Douglas Todd: Vancouver still suffering fallout from 'students' buying mansions
Opinion: 'The most important thing to understand about foreign capital is it never goes back. It just sloshes around' in Canadian real estate.
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One of the more shocking examples was the University of B.C. “student” who bought a $31-million house a few years ago in Vancouver.
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There were also the nine different international students who snagged $57 million in mortgage money from Canadian banks to buy posh dwellings across Metro Vancouver.
This is not to mention the countless other proxies who somehow obtained gigantic mortgages from Canadian banks without having to provide evidence they earned an actual income.
How can this happen even as ordinary Canadians find it a challenge to prove to banks they earn enough to secure a mortgage? Understanding how people serve as proxies for the real (or beneficial) owners of properties is a key to unravelling why Canadian house prices have spun out of control.
At least two questions stand out about this inflationary phenomenon.
Are such proxies still able to get whopping mortgages from Canadian banks?
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And what have been the long-lasting real-estate repercussions of this practice, especially for sought-after markets like Vancouver and Toronto?
Before answering these questions, let’s look at just how unregulated things were in real estate and banking six to 10 years ago, when hundreds of billions of dollars of foreign capital were pouring into the country.
How proxies easily snagged big mortgages
In evidence before the Cullen Commission into money laundering in B.C., a UBC geography professor emeritus laid out how offshore capital has streamed into Canadian real estate.
Up to 2016 “banks in Vancouver were giving preferential loan terms to foreign home-purchasers without full disclosure, effectively practising deregulation for non-Canadian clients,” said David Ley, author of Millionaire Migrants: Trans-Pacific Life Lines.
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“At one bank, international students who could put down cash for 35 to 50 per cent of a house price needed to provide no further financial evidence to qualify for an uninsured loan. Such easy credit access facilitated real estate investment and speculation.”
Bankers turned a blind eye by failing to report such questionable transactions, Ley says, noting Vancouver, Richmond and West Vancouver contained disproportionate numbers of addresses included in the Panama Papers’ database of offshore tax haven accounts.
Canadian banks earned big profits through such “dubious activities” as “providing generous mortgage terms to foreign students and other local proxies fronting for investors wishing to conceal their status as beneficial owners,” Ley said. “In each instance the consequence was to liberate more frothy capital for use in real-estate investment.”
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Stephen Punwasi, a Toronto-based real estate analyst, has also shown how Canadian banks were eager to give loans to foreign students with no jobs. He even published a photo of a bank branch poster, complete with a dragon-like Pokeman figure, telling international students to sign up for mortgages with “no income verification!”
The phenomenon of using proxies to buy property contributed to some of Vancouver’s newly minted mansion owners declaring poverty-level incomes, Punwasi said, citing Postmedia stories about tax avoidance. “The reason is widely believed to be that those earning income overseas just aren’t declaring their incomes locally.”
North Vancouver-raised Ron Butler, who now heads one of Canada’s largest independent mortgage brokerages, says Metro Vancouver has “shown the most insanity in the mortgage business.”
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Going back to the 1980s, when wealthy Hong Kongers fearing the return of their enclave to China first began looking for an offshore haven, international students and homemakers could buy mansions with large down payments from unverified sources, said the head of Butler Mortgages.
And then, Butler said, the foreign investors or their proxies would often secure the multi-million mortgages by buying large amounts of mutual funds with the same bank, in a process known as “hypothecation.” The banks loved it.
China, Iran, the Middle East and, in the past, Russia, have probably been the biggest source countries for such investment in Canadian housing, says Butler. But the money has flowed in from almost anywhere.
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“It’s the whole concept of ‘outpost families,’” said the mortgage broker, in which the family breadwinner stays in the homeland earning money while using proxies to invest in housing in a more stable nation.
The somewhat good news about proxies
The somewhat good news is that the trade in absurdly easy-to-obtain Canadian mortgages was cut back around 2016.
Canada’s superintendent of financial institutions quietly brought in new regulations, known as B20 and B21, that made it much harder for proxies with no incomes to get multi-million mortgages in Canada.
The changes have been helpful. But the damage, Butler suggested, has already largely been done. Canadian house prices have now been inflated by the unregulated money.
“The real key to understanding the billions that have come here already is this: They never go back. The most important thing to understand about foreign capital is it never goes back. It just sloshes around.”
Butler estimates roughly one-quarter of a trillion dollars — or $250 billion — has poured into Canada in recent decades through offshore investors, many of whom have used proxies.
That’s distorted higher local prices, which are now being exacerbated by “ridiculously” low interest rates inspired by the pandemic. “If I was to emphasize anything,” Butler said, “it would be that, since the money never goes back, it has created a long continuum.”
Housing investments by so-called marginal players also pushes values higher, Butler says, because many wealthy investors don’t care about getting the best price. They’re mostly looking for a long-term haven. Locals, especially young people, can’t compete in bidding.
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While the superintendent of financial institutions clamped down against the most egregious mortgages, in part to combat money laundering and international terrorist financing, Butler said many schemes still exist for foreign investors to transfer large amounts of money into Canadian dwellings.
Ottawa, for instance, still allows 15 per cent of a bank mortgage security to come from what it calls “nonconforming” sources, Butler said, explaining how a person from Cyprus who invests $40 million in Canadian real estate thus doesn’t have to explain the origins of $6 million of it.
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Another widely used technique for pumping huge amounts of speculative money into Canadian housing, Butler said, is by putting down payments on five to 10 presale condo units at the same time, typically in towers that are five years away from being constructed.
The trick, the broker said, is to sell the condos to someone else by so-called “assignment” just before a mortgage is required. By then the speculator, offshore or domestic, has already made a handy profit in Canada’s growing market.
“I could spin this stuff all day,” Butler said, explaining the numerous ways global capital has skewed housing affordability
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