Recent experience in Toronto shows that, after the new foreign buyers tax was imposed, Chinese demand dropped like a bowling ball, but demand may have begun to recover. CEO of Juwai.com Carrie Law explains.
Toronto is an interesting case study for Australians curious to know how foreign buyer taxes affect Chinese demand. This is especially important because Australia has probably the most restrictive foreign buyer regime in the developed world, especially when you combine the national restrictions and costs with the state-imposed costs in parts of the country.
After Toronto’s new foreign buyers tax kicked in, Chinese demand dropped like a bowling ball, but now that ball may be bouncing.
Chinese buyer inquiries halved in the two months after the tax was imposed and hit a low point in January, but they have grown over the most recent two months. Whether this upward trend continues for a third month, we don’t yet know. We expect a significant recovery in Chinese buying by year’s end, although not to the levels of April last year.
From other markets that have imposed foreign buyer taxes, like Hong Kong, Vancouver, Singapore, we know that there is often a pattern to the Chinese buyer reaction. Chinese buying drops off precipitously in the short term, then partially recovers in the medium term, and can fully recover in the long term, although this depends on particular market dynamics. So, while we don’t expect Chinese offshore buying to recover to prior levels this year in Toronto, we do expect it to recover above the levels seen in the immediate aftermath of the tax’s imposition.
Before the tax, families tended to buy real estate as a first step towards the goals of education or immigration. Now, because of the tax, it is more common for the property to come later ― after they have already moved to Toronto and have permanent residency or citizenship.
We also see purely investment-oriented buyers taking longer to make transactions in Toronto or deciding against it entirely.
What drives to Chinese demand for Toronto property? These are families who want their children to have a better opportunity than they did. For the first time, they have a chance to give their kids an international education and to live in a prosperous, advanced society. They are injecting billions of dollars into the local economy and universities for that privilege.
Data from Financial Times Confidential Research shows that 56.8% of Chinese outbound investors will invest more of their wealth overseas in the coming two years. If they have pure investment motivations, their goals tend to be stability and risk hedging, rather than high returns. Let’s not kid ourselves. They would most likely get much better returns on their money in China then they will in Toronto.
Chinese buyers still want to buy in Toronto. They still want to study there. They still want to work there. And they still want to raise families there.
MORTGAGE RATES MORE IMPORTANT THAN CHINESE
Most observers expect the Toronto real estate market to be moderate in the year to come. This is primarily due to the decision by the national banking regulator to hold Canadian mortgage applicants to higher standards. This decision gets to the heart of the cause of the property boom, which was cheap and easy credit ― especially for investors. When rates are low and credit flows, prices go up. It’s the first thing every university student learns about the housing market, and it has nothing to do with foreign buyers.
Prices are stalling in Toronto is because credit is getting more expensive and mortgages harder to obtain.