“We are sceptical of claims that Canada’s housing bubble is primarily due to foreign investors,” Capital Economics chief economist (North America) Paul Ashworth wrote in the report, as quoted by The Georgia Straight
“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,” Ashworth stated.
And while the loonie’s low exchange rate has encouraged greater investment by overseas nationals in Canadian real estate, the report argued that the prevailing climate of cheap credit is what’s actually overheating the markets.
“This is mainly a home-grown problem caused by low interest rates and irresponsible lending,” Ashworth explained. “Manias like housing bubbles are, by nature, irrational. All that irrationality requires is access to credit and the mistaken belief that prices will keep on rising in perpetuity.”
“We’re reliably informed that the mortgages in Toronto now stretch to 600% of combined gross income,” the economist added. “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.”
However, Ashworth acknowledged that while these developments are indeed troubling, the potential consequences would be far greater if foreigners really are the main drivers of the explosive home price growth in Canada’s hottest city.
“Let’s hope we’re right about foreign investors playing a minor role in the current bubble,” the report concluded. “Because if we’re wrong and [Vancouver’s] 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.”
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In defiance of the growing chorus of voices pointing at foreign capital as the main culprit in the runaway growth of home prices in Vancouver, a Capital Economics report released earlier this month put most of the blame on domestic factors.