that pooled investors’ contributions [5]” to sell the investment opportunities overseas to foreign investors [14]. Due to political unrest in Hong Kong and a housing boom in 1994 and 1989 which gave Hong Kong homeowners a stock of capitol to invest with, [16] the majority of investment interest came from Eastasia. As of November 1989, around 795 visas had been given out to investors through the program, three quarters of which were of Eastasian descent [5]. These investors moved into Vancouver and Toronto because they were beautiful cities with picturesque surrounding environments [17]. For this reason, Vancouver and Toronto saw the largest inflow of foreign investment. Although the program was thought to be successful based on the number of immigrants investing in Canada, the program had some major flaws that helped investors enter and subsequently exploit the real estate market.
Flaws and Loopholes in the Investor Immigrant Program
One of the largest issues with the Investor Immigrant Program was that it allowed wealthy investors to invest in real estate instead of business. Investment in real estate, has little to no benefit for the host country because it only creates temporary low-income construction jobs. Poor regulation for the allocation of investments allowed provinces to independently determine which investments would be approved for the program [14]. Due to interprovincial competition for the immigrant’s residency and capital, provinces would try and entice investors by approving and offering up real estate development opportunities to the overseas investors [14]. These opportunities were extremely desirable for the investors because they were low risk investments and allowed investors to essentially buy property in a province for themselves as a form of investment which simultaneously filled their investment quota for the Program. Consequently, sixty-nine percent of the money invested through the Investor Immigrant Program was spent on real estate [14]. The lack of regulation in the Investor Immigrant Program allowed foreign investors to exploit the Canadian real estate market by allowing them to essentially “buy” their Canadian citizenship by buying a residence in which they would live after their three-year investment term was fulfilled without ever truly contributing to the Canadian economy with their investment. During the investment period of the program, the average investor would buy a unit in a developing hotel or resort and then put the unit on the market for rent. This subjects the investor to the risks of the real estate market which qualifies the investment for the Program while ensuring that they are investing towards their citizenship [5]. Due to the investors interest in these developments, developing condominiums were pre-sold to wealthy investors overseas by the fund managers of the government approved syndicates because foreign investors were willing to pay higher prices for property than local residents. The thirst of investors for more expensive properties is shown in a Stat Can study that outlined that condominium apartments owned by non-Canadian residents in Vancouver were on average worth $190,500 more than that of those owned by Canadian residents [18]. An example property being sold to wealthier foreign investors was demonstrated by the events surrounding the Regatta and Expo 86 property in 1988. In 1988, Vancouver had sold the Expo 86 property to a man named Li Ka Shing, currently the richest man in Hong Kong and twenty third richest man in the world [19] [20], and his son Victor Li [21][22]. Li Ka Shing and Victor Li “channeled real-estate opportunities and information primarily to other Chinese businessmen [22],” when they sold 216 condominiums in the Regatta development and large chunks of the Expo land exclusively to Hong Kong and Singapore Chinese buyers over the course of the following two years [22].The sales that the developers Li Ka Shing and Victor Li made demonstrated the prices of the real estate market were shifting from being determined by local Canadians to the foreign investors who could pay more. This shift had been caused by the Investor Immigrant Program encouraging and allowing investors to invest in Canada’s real estate market instead of Canada’s businesses.
The second flaw in the Investor Immigrant Program was that the program lacked the policy to enforce the investors to reside inside of Canada for extended periods of time while they were part of the Investor Immigrant Program [14]. This lack of policy let foreign investors continue their business overseas and continue to maintain their high income. The proof of this failure lies in the low reported income tax of a lot of the wealthy foreign investors in Canada. It is shown that after 10 years of being admitted through the program, the average wealthy investor paid C$1,400 in income taxes as opposed to the Canadian average of C$7,500 [23]. This shows that investors earn the majority of their income outside of Canada. The possibility of this undermines the very reason why the Investor Immigrant Program was created; to increase the number of immigrants with money living and working in Canada. This flaw instead creates a labor market disparity. Labor market disparity is created when wealthy migrants buy into the local real estate system without participating in the local labor market. Their work outside the country allows them to earn more than local residents and buy houses at a higher price than local residents can afford. It creates a disconnect between the local labor market and the housing market. This means that there will be an upwards push in real estate prices as the housing market becomes tailored towards richer foreign immigrants who compete with each other for properties instead of being determinant on the income of the local Canadians [24]. This disparity is outlined by Fig. 1. which compares the annual average price increase of a house in Vancouver to the annual incomes of different jobs.
The annual average price increase was $193,000 which was higher than the majority the annual incomes of the professions [25]. This goes to prove that prices of housing rise faster than local incomes can keep up.
Conclusion
The investors brought in by these flaws have led to the real estate bubble we see today. Going back to the definition of an asset bubble, it is easy to see that the upper limit of the bubble was set by the marginal buyers due to the labor market disparity the lack of policy in the investor immigrant program created. The competition that fueled the rising of the bubble was the increased number of investors who entered the housing market because of the lack of regulation in the Investor Immigrant Program. The combination of these circumstances laid the platform for the real estate bubble to flourish and become the crisis it is today.