Limiting foreign investment would hurt sales and cost jobs: province
When Premier Christy Clark threw cold water on Vancouver Mayor Gregor Robertson’s call for measures targeting foreign homebuyers to cool the housing market — steps that have been taken in Australia, the U.K. and Singapore — she said such interference would have little effect on housing prices.
More importantly, it had the potential to harm the economy, according to the premier.
If the province drastically reduced foreign investment, it would have little impact on general housing prices, but would cause the loss of about $1 billion in residential real estate sales and 3,800 jobs in construction and real estate sectors.
It would also knock $350 million in nominal gross domestic product out of the economy, noted a B.C. Ministry of Finance analysis meant to back up Clark’s response.
If government action caused a 10 per cent fall in house prices, roughly $60 billion in home equity would be lost in the province, which would work out to about $85,000 for a homeowner in Metro Vancouver.
The analysis was based on using government policy to drive down a hypothetical foreign investment rate of five per cent to just one per cent of the total $27 billion in Greater Vancouver home sales in 2014.
Although there is no solid, clean data on foreign money, five per cent is considered the upper level of foreign investment by provincial estimates based on information provided by the real estate industry.
The province used an economic model from B.C. Statistics to estimate the impact on jobs and gross domestic product (GDP), a widely used measure of economic activity.
It is clear that the provincial government wants to be careful about tampering with the real estate and property development sector as it believes it is an important driver of the economy.
So, how important is this sector that is under so much scrutiny?
According to Statistics Canada data from 2011 provided to The Vancouver Sun, the latest numbers that are available for a detailed sector-by-sector break down, real estate agents, brokers and related activities generated $1.93 billion in GDP in B.C.
That is a contribution of just under one per cent of the province’s total GDP in 2011, and equivalent to the contribution by computer design and related services, truck transportation and legal services.
The real estate sector’s contribution was the same in 2009 and 2010. A report by the Real Estate Association of B.C. using 2007 data also found that the real estate sector contributed about one per cent to the province’s GDP.
The report on economic impacts also found that for every 100 house sales, $2 million in GDP was generated and the equivalent of 28 jobs were created. That year, the 102,000 home sales in the province on the multiple listings service (MLS) accounted for the equivalent of 28,000 jobs created.
The report noted that whenever homes are bought and sold, lawyers, appraisers, realtors, surveyors and other professionals collect fees. Governments also collect significant taxes, and many homebuyers renovate their homes to suit their lifestyles.
As well as the commissions and fees that have to be paid out, realtors must provide supplies and services to their offices where technology is increasingly important, said Dan Morrison, a realtor for 25 years and president-elect of the Real Estate Board of Greater Vancouver.
A hot market can also create increasing economic spinoffs, said Morrison, one of the 12,000 real estate agents in the Greater Vancouver area.
“Usually, you would have one home inspector, but in this market it’s not unusual to get five or six inspectors the day before the offers are presented so the people can present that offer without it being subject to inspection,” observed Morrison.
Cameron Muir, an economist with the B.C. Real Estate Association, says while the real estate sector directly does have an effect on the province’s economic output, it is the construction sector that delivers a bigger economic bang.
“When you build a house, there’s a tremendous amount of economic activity,” said Muir.
Statistics Canada data shows that residential construction contributed 2.7 per cent to GDP in 2011, nearly three times as much as the real estate sector.
A report by the Urban Development Institute, a group representing a broad spectrum of the development industry including developers, lawyers, bankers and real estate professionals, found in a study using 2012 data that the property development industry generated $8.17 billion in GDP, a little under four per cent of the provincial total.
The analysis encompassed construction of all buildings, property development, heavy and civil engineering and specialty sub-contracting. Residential construction made up about 75 per cent of the $20 billion in construction in 2012.
“The residential sector, broadly defined, does play a significant role. So,
changes in the demand for real estate will filter through the real estate economy and hence the broader economy,” says Central 1 Credit Union economist Helmut Pastrick.
“There are obviously indirect and induced spinoff benefits. When you start adding that up, it starts becoming a larger number,” said Pastrick.
Simon Fraser University economist Andrey Pavlov thinks the effect of the real estate sector — taken in the broadest sense to include the banking system which relies on mortgages for a significant portion of their business — is even bigger than the data on direct impacts shows.
“It’s hard to find hard data on that, but my feeling is that it’s a lot more. It’s more like 25 per cent,” said Pavlov, who specializes in real estate finance. “We don’t have any manufacturing really to speak of — with the exception of mining and forestry. Most of our industries are really real estate, finance, insurance and a bit of services.”
Across the border, analysis by the National Association of Realtors produces a higher relative contribution to GDP for the real estate sector with the inclusion of title insurance, rental and leasing, house appraisals, moving truck services and other related activities.
In Washington State, the real estate sector’s contribution was 16.6 per cent of GDP, while in Oregon it was 15 per cent.
“I think the premier is rightfully concerned that if we do something to the real estate market, that will have a negative impact on the economy,” said Pavlov.
Still, he believes the market is overheated and some action should be taken.
But Pavlov explains the rise in prices largely as a result of low interest rates and aggressive lending by banks, who take on very little risk because mortgages are backed by federal insurance through the Canada Mortgage and Housing Corp.
If the concern is that real estate is getting too expensive, the first step is to remove the subsidy and normalize interest rates, said Pavlov.
“In other words, don’t pour additional resources into real estate. Don’t get people to over-extend themselves. That to me is the proper response,” he said.
The federal government has taken some steps in an attempt to stem Canada’s hot real estate market, including reducing amortization periods and not providing CMHC insurance for homes worth more than $1 million.
However, the Bank of Canada lowered its benchmark overnight landing rate by 25 basis points to 0.5 per cent on July 15, a move that was promptly followed by the major banks.
University of B.C. economist Tsur Somerville believes slowing down price increases wouldn’t necessarily be a bad thing, but says you have to be careful not to use a big policy hammer that drives the market into a serious decline, given that the wider real estate construction market is important to B.C.
“You want to try to get a soft landing when you cool things down,” said Somerville.
He said any policies should directly target issues that are causing harm, which is difficult to pinpoint given the dearth of data on variables such as foreign investment.
He also noted you are contending with population increases in the Vancouver region largely driven by immigration.
Still, Somerville suggested that it may make sense to consider policies that deal with non-resident buyers and vacant properties, but also a broad-based supply response.
That could include increased density in more areas, and even allowing subdivision of lots to build additional single-family homes, he said.
Muir, the economist with the B.C. Real Estate Association, is frustrated with the current debate, arguing there is no crisis, and noting that apartments and condos have only increased in price five to six per cent since the financial crisis in 2008, while it is the stock of diminishing detached housing that is increasing in price.
Says Muir: “Why are we trying to devise a solution to a problem we don’t know exists?”
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