The Prohibition on the Purchase of Residential Property by Non-Canadians Act -- which came into effect in January of this year and bans foreigners from buying residential real estate in the country for two years -- is weird.
We can debate whether banning foreigners from buying residential real estate is really helpful for housing affordability and if it's the most impactful place to focus our attention (and we have talked about this many times before), but the part that is particularly odd is this feature here:
...the law’s definition of residential property includes land that is zoned for residential use or mixed use, which covers huge swaths of commercial land across the country. As well, an entity is deemed foreign if a non-Canadian owns a minimum of 3 per cent of the entity.
What this means is that the following scenario is now technically a problem (not actual legal advice!):
You own a commercial property with zero homes
You have long-term commercial leases in place that also generally preclude you from building new homes in the foreseeable future
The zoning of your property allows for residential uses (which you like having in your back pocket)
And your cousin from Italy owns 3% of the entity that owns the real estate
This is a scenario where residential homes do not exist and they are unlikely to exist any time soon. It seems clear cut, but I suppose one could argue that it's exceedingly onerous to try and figure out which sites are soft sites and could actually be developed with new residential. And so if you have the potential to build and then own residential, you should be regulated as if you might ultimately own some of it one day.
But even here, I don't know why we would want to restrict the supply side of the housing equation. If you're a developer in Canada where housing is known to be kind of expensive and you want to build more of it for Canadians, isn't that a good thing? And isn't it also a good thing if we can get some non-Canadians to help pay for these new homes?
The Journal published a piece this past week talking about China's $52 trillion residential property bubble. According to a recent study by Goldman Sachs, this is the current value of all Chinese homes (built homes and developer inventory). And to put this number into perspective, it is twice that of the U.S. residential market.
Now, I don't know all that much about the Chinese housing market and I have no idea where prices will go next. But it is interesting to look at some of the data, particularly in light of this current pandemic. Urban home prices in China were up 4.9% year-over-year in June, and 1.9% year-to-date. Shenzhen appears to be one of, if not the hottest market. Why is that?
At the same time, it is believed that about 21% of urban homes in China were vacant as of 2017. I don't know what the figure is today, but this is a high number. As of last year, urban China also had a homeownership rate of about 96%. (Here is a look at how this number compares with other countries around the world.)
What is clear is that Chinese households are going long property, and eschewing other investments such as stocks and bonds. Above is a chart showing how China compares to the US, where bonds lead, followed by stocks. Presumably it is because property is viewed as a safer and more lucrative investment in China.
According to a report by China Guangfa and the Southwestern University of Finance and Economics, urban Chinese have on average about 78% of their wealth tied up in residential real estate. Many own multiple homes. In the U.S., this figure is about 35%. (I don't know what the number is for Canada, but I would be interested to know.)
Call me old fashioned, but I think it's important to keep in mind things like rental demand and cash flow when thinking of property.
All figures and charts from the WSJ.
At the beginning of this year, a16z announced that they co-led a $175 million investment in the real estate company Loft. Based in São Paulo, Loft is doing in Brazil what Opendoor is doing in the US. They are bringing more liquidity to the residential real estate marketplace, and it turns out that the need for this is even greater in Brazil. That has apparently made Loft one of the fastest growing real estate companies in the world today. Here are some interesting facts about residential real estate in São Paulo. And here is a talk by Alex Rampell (general partner at a16z) on how software is going to eat the real estate world.
https://www.youtube.com/watch?v=IRPH3K1GXj0