Friday, September 26, 2014

Chinese Investments in Canada

Statistically-speakingCanada Foreign investment real estate

Talk to anyone about the level of Chinese foreign investment in Canadian real estate, and you’re bound to get a different answer each time you ask the question. Why? Because the Canadian Government doesn’t actually collect the kind of data on foreign investment that most other countries around the world do. In the absence of hard numbers on the subject, we’re left to ponder the root causes of rising home prices in major cities on our own, and whether or not real estate markets are being driven by other factors.

Studies with mixed results

 In an effort to measure the impacts of foreign investment in the Canadian real estate market, many studies have come up with mixed results that range from independent studies on last names, to pseudo-scientific analysis that focuses squarely on luxury home sales from a single agency.
Regardless of which side of the fence your opinion falls on, we can all agree that foreign investment in Canadian real estate is not disappearing anytime soon.  This raises two important questions: Is the money coming from China? If so, why are they investing in Canada?

Loosening currency restrictions

The Chinese government caps the maximum amount of yuan that individuals are allowed to convert each year at USD $50,000. In addition, individuals are banned from directly transferring the currency abroad. However, despite these currency restrictions, wealthy Chinese have been buying pricey real estate in markets such as New York, Sydney and Vancouver for years.
To understand how that’s possible, we first need to examine Chinese internal politics. According to the Society for Worldwide Interbank Financial Telecommunication, the yuan surpassed the euro in 2013 as the world’s second most-popular currency in trade finance. To help maintain the surging profile of the yuan, Beijing has taken steps to free up the movement of capital in to and out of China. In February 2014, The People’s Bank of China quietly expanded a little-known trial program that’s been in effect since 2011, which makes it easier for companies with operations in Shanghai’s free-trade zone, to move yuan.

Hedge cities

What’s the allure of Canada and why are they investing their money here? There are a number of factors as to why Canadian real estate is such a big draw overseas in China. For instance, the stability of our political and investment climate, our relatively low prices, and the sheer beauty of our country. But the two biggest ones are:
  1. Convenience: Canada is conveniently located across the Pacific, which makes it increasingly accessible for Chinese investors compared to other major property markets.
  2. Low Risk:  Canadian cities are seen as ‘hedge cities’ by Chinese investors, which means Canadian real estate is viewed as a safe place for long term investment.
By comparison, Chinese investors spent $22 billion on American real estate in 2013, and $17.2 billion on Australian real estate. So while we know there’s no official data for Canada, the smart money is on Chinese investor spending in Canada being on par with those two countries.
But it’s not just wealthy Chinese investors who are getting in on Canadian real estate. Small-time investors like China’s middle class are buying individual units. They probably number close to the half-billion mark, they make up less than 45% of the total Chinese population, and they are flush with savings and disposable income. This means they need a safe place to deploy their capital.
Some families are looking for a safe-haven for their life savings, while others might be looking for a place to retire. While that does technically reduce the overall number of units available for purchase by small-time Canadian investors, there are far worse things than having your country viewed as a hotbed for investment.

Shining star

The one thing we know for sure is that without any data on foreign investment in Canada, it’s hard to have a truly informed debate on the subject. We also know that capital always flows where the risk is low and the returns are high, so in the absence of that hard data, we see Canada continuing its reign as a shining star on the international property map throughout 2015.


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