NO CITY ON EARTH'S RESIDENTIAL REAL ESTATE MARKET HAS been more affected by a targeted and concentrated Asian investment, particularly that from China, than Vancouver, British Columbia.While only the perspective of time will define the consequences of this growing control over large segments of the region's housing markets, its impact on affordability and the region's overall economy is not positive.What are the lessons for other regions seeking the quick fix of offshore investment, in particular those learned from the Vancouver experience? The circumstances that have made Vancouver the epicenter for Asian investment cannot be readily duplicated, and evidence increasingly indicates that they should not be.
This rapid and unplanned rise of Asian investment in Metro Vancouver has led to, contributed to, and greatly accelerated the following:
* A virtual destruction of traditional housing affordability models. By the second quarter of 2011 the average price of a detached home in Vancouver was $843,300 (which would currently purchase only a modest residence). To fund this average residence now requires an impossible 95.5 percent of household income. Canada's largest bank now raises the possibility that in Vancouver "home ownership is becoming a far-fetched dream."1
* A corresponding rise in overall local household debt to unsustainable levels;
* A severe shortage in affordable rental stock;
* A speculative real estate economy superseding much of the traditional mixed-use and balanced economy as a taxation driver;
* Provincial and local governments that increasingly involve themselves in the real estate market, dependent on the taxation and fees, and in the process distorting the risk/reward property development matrix;
* Wordy, expensive and unproven green initiatives being used to partially justify land use policies and high housing costs;
* Evidence that foreign investors may have no permanent commitment to local communities other than their financial involvement, nor an interest to assimilate.
On June 15, 2011, Mark Carney, the governor of the Bank of Canada (the equivalent of the chairman of the U.S. Federal Reserve), spoke before the Vancouver Board of Trade to once again warn Canadians about the bank's growing concern over this country's overheated housing market and unprecedented levels of personal and household debt. With the average Canadian spending 147 percent of annual income (on par with the U.S. and the worst of Europe),2 and most of this debt tied to housing costs, the governor has consistently warned Canadians not to rely on ever-escalating housing prices to keep them solvent.
That Carney chose to speak in Vancouver was no coincidence. It was a deliberate attempt to warn Canadians and, in particular, Metro Vancouver residents, that their debt was unsustainable and that with interest rates eventually rising and continued global economic challenges, the vulnerability of this region of Canada was particularly troublesome:
While Canadians have seen the value of their real estate holdings rocket upwards some 250 percent in the last twenty years, vastly outpacing increases in consumer prices and incomes, it hasn't necessarily left the country better off. Some people in this room may have been enriched by recent developments, their children and neighbors may have been relatively impoverished.3
While Carney acknowledged that Vancouver has always been Canada's most expensive housing market, even with its heavy Asian investment, the housing fundamentals and trend lines were negative. Furthermore, the Bank of Canada would not provide future stimulus or policy to extradite this or any other Canadian market should Canada experience the bursting (or leaking) of its real estate bubble. "We cannot manage monetary policy for a specific housing market or specific region."4
The rise of China's economy has been monumental, as has been its global home buying spree. …