The Australian and Canadian economies are often compared given their similar size, histories, economic structures and banking systems. When it comes to cities, Vancouver with its natural harbour is Canada’s nearest thing to Sydney in terms of amenities – and correspondingly, it is the market in Canada where the housing affordability debate is hottest. Since 1990, Vancouver has experienced a comparable rise in prices to Sydney (despite negative gearing not being allowed) Prices have roughly trebled in real terms and more recently annual growth was well over 20% to mid 2016. (See Chart below) While sharply lower interest rates are the prime cause, foreign investors have taken much of the blame for the rise in prices in in the Vancouver press. In response, the provincial British Columbia (BC) Government introduced a 15% transaction tax on foreign purchases in mid-2016 – hefty enough to put a big dent in foreign purchases. A study of the Vancouver market - released in mid-2016 - suggested that foreign buyers accounted for about 5% of sales in that city and that it was heavily concentrated in the higher end of the market. This figure of 5% is well below the conflated numbers in the media and is not large.
But, while the figure is not large, it is what happens at the margin that counts. If those buyers dropped out, it would be expected to cause a drop in prices, which it did. The median price dropped about 4% in the second half of 2016 (see report) and almost certainly more in the higher priced areas.
That said, the latest figure indicate that the price falls have not been sustained in the broader market. The 4% decline only takes back a fraction of the price rises in the recent past – indicating that foreign buyers are really only peripheral to the whole story. Contrary to claims in the media report (“a lesson for cities like London and San Francisco”) such policies are not the answer to the housing affordability problem.
In Australia, foreign investors have also been blamed and targeted. In response, in 2016 most State Governments introduced higher transaction taxes (modest vis-à-vis the BC tax) on foreign purchases and we have seen APRA pressure the banks to sharply cut back on lending to foreign investors. To date at least, there is no obvious effect on prices which have continued to rise in Sydney. Why so?
In Canada, there are no restrictions on foreign investors buying established houses which means their presence will impact more on demand than in Australia where foreign buyers are largely restricted to the supply side of the market (i.e., buying in the new (unit) market).
To the extent that foreign buying occurs in the established market it is closely linked with international students studying in Australia. Government figures just out show numbers of full fee-paying students living in Australia jumped 11% to about 550,000 in 2016.
While the Vancouver experience has not been repeated in Australia, it does serve to highlight how negative shocks to demand from policy changes can have short term adverse impacts on prices. The authors of reports (in the lead up to the election) in 2016 claiming that the changes to negative gearing would only cause prices to fall 2% or thereabouts should take note. Domestic investors are a far more substantial part of the Sydney/Australian market than foreign buyers are, or were, in the Vancouver market.
For those interested, article referring to fall in Vancouver market:
Sydney vs Vancouver House Price Indexes 1990 - 2016
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