Economists go to battle over foreign investor influence on the housing market
Story by: Garry Marr
One economist calls in complete nonsense while another wonders how anyone can suggest foreign investors are not having an influence on the market.
Without naming anyone, Bank of Montreal chief economist Doug Porter has called out a report from Wednesday which suggested it was “complete nonsense” that price gains in Toronto were justified based on foreign buying, among other issues.
“It appears that not everyone believes, as we do, that a recent rapid escalation in foreign buying is a driving factor behind the recent surge in Vancouver and Toronto home prices,” said Porter, in a economic note, adding the finance minister in British Columbia has said the influence on foreign buyer is factual and beyond conjecture.
Using a small sample of 19 days in June, the British Columbia government found about five per cent of purchases in the Greater Vancouver area were being made by foreign buyers. This week, in response to requests from the city of Vancouver, it agreed to give the municipality the power to tax owners of vacant properties — a punitive measure said to be aimed at overseas buyers.
All the talk isn’t convincing Paul Ashworth, the chief economist with Capital Economics, who questioned the influence of both foreign buyers and demographics and who seems to be the target of Porter.
“The usual suspects will claim that these price gains are somehow justified by demographics or foreign cash buyers. This is complete nonsense. Demographics evolve very slowly and changes play out over years, if not decades. They do not justify annual price gains of this magnitude. There is also almost no hard evidence that foreign buyers are the cause,” said Ashworth, who maintains prices gains in Vancouver and Toronto are “domestically generated mania” driven by a growth in credit.
Mr. Porter compared Teranet’s house price index with household credit and while he says his chart “doesn’t fully prove our point, it makes a strong contribution. Note that home prices tend to ebb and flow very closely to overall household credit growth.”
The economist says there were wild swings around the financial crisis in 2008-2009 but home prices have tended to grow slightly slower than credit growth over time.
“But look at what has transpired in the past year — prices have absolutely surged, while credit growth has barely budged. Something besides domestic borrowing has clearly fanned the flames. We will simply note the anecdotal evidence that many foreign buyers do not borrow to buy,” said Porter.