An economics newsletter published earlier this month (August 1) throws cold water on the notion that foreign buyers are to blame for Metro Vancouver’s runaway real-estate market.

“We are sceptical of claims that Canada’s housing bubble is primarily due to foreign investors,” reads the report by Paul Ashworth, Capital Economics’ chief North American economist. “Blaming foreigners for a country’s problems has always been a handy fall-back for politicians; whether it’s a lack of jobs, crime or, in this case, housing affordability.”

The paper begins by explaining flaws in the belief that foreign buyers are to blame for what has happened to the Vancouver and Toronto markets in recent years. It then goes on to offer alternative explanations.

“This is mainly a home-grown problem caused by low interest rates and irresponsible lending,” it states.

The report, which is only available from the U.K.-based research firm via a paid subscription, notes that according to the latest provincial data, 10 percent of Metro Vancouver residential sales during a few-week period this summer went to foreign buyers. That compares to 22 percent of 2015 sales in Florida and 16 percent in California. “Yet prices increased by only 7% in Miami last year and 10% in San Francisco,” it states.

Next, the paper looks at another housing bubble and notes that during such periods of price increases, costs for housing do not rise at a uniform rate across different cities.

“All housing bubbles exhibit big regional divergences,” the paper states. It presents data for how prices changed in a variety of U.S. cities from 2000 to 2006, by 100 percent or more in Los Angeles and Washington D.C. to 60 percent or less in Seattle and Cleveland.

"Manias like housing bubbles are, by nature, irrational," the report continues. "All that irrationality requires is access to credit and the mistaken belief that prices will keep on rising in perpetuity.”

Ashworth emphasizes that Capital Economics “wouldn’t dismiss the foreign investor story completely”. He acknowledges, for example, that a low Canadian dollar has made investing in Vancouver real estate a more attractive venture for foreign buyers.

“Nevertheless, we don’t believe foreign investors are primarily responsible for the housing bubbles in Toronto and Vancouver,” he writes.

In an effort to explain why Vancouver and Toronto have experienced sharper increases in home prices compared to other Canadian cities, the paper looks at lending conditions for insured mortgages.

It states that last year in Montreal and Ottawa, about 10 percent of insured mortgages had a loan-to-income ratio of more than 450 percent.

Meanwhile, in Toronto, about 40 percent of insured mortgages were made at that risky quotient, and in Vancouver approximately 33 percent of insured mortgages had a loan-to-income ratio of more than 450 percent.

“We’re reliably informed that the mortgages in Toronto now stretch to 600% of combined gross income,” the newsletter reads. “So two people both earning $100,000 gross can borrow $1,200,000. What has really changed in the past 12 months is not a big increase in foreign buyers, but a further decline in interest rates, which has allowed lenders to relax lending standards even further.”

The paper concludes with an alarming statistic related to Canada’s gross domestic product (GDP).

It states that while real estate ownership-transaction costs still only account for 1.8 percent of GDP, since the first quarter of 2014 commissions on real-estate sales accounted for 21 percent of Canada’s overall gain in nominal GDP.

If foreign investors are to blame for Vancouver’s housing bubble, the paper warns, and if British Columbia’s new 15 percent tax on foreign investors is successful in scaring away those buyers, the tax could have a harsh effect on the country’s economy.

“Let’s hope we’re right about foreign investors playing a minor role in the current bubble,” the paper concludes. “Because if we’re wrong and this new tax scares foreign investors away and triggers a big drop back in home sales, it could have a significant impact not just on the B.C. government’s finances but on the entire economy.”