Crucial bit of missing information may be driving Canadian home prices

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Canada's housing market is a bubble about to burst in some cities, or in the midst of a soft landing. Either way, a crucial piece of information on just what's driving the market is missing in action.

Unlike in other countries such as the United States and Australia, neither the Canadian federal government nor industry keeps track of the numbers of foreign buyers or where they come from. Anecdotal evidence about foreign buyers abounds, yet hard evidence is lacking.

It's a crucial bit of missing information. Understanding what's sparking demand in real estate can offer insights into the health of the market and what's driving prices, and to better predict cycles – by knowing, for example, how a slowdown in China's economy might affect local markets.

It can also help politicians make wiser decisions about the sector, such as whether restrictions may be needed if speculation becomes too high.

"It's very hard to have a policy debate about what we should do when we don't really know what's going on," said Tsur Somerville, director of the University of British Columbia's centre for urban economics and real estate.

On a quiet leafy street north of Toronto, Mr. Zhang – who asked that his full name not be used – taps the walls and inspects the furnace of a $2.68-million home.

He's got five days in the city to make his decision. This five-bedroom house, with Jatoba cherry wood floors and a home theatre, is a little over his $2-million budget, but he'll see half a dozen others this week before making a selection.

He's looking to buy because his 15-year-old daughter will be attending private school in Canada later this year. The owner of a steel business in Beijing has applied to immigrate to Canada, and figures he may as well purchase a home now.

"Canada is a beautiful country. It is good for living, for higher education and it is not that populated," said Mr. Zhang, who ultimately bought a $2.2-million home in Oakville, Ont.

Rumours are rife about foreign buyers. In Toronto, Russian and Iranian buyers, flush with cash, are snapping up condos. In Vancouver, Chinese investors are buying luxury apartments. In the Maritimes, wealthy Americans and Europeans are acquiring coastal vacation property.

Estimates of the level of foreign buying are all over the map. In the Toronto and Vancouver markets, they can range from 3 per cent to – in some pockets of the condo market – upward of 60 per cent.

Debate percolated last year about whether Canada should place restrictions or slap fees on non-residents who buy property in the country. But "we definitely had policy recommendations in advance of knowledge," Mr. Somerville said.

Published stats would help analyze ebbs and flows of demand, occupied units versus vacant ones, and the dynamics of over-supply – how foreigners factor in to the equation of household formation to new construction.

Shifts in the housing market can have huge spillover effects on the broader economy, on everything from retail sales to employment and the building of new shopping malls.

And yet, "we're missing quite a meaningful part of housing activity in this country," said Sherry Cooper, chief economist at Bank of Montreal.

Canada's housing market has boomed since the recession, until lately. Without knowledge of the source of buying, Ms. Cooper said, "we have difficulty assessing just how sticky this money is, how vulnerable we might be to international capital flow changes, or what are the fundamentals that determine what has been extraordinary building and buying in our major cities."

Canadians, meanwhile, are flocking to the U.S. market, snapping up holiday homes in the sun. They are now, by far, the biggest bunch of foreign buyers of American real estate.

Just how do we know this? Each year, the National Association of Realtors publishes a study on international buying activity in the U.S. It shows who the biggest buyers are, the fastest-growing nationalities of buyers (Canada, China), where they're buying (Florida, California), why (bargain vacation homes!) and how levels of foreign buying change from year to year.

The industry has collected this info for more than five years, gleaned from questionnaires and followup emails to 50,000 real-estate agents. It's valuable information for the public, government officials – and the industry itself, helping realtors better understand their markets, says Jed Smith, the association's Washington-based economist.

Australia, for its part, tightened its rules in 2010 to ensure that investment in its market by foreign non-residents "doesn't place pressure on housing availability for Australians."

In London, U.K. property broker Savills asks its clients about their nationality and why they're buying. Its latest report shows foreigners now comprise a third of buyers of prime residential properties, up from a quarter in 2007. It also found the biggest buyers are Western Europeans.

It's a contrast to Canada. CMHC does not monitor or compile data on foreign investors. Its mortgage loan insurance isn't available for foreign buyers, meaning someone outside the country would need a down payment of at least 20 per cent, and have to get conventional financing . The Canadian Bankers Association doesn't keep data on this. Nor does the Canadian Real Estate Association. The Bank of Canada doesn't track it, though Governor Mark Carney has noted that heavy investor demand – much of it foreign – "reinforces the possibility of an overshoot in the condo market in some major cities."

He has implied that the bank could compile data if it chose to. "We have, through partners, access to all mortgage insurance transactions and all real estate, effectively all real estate transactions, the residency of those transactions, and we can do deeper drills in various areas, if we wish, to establish that."

As for the federal government, Finance Minister Jim Flaherty told The Globe and Mail last April that it doesn't have a good handle on the amount of foreign money in the country's housing market. "It's mainly anecdotal, so I don't have a statistical grasp of it, no," he said, adding that he hears about lots of people in emerging economies paying cash for condos in Toronto and Vancouver .

Monitoring foreign buying in Canada poses challenges. Some buyers purchase homes through local family or a lawyer's office, so on paper they appear to be living in the country. Plus there may be privacy concerns around asking buyers where they come from or why they're buying.

Still, Lawrence Kobescak, mortgage agent at Ontario Mortgage Superstore.com, is among many who'd like more clarity on the trends. "Without a clear picture of foreign ownership in the residential market in Canada, we cannot predict the impact shifting foreign investor sentiment may have on the Canadian housing market," he said.

For example, it's tough to gauge whether Canada's hot market since 2008 partly stemmed from a flight to security by foreign investors. Conversely, a global recovery could spur interest rate hikes, put the squeeze among foreign investors' returns and cause them to retrench. "Without accurate statistics of foreign ownership of residential properties in 2008 and in 2012, we would only be guessing."

International interest in Canadian property is unlikely to abate any time soon. Volatile stock markets and Canada's reputation for economic stability are luring investors. So are housing prices that are still lower than other major global centres. And, unlike many countries such as Australia and Switzerland, foreigners face no restrictions on home buying.

Interest in Canadian residential real estate among foreign buyers has been steady in recent years, with particular interest from Asia, says Luis Lopez, head of business development, credit, international private banking for RBC Wealth Management. "The investment dollars are coming here and we are seeing them stay here, it is not for the short term," he said. adding that "much remains to be seen" on how China's slowdown will affect real-estate markets in Vancouver and Toronto .

There's also more wealth sloshing around, looking for a safe place to park. Globally, 175,000 people crossed the millionaire threshold last year, led by growth in emerging markets like China and India, according to Boston Consulting. In China alone, the number of millionaires hit 1.4-million in 2011 from 1.2-million the year before, and that number will keep growing "strongly" in the coming years, it said. Investors from mainland China tend to see Canada as one of the top destinations for real-estate investment, according to real estate services provider Colliers International.

"Most Mainland Chinese investors buy properties in Canada because their children study there," said Derek Lai, director of international properties, last year. "Now we also witness an emerging trend of younger buyers, such as Chinese students, purchasing bigger apartments or luxury properties."

Foreign appetite for Canadian homes will persist, says Michael Adelson, Toronto-based sales rep for ReMax Realtron, who recently represented a seller that sold their bungalow for $421,800 over asking to a foreign buyer.

He has worked in the industry for 25 years, and seen interest from Hong Kong, Korea and Iran flourish. As someone in the industry, he's happy to see such strong demand. As a citizen, he's worried some local people might be getting priced out of the market.

"People have recognized this is a relatively cheap country to buy," he says. "I think it will continue unless they put some controls in place."

Tony Ma agrees. The agent in Markham, Ont., has hosted several groups of visiting Chinese buyers in recent months alone. They typically buy a house for $1-million or $2-million, either to live or as an offshore investment. Canada's multicultural communities, affordability and democratic system will continue to lure buyers, he says. "I don't see this market cooling any time soon."