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Monday Morning Quarterback: Capital Controls & Foreign Investment

TorontoRealtyBlog

“Foreign Investment” has become a buzz-term of sorts, and it often leads to an overblown conversation about a non-existent evil in our marketplace.  Although, I suppose it depends on who’s talking…

In today’s blog, I want to discuss the idea of free-flowing capital between countries, and how this has helped boost the Canadian Real Estate market, but I’d be remiss if I didn’t examine the incredible disdain among the “average Canadian” for foreign ownership in our major cities.

I’m not one for reading anonymous online comments, but even still, the comments from last week’s CBC piece are eye-opening…

CurrencyFlowing

How do you feel about foreign ownership of Canadian real estate?

Did that question bore you?  Or did it annoy you?

Did you sigh at the sight of another mention of “foreign ownership,” which is one of the most over-blown topics in real estate?

Or did you take a long inhale and grind your teeth at something that you think has been costing the average Canadian money for the last decade?

I read the Don Pitts column in last week’s CBC.ca, and my intention was to examine the subject matter of that article – the free flow of capital, and how it can affect our market, but perhaps the bigger story here is how Canadians feel about foreign ownership of “our” homes.

Sure, you might suggest that anonymous Internet readers’ comments are the lowest form of human communication, and can’t possibly be taken at face value.

But at what point to we read ten straight comments, all of the same opinion, and start to believe that perhaps there’s some merit to it?

First, let’s look at the article.  Actually, it’s two articles I want to look at.

Two weeks ago, Mr. Pitts wrote this article:

“Global Capital Still Looking For A Canadian Home”

Here’s an excerpt:

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A crisis in developing markets means there is some serious money on the move around the world. And despite the falling Canadian dollar, there are good reasons to think some of it is on its way here.

So far, new data shows house prices in Vancouver and Toronto are still hot, at least partly due to the interest of overseas buyers. Increasingly that money may be moving into things other than real estate.

At first glance, putting your money into loonies might seem like a bad idea.

For more than a decade the Canadian dollar has been identified as a petro-currency, and as the price of oil tumbled toward $30 US this week, the loonie has been falling too.

But neither that nor threats of rising interest rates and tighter mortgage rules seem to be slowing the flood of new cash into Vancouver and Toronto property.

One of the reasons could well have to do with something happening on the other side of the world. If so, expect more of it.

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Mr. Pitts was writing about something we all know: that foreigners who fear for the safety of their own banks, equity markets, and currency, have been putting their money in “safe” Canadian real estate for quite some time.

And as the Chinese markets plunged to start 2016, it looks as though more and more Chinese Yuan will be converted into Canadian Dollars, and eventually into Canadian homes.

But then last week, Mr. Pitts followed up with this article:

“Chinese Controls On Capital Could Affect Canadian Property”

How is that for timing?

In the first line of the second article, Mr. Pitts even noted the coincidence, saying “I may have jumped the gun.”

So we go from talking about how Chinese money will continue to pour into Canada, driving the price of real estate higher, to talking about how capital controls could see less money coming into our country.

From the article:

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On Friday the Shanghai correspondent for the Financial Times, Gabriel Wildau, reported that China is moving to step up capital controls in an effort to stem the flood of cash out of the country.

This week it will be interesting to see if other countries begin to follow suit, which could reduce the amount of cash seeking safety in the world’s developed countries.

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One of the effects of the rush of money out of countries like China, Russia and those in South America has been a surge in developed-country real estate. If a trend toward currency controls develops suddenly, that growing flood of money could turn to a trickle. 

That’s if the currency controls work. There are so many ways to move money now, including untraceable bitcoin transactions, that determined individuals can always find a way.

Without truly stringent restrictions that would interfere with trade, even a government determined to stop the flow will only be able to slow it.

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If a country can enact currency controls, or better put: restrictions on the flow of currency, surely they could enact something like……oh…..I dunno….say…….restrictions on the purchase of real estate by foreign investors, could they not?

I know that these are two vastly different topics, and I’m making an effort to link the two.

But when reading the two articles on CBC.ca about the possibility of Chinese capital controls affecting our real estate market, I had the good fortune (or mistake…) of scrolling down to the comments section, and witnessing the absolute vitriol that people were spewing on the subject.

If I didn’t know better, I’d say that most people believe that real estate in Toronto and Vancouver is unaffordable because of foreign investment!

I know people are frustrated with the price of real estate, but what is it with our society’s constant need to find, and persecute, a “bad guy”?

Here’s a quick sample of the comments I read:

Comment1

Comment2

Comment3

Comment4

Comment5

Comment6

Comment7

Comment8

And so on, and so on.

90% of the comments were angry, and most of them were angry at foreigners for buying real estate in Canada, and Canadian politicians for allowing foreigners to buy real estate in Canada.

It seems as though Canadians firmly believe that “our” real estate is for “us” and that it somehow “should” be more affordable.

Some of the comments were outrageously racist, so I chose not to include those.

But I honestly didn’t see anything arguing the other side, such as:

“How many people have made half their wealth from the real estate boom?”

Or what about, “How many jobs have been created by the last two decades of construction and a climbing real estate market?”

It was just hate, hate, and more hate.

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I guess the take-away from both the CBC articles, and from today’s blog, is this:

1) If China were to restrict bank withdrawals and the free-flow of capital, it could result in less foreign investment in Canadian real estate, on a very marginal level.

2) A lot of Canadians are really, really REALLY pissed about the price of real estate, and they are choosing to ignore free market economics.

Okay, wait.  Both of those take-aways were soaked in my opinions.

Perhaps it’s not fair to say “they are choosing to ignore free market economics.”

But the notion that real estate “should” be more affordable has never flown with me, because a market of buyers and sellers ultimately determines the price.  Whether those buyers and sellers live in Toronto or Hong Kong, is another story.

But I feel as though many people, most of whom  don’t own real estate, or want to own bigger and better real estate, but can’t afford it, want there to be this identifiable and unlikable “bad guy” that they can blame for all their woes.

Wouldn’t it be so much easier to blame foreign investment, and a bunch of people who don’t look like us, speak like us, or act like us, than to blame low interest rates, an expanding population, society’s increasing stomach for debt, and under-priced Toronto/Vancouver market relative to the globe to begin with?

If our dollar continues to decline, mark my words – there will be FAR MORE foreign investment coming into Canada, and even if a country like China enacts currency controls, they’re only going to stop a fraction of that money from coming out…

The post Monday Morning Quarterback: Capital Controls & Foreign Investment appeared first on Toronto Real Estate Property Sales & Investments | Toronto Realty Blog by David Fleming.



This post first appeared on TorontoRealtyblog.com | Toronto Real Estate, please read the originial post: here

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Monday Morning Quarterback: Capital Controls & Foreign Investment

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