How foreign money can help us meet our housing goals

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Vancouver real estate experts argue that foreign money can play a role in the creation of affordable rental housing units. They say government policies aimed at curbing foreign investment are serving to stem the funding necessary to get new housing built – and the affordable units that could be part of the equation.

But first we must get real about the extent of foreign capital, says Andy Yan, director of Simon Fraser University’s City Program and associate professor.

While 4.3 per cent has been used to describe the percentage of residential properties owned by non-residents in Metro Vancouver, it’s a heavily diluted and misleading figure, says Prof. Yan. It reflects all types of housing that had been built in previous decades, purchased by non-residents at a regionwide level.

For a more accurate picture, he has updated the latest data from the Canadian Housing Statistics Program (CHSP) by municipality, property type and period of construction, owned by non-residents. Because investors are active in the new condo market, he looked at condos built between 2016 and 2021, based on CHSP data released in 2023.

In Metro Vancouver, non-resident ownership of new condos is at 11.7 per cent, or roughly, one in 10 people, he says. That’s more than double the number usually cited, and a far more realistic reflection of the foreign capital situation, he says.

In the city of Vancouver, 13.5 per cent of those condos were purchased by people who reside outside the country, who may or may not hold a Canadian passport.

In the city of Richmond, it’s 16.2 per cent; in Burnaby, it’s 12.7 per cent.

“Over one in 10 people who buy a newly built condo don’t live in Canada,” says Prof. Yan, who gets frustrated with misleading data around such an important housing policy topic.

“It’s not that all foreign buying is bad, but it can and should be directed. It shouldn’t be a free-for-all that can cause displacement but should reflect the priorities of housing full-time residents. That’s important in a region where local incomes have historically been lacklustre and the economy capital poor,” he says.

“We should learn from other countries like Australia and Singapore, this idea that it’s better to direct foreign capital than just ignore it. So much of the conversation has been about how to measure it. And we know foreign buying and capital is there, so what do we do about it? Some people want to ban it, and that’s one response. The other is, direct it. You could direct it, for example, through a housing investment bond to fund affordable housing projects, instead of fuelling a speculative real estate market.

“My point is the issue of foreign capital is a conversation we need to have instead of denying it exists.”

About half of all new condos in Vancouver are investor-owned. For the private developer, the foreign investor may play a key role in providing inclusionary housing, which is the policy term for providing a portion of below-market housing in exchange for more density. Metro Vancouver recently released a report that showed policies for inclusionary housing have had some success, resulting in 9,200 below-market homes, either completed or approved, aimed at moderate incomes. The number is an estimate, because projects can be cancelled and change. The percentage of the building designated inclusionary, and the incentives given to the developer to build the units, depend on the municipality. According to the report, higher priced markets can support inclusionary housing of 10 or 20 per cent, but lower priced markets would have a tough time making it pencil out. The policy is dependent on market-rate condo sales.

“Development will continue to occur under inclusionary housing if the revenues for the market-rate units are high enough to cover the lost value from including affordable housing units in the project,” said the report. “Because the success of an inclusionary housing policy depends on market-rate development, these policies only work when new development is occurring.”

The province is currently reviewing the idea of making inclusionary housing mandatory instead of voluntary. While laudable, Prof. Yan argues that the definition of affordable doesn’t necessarily translate into affordable for a lot of people.

For example, the current Canada Mortgage and Housing Corporation definition used by the City of Vancouver is 20 per cent below the city-wide average rent.

“That may mean something to households with high incomes, but on the east side of the city, with lower rents, it can actually mean that rents go up, and there’s tenant displacement, because it’s a citywide average,” says Prof. Yan.

As well, private development depends on market cycles, and housing only gets built on the upswing. To get a high-rise project built, developers need to obtain financing by selling enough presale units within a 12-month period. That’s where investors and foreign money play a key role, says Tony Letvinchuk, managing director, Macdonald Commercial Real Estate. Mr. Letvinchuk says those inclusionary housing units would have been built during “the heyday” of development, when the numbers made sense. He argues that foreign capital helps provide the financing needed to build condominium towers throughout the region. Those towers are most often the source of below-market housing units because if market conditions are favourable, the developer can make them work. That’s where foreign investors come in.

Several years ago, in response to an overheated market and foreign purchases, the province brought in the foreign buyer tax, as it was known. Two years ago, the federal government introduced a foreign buyer ban, and recently extended it.

“The levels of government and the central bank are trying to do the right thing for the issues facing the public and for the financial stability of the country, but at the same time some of these policies work against the stated goals for housing supply,” says Mr. Letvinchuk.

“We had that bulge over 2017, 2018 and 2019 and presales were very strong and the core of that often came from what might be described as foreign capital for a home in our marketplace, and those presales actually contributed to a rather large degree to getting projects off the ground.”

That made the bottom line workable, he says, which allowed for a mix of housing options, such as the city of Vancouver’s inclusionary housing policy to include 20 per cent below-market units.

“Now they are looking like brilliant deals, because you couldn’t do that today given the current interest rate environment and the cost to build,” he says. “We don’t want to be negative, but that was the heyday, in the past decade, for getting housing built when financing was at rock bottom and construction prices, at 30 and 40 per cent of what they are today.”

Another fact of privately built housing is that it caters to investor demands, which may not be the same type of housing needed by working locals with families and lower incomes. Developer and real estate consultant Michael Geller has argued in favour of government-mandated policy for larger, family-friendly units.

Mark Goodman and Ian Brackett, brokers at Vancouver-based Goodman Commercial, say that investors are attracted to concrete towers and “bare bones” units that can command top rents. Concrete towers take years to build, and investors can afford to wait because by the time of completion the unit will have likely gone up in value.

“If you are someone who actually needs to live in a unit, not many people can plan five years from now, whereas an investor can be more patient, put down a deposit, wait, get the unit, and then hopefully the price has gone up in that time,” says Mr. Brackett.

“These presales are the lubricant for the developer,” adds Mr. Goodman. “They finance the projects, and because you don’t have that, it translates to less housing, which translates to less units that add to the rental pool plus affordable rental components, and one could opine the net effect is negative for the country.”