Canadian real estate boom extends beyond stock market drop

Real estate sales in major Canadian cities have grown tremendously this year and will continue to do so, according to a market report by Sotheby’s International Realty Canada.

In Vancouver, sales of properties with at least $4 million have increased by 71 percent, while properties between $2 million and $4 million have sold at a 52 percent higher rate compared to the first half of 2014. While Calgary’s real estate bubble may be getting ready to burst, Toronto and Montreal join Vancouver in high growth, partially as a result of interest from Chinese consumers, but the volatile stock market may not be the biggest cause.

"There are a number of factors behind the surge we’re seeing in Toronto and Vancouver real estate, including historically low mortgage rates, unemployment rates that are below the national average, a limited supply of real estate in the cities’ prime neighborhoods and the fact that there’s been a consistent, upward trend in home values over the past five years," said Elaine Hung, vice president of marketing for Sotheby's International Realty Canada.

"All of this has led to tremendous confidence in Vancouver and Toronto real estate as a secure, long-term investment, particularly given the recent volatility in global stock markets," she said.

Second homes
In preparation of Hong Kong’s transfer of sovereignty from the United Kingdom to China in 1997, many Hong Kong residents purchased second homes in Vancouver in anticipation of potential upheaval. As a result, the next generation was able to study in British Columbia’s leading universities, and the city today has the largest population of Chinese immigrants in North America.

Sotheby's Canadian real estate

The boom in Canadian real estate today may be for similar purposes as China’s economy continues to grow and the raw number of high-net-worth individuals continues to grow rather than being a lower-cost alternative to investing in larger North American cities.

“I wouldn't say Canada is exactly an alternative to New York or London based on cost," said Avery Booker, partner at China Luxury Advisors. "The people choosing Canada are often doing so to not just park cash abroad, but in many cases to send their entire families, and put their children in Canadian schools.

"For those looking for strictly investment homes, they'll continue to prefer a relatively small number of cities [such as] New York, London and San Francisco," he said.

Affluent consumer inside Peninsula Hotel

A recent report by Sotheby’s and Wealth-X, “Homes as Opportunity Gateways,” suggested that luxury real estate buyers might look to Western real estate as a long-term rebalancing schedule. The new report does not make mention of the role of foreign investors or other property buyers, and it is also too soon to tell if properties are being purchased as second homes and home for kids studying abroad or if they are purely investment properties.

“At this point, I would say Vancouver is popular among (increasingly mainland) Chinese more because of good schools, a hot real estate market, its climate and environment, lots of direct flights to China and a range of other things, [not for] political reasons,” China Luxury Advisors' Mr. Booker said.

Indeed, with wealth increasing among the affluent in China and the economy growing, the bump for Canadian real estate should not be over-credited to market trouble overseas. In fact, Chinese consumers have been looking for alternatives to the stock market since long before the crash.

“The interest in overseas real estate isn't strictly related to the stock market fluctuations but is the continuation of a long-term trend to diversify assets," Mr. Booker added. "There are relatively few investment options available in China, and international real estate has generally been seen as a safe bet compared to the Chinese stock market, with better potential returns than keeping assets in local Chinese banks.”

Booming markets
Although it may still be too early to recognize stock-market related market shifts or attribute slowing growth to overseas investments, it will not be a surprise if Chinese and other foreign money pours into Western real estate as the stock market continues to ebb and flow.

Despite Canada’s growth, investments in New York and other premium locations should not be expected to fall away altogether. If Chinese consumers look for real estate as an investment rather than as a home, high-priced markets could remain the most attractive (see story).

Previous reports have also indicated that high-net-worth individuals will be less harmed by falling stocks than the average consumer.

Per the New York Times, Julian Evans-Pritchard of Capital Economics said, “With only a small and relatively wealthy portion of Chinese households exposed to the stock market, we aren’t too concerned. Given that the stock market didn’t provide any noticeable boost to spending on the way up, there is no reason to expect it to be a drag on the way down.”

For those who have a hand in directly in the stock market, one solution to the possibility of continued economic disparity has been real estate. According to The Guardian, wealthy Chinese citizens have been investing in properties in countries such as Australia, Britain and the U.S. as a way to safeguard their money through a sound investment (see story).

"Canadian mortgage rates are at historical lows, and since there’s widespread confidence that real estate will net a solid, long-term return, homebuyers and investors are purchasing accordingly," Sotheby's Ms. Hung said. "At the same time, Toronto and Vancouver are the top two destination cities for immigration in Canada, and both are consistently ranked among the most livable cities in the world.

"Many of the homebuyers with international ties that Sotheby’s International Realty Canada is seeing in the luxury market are looking to settle in a safe, politically stable country, in cities that offer a standard of living far more comfortable than what their families might be able to experience in their countries of origin," she said. "Others are looking to diversify their financial portfolios with real estate investment in stable markets."

Final Take
Forrest Cardamenis, editorial assistant on Luxury Daily, New York