The rate of rising home prices in Canada’s largest city slowed slightly in May as a new tax on foreign buyers – one of 16 new measures meant to cool the country’s white-hot housing market – failed to cool the Toronto housing market despite a dramatic rise in new listings, Reuters reported, citing data from the Toronto Real Estate Board.
The industry group reported that home prices rose 14.9% last month from the same period a year earlier, well below the pace of gains seen in recent months, while new listings jumped 48.9% and sales fell 20.3%, according to the Reuters report.
Back in April, the provincial government of Ontario announced a slew of drastic measures, including a 15% tax on purchases by non-resident foreign investors, to tamp down on the housing market insanity that left many locals unable to buy even a modest home.
Attempts by local authorities to rein in price gains in some of Canada’s hottest urban markets have threatened to unleash a crisis on par with the US subprime implosion of 2007.
Yet, wealthy foreign buyers – primarily Chinese hoping to protect their wealth by moving it out of China’s debt-laden economy and into more established markets in the west and the antipodes – are refusing to quit.
Perhaps, as we’ve previously asserted, homeowners in the US’s northern neighbor were lucky that an earlier attempt to deflate the Vancouver housing bubble – the biggest of all time – has mostly failed so far. In May, the Vancouver housing market did the impossible and in a testament to the persistence of Chinese oligarchs, criminals, money launderers and pretty much anyone who is desperate to park their cash as far away from China as possible, bounced right back to all-time highs after a short-lived dip in prior months.
Toronto’s new tax on oligarchs mirrored a similar measure adopted by Vancouver’s own local housing board last year, including a 15% tax aimed at foreign buyers that was similar in its construction to the new measures implemented by the Ontario housing authority.
Luckily for Canadian home owners – and the Canadian banks who supplied them easily securitized mortgages - who were forced to buy at unrealistic home valuations, the "mean-reversion" outcome that could’ve been brought about by the introduction of these new taxes has yet to materialize.
But investors aren’t out of the woods just yet, according to Jason Mercer, TREB's Director of Market Analysis, who told Reuters that a delayed reaction could be brewing.
Mercer shared his thoughts about the market with Reuters, asserting that it's too early to say whether the surge in new listings in Toronto last month was a response to the new rules or simply sellers responding to the recent surge in prices, or whether the rise in listings or drop in sales will be sustained.
"In the past, some housing policy changes have initially led to an overreaction on the part of homeowners and buyers, which later balanced out. On the listings front, the increase in active listings suggests that homeowners, after a protracted delay, are starting to react to the strong price growth we've experienced over the past year by listing their home for sale to take advantage of these equity gains."
As the TREB report showed, sales of detached homes led the overall drop in demand in May, falling 26.3% from a year earlier, while sales of condominium apartments were down by 6.4%.
Another reason for the buoyancy exhibited by Canadian home prices could be that the supply of housing stock dropped to a 15-year low in 2016 and it will take time for new listings to rebalance the market.
"At the end of May, we had less than two months of inventory. This is why we continued to see very strong annual rates of price growth, albeit lower than the peak growth rates earlier this year," TREB President Larry Cerqua said in the report.
Inventory, which remains low despite the surge in new listings, is another factor propping up home valuations in Toronto, where supply dropped to a 15-year low in 2016. As Reuters noted, it will take time for new listings to rebalance the market.
But even as Canadian and Australian regulators' attempt to rein in the obvious housing bubbles brewing in their respective local markets, their own efforts have already been eclipsed by China’s Communist Party, which adopted a new set of capital controls back in January meant to stop oligarchs from moving money out of the world’s second-largest economy, even as it faces a slew of macroeconomic and political risks.
Here’s a rundown of China’s new regulations, courtesy of Bloomberg.
- Customers must pledge money won’t be used for overseas purchases of property, securities, life insurance or investment-type insurance. While such rules aren’t new, citizens previously didn’t have to sign such a pledge
- Customers must give a more detailed account of the planned use of funds, such as business travel, overseas study, family visits, medical treatment, merchandise trade or purchases of non-investment insurance policies, including the timing, by year and month
- Violators of foreign-exchange rules will be added to the currency regulator’s watch list, denied foreign-exchange quota for three years and subjected to anti-money-laundering investigations
- Customers must confirm compliance with restrictions on money laundering, tax evasion and underground bank dealings
- Customers must now confirm they aren’t lending or borrowing quotas to or from other citizens
- And while some of the new capital controls above may not seem that onerous, they're already threatening real estate deals from London to Melbourne as Chinese buyers are finding it increasingly difficult to fund down payments.