By Josh Gordon

Foreign money has played a central role in Metro Vancouver’s housing crisis. This is the view of the vast majority of Metro Vancouverites. In poll after poll, year after year, a strong majority of Metro Vancouverites have deemed “foreign buyers or investors” to be either the most important factor, or among the most important factors in the crisis.

The public, it turns out, has it right. But not according to Charlie Smith, the editor of the Georgia Straight. In a recent column he suggested that this consensus view was in fact a matter of “public ignorance”, and that Kennedy Stewart, Vancouver’s new mayor, should set about re-educating us.

I disagreed with this, so I wrote up a brief critique of Smith’s column on Facebook. He then responded with a second column, and here we are.

My main hope here is not really to shift the debate much. In my view, people’s view of the causes of the housing crisis are pretty much set at this point. Instead, I want to do three things: (a) expose the insincerity of some of those who continue to deny or downplay the role of foreign money; (b) explain why the Canada Mortgage and Housing Corporation (CMHC) report that these folks point to is flawed; and (c) suggest that recent events and evidence thoroughly vindicate the view held by most Vancouverites.

Word games

What you’ll notice when you see people try to minimize the role of foreign money is that they fixate on “foreign buyers”. (We’ll call these people “minimizers”.) When they do this, they want you to focus on the nationality of the buyer, or sometimes their residency. In other words, they emphasize stats about foreign citizens purchasing housing, which the B.C. government now collects, or “nonresident” owners, which Statistics Canada has collected for Toronto and Vancouver.

The problem is that these stats only capture a small part of the foreign ownership that’s happening in Vancouver. This means that those stats are misleading.

What matters is where the money comes from. Foreign ownership, properly defined, is “ownership primarily based on foreign income or wealth.”

Those who have studied this issue, including the pioneering David Ley, have always seen the source of money as the primary issue. That’s because if we want to understand the impact on house prices, whether the buyer is a resident or a citizen is less important than where the money comes from.

The issue with foreign money being used to buy housing is that housing prices no longer merely reflect local incomes. In fact, with sufficient amounts of foreign ownership, housing prices can become decoupled from the local labor market—as they have in Metro Vancouver, which is why the stats comparing house prices to incomes are so off-the-charts.

Consider two cases. One case is the “satellite family”, where the breadwinner earns abroad while the family resides in Vancouver. They use foreign money to pay for housing and usually don’t pay local income taxes, even though they are permanent residents or citizens. Another case could be called “the caricature”, the wealthy guy buying a house in Vancouver from across the world with the click of the mouse.

Each of the cases will have the same effect in terms of pushing prices for desirable property beyond what most local incomes can afford—at least as long as the amount of money involved is the same. But the residency and citizenship are different. If we fixated on those things, we’d miss the influence of the satellite family. And yes, there are a lot of satellite families in Metro Vancouver, in the tens of thousands, because of the history of the Investor Immigration Program and other forms of wealth migration.   

Many readers will be going “we know, we know” at this point. And that’s the point: this has always been well understood in the debate. For years.

Yet when Smith comes to “minimize” the role of foreign money, this fundamental point is ignored. The only stats he relates are those about citizenship or residency. There is no attempt to make the relevant distinctions, even though that is precisely what local experts have been saying for years.

It’s possible that Smith simply hasn’t grasped this point, despite it being repeated over and over. But others don’t have the excuse of ignorance. Remarkably, and sadly, prominent people such as Sam Sullivan, the B.C. Liberals’ housing critic, and Evan Siddall, the head of the CMHC, have continued to do the same insincere, “minimizing” routine.

There’s a twofold irony here. First, the people who are claiming that the public is ignorant are often the same ones who are out of line with the expert analysis.

(They’re also out of line with the New York Times, the Wall Street Journal, the Economist, the Guardian, and local real estate economists. But who’s counting?)

Second, properly understood, even if we look only at the nonresidency data from StatsCan, the influence of foreign money is readily apparent: for condos that were completed in 2016–17 in Metro Vancouver, roughly 16 percent were owned by nonresidents. What matters most for price trends is the flow (share of current buyers) not stock (share of all owners), as I’ve argued before. By any standard, that share of buyers is going to sharply move a housing market. In one American study, each extra share of out-of-town buyers added nearly two percent to the price growth in the following year.

Ultimately, then, many of the minimizers are relying on word games. Since the public polling asks about “foreign investors” or “foreign buyers” and doesn’t give respondents the option of “people using foreign money”, the minimizers get to jump all over the supposedly “ignorant” general public by fixating on citizenship or residency, and thereby “debunking” them. But nothing of the sort has happened. It’s quite a spectacle.

The CMHC bungles it

“Minimizers” love to cite the CMHC housing report that was released in February 2018. It gives their claims an air of government authority; it nicely complements their narrative; and at 225 pages and endless charts and regressions, no member of the public is actually ever going to read it, apart from a few serious keeners.

There are several problems with the report, however, which can’t all be spelled out here. The key problem is that the methodology that’s used to generate some of the main conclusions cannot lead to reliable findings.

If we want to generate reliable conclusions, an analysis of house prices would (i) include data over a long period of time, (ii) include several Canadian cities (or “cross-sectional variation”), and (iii) include all or most of the relevant causal variables. If we had good data, we could then put all of this information into a regression analysis that could estimate the effect of the main causal factors on house prices (such as incomes, population growth, etc.).

The problem with the report is that the regression analysis does not do that for its main claims. It only looks at individual cities separately, by comparing price movements over time. And it doesn’t include some of the potentially relevant causal variables—measuring things such as foreign ownership, speculative activity, or supply constraints—in an integrated model. So (ii) and (iii) don’t apply.

That leads to skewed results. For instance, the report claims that income growth, population growth, and low mortgage rates account for 75 percent of Vancouver’s big price gains (up 48 percent from 2010 to 2016). Yet Calgary and Edmonton see much weaker house price growth despite having greater income growth, greater relative population growth, and roughly the same mortgage rates. If these were the main relevant factors, as the report claims, then Calgary and Edmonton should have seen much stronger price growth. Something else needs to be invoked to account for that, but that lies outside of the scope of the model. In that sense, the claim about “explaining 75 percent” falls apart.

Leaving out important variables also affects the reliability of the analysis. When you are missing important variables, the analysis can potentially suffer from “omitted variable bias”—where causal influence is improperly attributed to the variables that are in the model, because they correlate with (and “soak up”) other important causal factors which have been left out.

So especially if they are going to make claims about the relative impact of foreign ownership, then the CMHC would need to include data measuring that in the models. But they don’t, and that’s because we still don’t have precise, longer-term data on foreign buying or ownership.

(In fact, a CMHC analyst recently admitted that they don’t know the impact of foreign money.)

This is why most academics in the field, including myself, have never attempted a regression analysis of the broader Canadian housing market in recent years: there are too many variables for which we lack good data.

In the most influential analyses of house prices in the U.S., where they have much better data and more cases (cities) to compare, the papers meet the standard of adopting these features in the analysis (i.e., (i), (ii) and (iii)). That’s not the case here, however.

In order to look rigorous and authoritative, the CMHC leadership bulldozed ahead regardless, despite these problems. In my review of the draft report, I noted that their shaky findings would be misused in the public debate, and that’s exactly what’s happened.

Vindicating the public

How do we know, then, that foreign money has played such a big role in the housing crisis, if we lack precise, long-term data? Because everything that has transpired indicates it. The inferential case is remarkably strong.

You simply need to ask yourself the following: what would we have expected to see empirically if a big influx of foreign money was a major cause of the recent housing crisis? To crib my Facebook post…

First, we’d expect to see a sharp rise in prices at the high end of the market to begin, one disconnected from any fundamental shift in the local economy. Check. Second, we’d expect this price surge to gradually ripple out, as those who would have previously bought in or near the priciest areas took their purchasing power further out. Check.

Third, we’d expect consistent indications that the bulk of sales at the high end were to foreign money (see the research by Andy Yan, Macdonald Realty, Landcor, etc.). Check. Fourth, we’d expect the prices in the high end to be completely disconnected from local incomes, with average price to income ratios in the 20s or higher. Check. Fifth, we’d expect no slowdown in housing construction to have preceded the price spike. Check.

Sixth, we’d expect other cities that might be affected by the same flow of foreign money (capital flight from China) to see their prices rapidly escalate in the same period (Sydney, Melbourne, Auckland, San Francisco, Seattle). Check. Seventh, we’d expect that Canadian cities unaffected by this flow of money would not see their prices go haywire (Calgary, Edmonton, Saskatoon, Ottawa, Montreal, Halifax). Check. Eighth, we’d expect that the price pressure would ripple out to other nearby communities in B.C., as those who cashed out from Vancouver and brought their wealth there helped push up prices. Check.

Ninth, we’d expect the price surge to generate a ton of new construction activity, as developers realized that they could get much more money for developments than they had previously thought, and they rushed to get projects started. Check. Tenth, all of this construction activity would then juice the local economy and make it appear like the strong housing market was being driven by the economy, rather than primarily the reverse, which was actually the case. Check.

Eleventh, when the flow of foreign money into the market was curtailed, both through policy action (foreign buyer tax, speculation tax) and capital controls in relevant countries (China), then the high end of the market would sharply slow down and prices would begin falling, since it was never based on local incomes. Check. Twelfth, that foreign money would partly be redirected elsewhere, heating up other housing markets (Toronto, Seattle, Montreal). Check.

Thirteenth, many local buyers would continue to have speculative expectations—or a “fear of missing out”—as prices in lower priced areas or segments continued to rise due to persistently low inventory through 2017—which had been driven to low levels by a sharp increase in sales, which again began at the top. Check. Fourteenth, when the government broke those speculative expectations (the speculation tax, expansion of foreign buyer tax, promises of ownership transparency), the market would slow down across the board and prices would start to drop, since the flow of foreign money had dropped substantially. Check.

In all of these ways, the notion that foreign money played a central role in the housing crisis is vindicated. Inevitably some will continue to disagree, either because of a vested interest or a contrarian spirit, but the evidence is overwhelming.

Creating affordability

Ultimately this matters because it informs our policy response to the housing crisis. If we get the diagnosis right, we can get the prescription right.

Smith has received an angry response to his recent columns not because of some innate stubbornness of citizens—or “cultural cognition”, as he puts is. Instead, it’s because he’s recycling the same flawed analysis that developers offered up while the housing crisis spiralled out of control—an analysis that has always been used to stymie policy action to limit foreign ownership.

Foreign ownership is not the only cause of high housing prices in Vancouver, but it is a central one and one that is amenable to policy action. If we are serious about achieving affordability in Metro Vancouver, and B.C. more broadly, then we are going to need to address it.

As it is now, we often effectively subsidize foreign ownership. Those who place their families here, but do not pay income taxes here—i.e., satellite families—are able to free ride on the social services and infrastructure that local taxpayers sustain. This benefits some people a great deal, such as developers and speculators. But it also means that people in the labour market, many of whom are shut out of ownership, are effectively subsidizing wealthy people from around the world. This is perverse, and it’s a recipe for an unhappy society.

The proposed “Speculation and Vacancy Tax” has the potential to be the most forceful mechanism to tax and discourage foreign ownership. By potentially forcing satellite families to pay a two percent property surtax every year, better social services and subsidized housing can be provided to local working taxpayers to compensate for the affordability challenges that have emerged, and foreign ownership will decline. Immigrants who arrive and work and pay taxes in B.C. have nothing to fear from such a tax.

This is definitely consistent with a progressive agenda, which is why the NDP and the Green party have got on board with it, along with their voters. It’s also just common sense, which is why this approach has overwhelming support among B.C. Liberal voters in Metro Vancouver and among local economists.

It’s an agenda the Georgia Straight should get on board with. It certainly isn’t ignorant.