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By Cory Loviglio, Quantitative Strategist, Ten-X Research

The housing bubble in Vancouver was fueled in large part by demand from wealthy Chinese buyers, sending home prices skyrocketing and squeezing home buying prospects for many local residents. The outcry over unaffordable housing prompted the province of British Columbia to take action in an attempt to slow the runaway housing market, and in late July the government introduced an additional property transfer tax of 15% for foreign nationals purchasing homes in the Vancouver metro area. This followed suit with measures taken by Australia and Hong Kong in their efforts to curtail foreign investment in local real estate.

The drastic measure was taken to cool an overheated housing market that was gouging affordability for local residents, and it appears the tax was effective in popping Vancouver’s housing bubble. According to the Real Estate Board of Greater Vancouver, prices for residential homes peaked in August at $933,100 after an astonishing 31.4% year-over-year gain, but have now decreased for three consecutive months, most recently down 1.2% in November. Sales have tumbled even more, declining sharply among all property segments, though the National Bank of Canada among others notes that the sales downtrend began in early 2016 after other factors came into play.

In February, the minimum down payment for mortgage loans over $500,000 was doubled from 5% to 10%, and the property transfer tax was increased from 2% to 3% on homes sold for over $2 million. At the same time affordability issues continued to dampen demand from local buyers. Nonetheless, the recent 15% tax has intensified the sales decline. British Columbia released statistics confirming that the number of foreign purchases have declined, accounting for just 3% of Metro Vancouver transactions in October, well below the 13.2% share seen before the 15% tax was implemented.
vancouver prices

As foreign buyers start to shy away, there is the question of what happens to the money that previously flowed into Vancouver housing. With uncertainty in China amid ongoing yuan depreciation, Chinese investors are likely to continue seeking offshore real estate to store money, setting their sights on other foreign real estate markets outside more restricted areas like Vancouver. In addition to Canada, the US has been a popular location, appealing to the Chinese as a relatively safe investment locale. For those who were previously targeting Vancouver, they can look elsewhere in Canada and in nearby US markets that have become popular for trophy assets. In addition to Toronto becoming a popular alternative to Vancouver, anecdotal evidence suggests that Chinese buyers are turning to nearby Seattle.

vancouver sales

Seattle is a geographically close alternative, a well-established metro with waterfront property just hours from Vancouver. Seattle also offers more reasonable prices than other west coast markets, as its median single-family sales price of $466,000 this past quarter is dwarfed by the likes of $1.01 million seen in San Francisco and even $880,000 in San Jose, per IHS. According to data from Juwai.com, a top Chinese international property portal, home purchase inquiries have fallen significantly in Vancouver since the tax was announced, while Seattle and Toronto have seen a huge boost.

chinese search shift

It is difficult to discern whether there has been any direct impact on prices or sales as of yet, as Seattle’s housing market has already been on a tear in recent years. Single-family sales have boomed 55% over the past five years, and are currently up 5.1% from a year ago, bucking the national trend which saw US sales contract 0.8% over the past year. Seattle home prices increased a seasonally adjusted 2.1% in the third quarter, a healthy gain but fairly pedestrian for Seattle of late. Home prices are up 12% year-over-year, double the US pace and marking six consecutive quarters of double digit annual growth. Seattle’s strong ties to the tech industry and its high incomes have sent prices skyrocketing in step with the tech boom. If Vancouver has had any impact on Seattle’s housing market so far, it has gone undetected in an already active market, though it is more likely to take some time for new searches to produce new sales.

It seems that Vancouver’s new tax will undoubtedly shift some additional foreign activity to Seattle. It’s difficult to imagine that all of the excess demand formerly directed to Vancouver will uniformly move to Seattle, as it will likely scatter to multiple locations, but the fallout from Vancouver seems likely to heat up an already active Seattle housing market. This would fuel further demand and put additional upward pressure on home prices in the metro. This development will likely provide an extra boost Seattle’s thriving housing market, the extent of which remains to be seen.