The last ten years can undoubtedly be dubbed
Canada’s strongest period with respect to real estate appreciation. Significant
demand for all asset classes, particularly residential, has led to
unprecedented pricing. While ‘strongest’ might be an uncomfortable word to use
for some, I suspect it really depends on which side of the fence you reside –
the ownership side, or, the non-ownership side.
Real estate has now become such a point of
discussion; you cannot open a newspaper or entertain guests without real estate
values or ownership rearing its head. A
sore point for some…a victory for others.
From a residential perspective, the affordability of Canada’s metro
centres has become a challenge for many.
This is no more obvious than in Vancouver where the residential market
has become fodder for not only local daily publications, but also publications
with a much broader international scope such as the Economist, Huffington Post
and the Wall Street Journal.
Hand in hand with the discussion on real
estate values invariably comes the topic of foreign ownership. Although Metro
Vancouver has historically attracted a significant amount of foreign investment
(US and Asian to name a few), the recent meteoric rise in values has at least been
subjectively attributed to offshore investors (particularly within the Richmond and West Side markets).
Unfortunately, while the Land Titles Office (LTO) records the address
for a property owner, it does not
record whether the owner on title is a resident or non-resident of Canada. This address can simply be a local lawyers office. The debate that has waged on has therefore
been subjective rather than quantitative.
Earlier this year, in an effort to understand
the issue of affordability, the City of Vancouver created the “Mayor’s Task
Force on Housing Affordability”. The
task force determined that the impact on housing affordability by foreign
investment was important enough to warrant a separate report on the topic. The paper cited two separate studies – one
conducted by the Urban Futures Institute using LTO data from 2010, and one
conducted by Bing Thom Architects using BC Hydro data from 2008. Without going into details the conclusion was
that further investigation was required largely in part due to the limitations
of the raw data, and, that no opinion on the effect of foreign investment could
be determined.
The point of this preamble is that regardless
of what has driven up Vancouver’s prices, foreign investment of real estate is
a concern for many nations. Locally,
foreign investment has made the public question whether or not it should be
regulated. It brings up the question as
to how real estate should be treated from a sovereign perspective. Is real estate an asset that should be
reserved or prioritized for domestic use? Perhaps the more important question
we should be asking is whether housing
should remain free from external influences.
Foreign ownership in Vancouver, whatever the
level, is simply a representative sample of what is occurring on a worldwide
basis. Most discussions in the
mainstream media have tended to focus on the residential side. Recently however, there has been considerable
interest devoted to an asset class that could impact a country’s population in
ways that might be more significant than rising housing costs. The considerable interest in this asset class
has attracted the attention of almost every country within 60 degrees of
latitude from the equator. This asset class is agricultural land.
In case you haven’t noticed, (which you
probably haven’t but not out of ignorance but by reason of location and income)
the world food markets have experienced several price shocks brought about
(most recently) by supply side interruptions due to weather related
events. In North America it is estimated
that food prices will rise 4-5% next year as corn futures reach record level
and wheat hits a 4-year high. CBC news
(Nov 27, 2012) reported that food prices in Alberta are 28% higher than they
were in 2002.
Ok, perhaps you have noticed. But it has
likely created less grief in your household than it has in other less fortunate
households (or countries for that matter).
Clearly, if the output has risen in price and demand, the inputs have
too. And, considering a rising
population, changing weather patterns and higher operating costs (fuel
particularly), securing a nation’s food supply has been a top priority for many
leaders, not to mention the increased interest by private agricultural REITS,
food producers and cooperatives.
So how does this relate to off shore
investment in Vancouver’s residential market?
Like I mentioned, our concerns are a small example of what is happening
on a global level. Agricultural land
purchases by foreign companies and state owned corporations have increasingly
been in the headlines. China, Saudi
Arabia, the UAE, Qatar, Russia, Japan and Western European nations have all
been busy acquiring farmland from other nations that are either more food
secure, financially unable to develop their lands, or lack appropriate
regulations to prevent the wholesale divestiture of an incredibly important
national asset.
Australia is perhaps one of the best examples
in the Western world. Recent mass acquisitions of Australian farmland by
sovereign funds from China, the UAE, Qatar, Japan and more have the Australian
Greens Party wanting a moratorium on agricultural land purchases by foreign
interests until the country can understand its position better. New Zealand is
seeing a rise in interest from a variety of groups (Save the Farms) to preserve
agricultural land for domestic owners.
Interestingly enough, New Zealand, much like BC, is having a very
difficult time determining the extent of its current foreign ownership
levels.
In the case of Australia, how much land are
we talking about? A lot. In New South
Wales alone, foreign interests control an estimated 800,000 hectares. Think of
that in relation to the size of Vancouver Island at approximately 3.13 million
hectares. But again, Australia is not
exactly sure what the number is on a national level (estimates indicate between
6% and 11% of agricultural land).
Tracking foreign ownership through the maze of corporations used to
acquire land can be challenging. And
consider that Australia’s Foreign Investment Review Board only reviews an
investment in land if it is in excess of AU $244
million.
But should we really care if foreign
interests control significant amounts of agriculturally productive land? That’s
an argument that partially depends on the country I suspect. In the case of many African nations that lack
the financial wherewithal to develop their lands, perhaps it might be seen as a
benefit. At least the host country will benefit from access to employment; a potentially
increased food supply; improved technology and industry knowledge; access to
capital; and, most importantly,
productive agricultural land.
In the case of Australia however, a country
that is already well capitalized and a net exporter of agricultural products,
the benefits are not as clear. And while
some might argue that the acquisition by Saudi Arabia (as an example) are being
made as purely economic investments much like any fund would acquire an income
producing asset (or stock, or bond), I think the issues begin to change when we
consider sovereign investment funds as opposed to pure corporate acquisitions. We also need to be cognizant of how the
agricultural industries in countries like Australia and Canada were developed
in the first place - through outside influence, foreign investment, and hard
working immigrants. But are the recent
massive acquisitions different today?
And have our attitudes and needs changed?
Without respect to subsidies in agricultural production, agriculturally produced goods, for the most part, enter into the supply of global trade. Regardless of who is producing these assets they should have the same price and the same cost. As a Canadian consumer, the price of wheat will be the price of wheat regardless of who is producing it.
Without respect to subsidies in agricultural production, agriculturally produced goods, for the most part, enter into the supply of global trade. Regardless of who is producing these assets they should have the same price and the same cost. As a Canadian consumer, the price of wheat will be the price of wheat regardless of who is producing it.
Canadian Regulations
So what about Canada? We certainly do not
have a provincial policy in British Columbia to control the purchase of real
estate by foreigners. We do however have
the Agricultural Land Reserve that preserves our agricultural land for
agricultural use. At least this controls
the supply of agricultural land, but how about the production of agricultural
products?
What about other provinces? It turns out many of our provinces have
fairly stringent regulations when it comes to foreign ownership of land - at
least when it comes to agricultural land.
Alberta, Saskatchewan, Manitoba, Quebec and Prince Edward Island, all
have regulations in place that are intended to prevent foreign ownership of
agricultural land (PEI is a little different).
Saskatchewan has historically had the most
stringent regulations. Until 2002,
ownership of agricultural land in excess of 320 acres was strictly limited to
Saskatchewan residents only. This law
was changed in 2002 to permit all Canadians (and residents) the right to own
farmland in the province. Saskatchewan’s
policies appear to be strictly applied.
Recent discussions with Mark Folk, the general manager of the
Saskatchewan Farmland Security Board, indicated that their board reviews all
purchases of farmland in the province – this is reportedly more than just a
cursory review.
It is not surprising to see Saskatchewan has
had such a stringent historic policy.
Let us not forget that this is the birthplace of Canadian Medicare and home
to Tommy Douglas. Saskatchewan’s
political position might have influenced the creation of the Saskatchewan Farm
Security Act in 1974, much like the BC NDP government created our ALR in 1974.
Alberta and Manitoba also have similar
regulations to Saskatchewan that restrict the ownership of agricultural land to
predominantly Canadian interests. In
Quebec you need to be a Quebec resident for at least 366 days before one is
eligible to purchase farmland. On Prince Edward Island you need to get approval
to purchase more than 5 acres (not just farmland) if you are not a provincial resident.
Obviously the protection of farmland has been
of interest to Canadians for several years now.
It would be interesting to sit with policy makers at the time that these
Acts came into being to understand the factors that led to their creation and
the general climate at the time.
Certainly the recent global surge in farmland acquisition has had
significant impacts in other parts of the world with respect to raising the
question of foreign ownership.
From a global perspective, Saskatchewan
farmland is considered to be very affordable.
Couple this with a stable Canadian government, strong financial system,
and many other factors, and it’s easy to understand the interest in our
agricultural sector. Saskatchewan land
prices would undoubtedly be much higher today if not for Saskatchewan’s policy.
In fact, prices have gone up.
Determining one single factor for their increase is challenging, but at
least part of the increase is certainly due to the change in the policy in 2002
allowing any Canadian interest to acquire land.
I imagine we would be looking at a very different picture if there were
no restrictions at all.
It is interesting that many of our provinces
felt it was important to develop foreign ownership restrictions on agricultural
land. I am guessing that the protection and control of our food supply is
deemed to be important to the economic welfare, the social fabric, and the
safety of many of our communities. When
it comes to residential real estate however, there does not appear to by any
such consideration. Perhaps what we should be considering is that the 'product' produced by residential real estate must be consumed locally. The product produced by agricultural land however can be consumed globally. On the flip side of this argument however is if foreign investment raises local prices beyond the reach of those tied to the local economy, they are unable to source cheaper housing from abroad much like you would buy apples from Washington state.
Perhaps we treat residential real estate as an investment to a greater degree than we should - to the benefit of some, and to the detriment of others. Food, Shelter, and Clothing. These are motherhood issues. Perhaps we should ask ourselves what place the government has in the regulation of these basic human needs. It’s an interesting thought.
Perhaps we treat residential real estate as an investment to a greater degree than we should - to the benefit of some, and to the detriment of others. Food, Shelter, and Clothing. These are motherhood issues. Perhaps we should ask ourselves what place the government has in the regulation of these basic human needs. It’s an interesting thought.