Vancouver Housing Prices are NOT caused by foreigners

A recent article titled "Vancouver housing prices tied to China’s economic growth", Barbara Yaffe quoted two "experts" (David Ley and Robin Wiebe) who will tell anyone who will listen that "housing prices here [in Vancouver] are tied inextricably to purchase activity by foreign buyers." You'll find the use of words like "coincide," "relationship," and "exceptional correlation" between 1) periods of faster growth in China and growth of Vancouver's housing market, 2) house sales and housing starts and GDP growth in China, and 3) international immigration to Vancouver and the city's property prices. Nowhere do we see the words "cause" or "leads to."

Correlation is mostly meaningless, especially when you're using it in the way that David Ley does (see Figure 5.8). One commenter says:

I work at the same institution as Professor Ley, but still I must critique the "evidence" presented in the graph. Perhaps there is more elsewhere in the study, but Figure 5.8 does not provide evidence of anything.
A correlation of 0.94 or 94% looks impressive, but those who know statistics will understand that in the analysis of time-series data, one cannot just correlate the level of something (house prices) and the level of something else (immigration). It is very easy to get very high correlations. Don't believe me. Just try computing the correlation of the house prices with your age. I did. Guess what--the correlation is 94.5%. Evidently, my age predicts Vancouver house prices better than net immigration. Obviously, you can put in anyone's age and the result would be the same.

You can see more examples of ridiculous correlations at spurious correlations, like "US spending on science, space, and technology correlates with suicides by hanging, strangulation and suffocation" (0.992) and "Divorce rate in Maine correlates with Per capita consumption of margarine" (0.993).

Repeat after me: correlation does not imply causation.

Also lacking in the Yaffe article was any serious discussion of the more obvious causes of housing price increases, such as interest rates, 0% down mortgages and 40 year amortizations in the mid 2000s, and the effect of CMHC default insurance. These all have a real effect on housing prices. There was a singling out of Vancouver, and no discussion of all the other Canadian cities that have experienced similar relative price increases, and no mention of all the non-foreign buyers owning multiple condos (and renting them for very little profit), thus speculating on price increases on the value of the home.

The effect that interest rates have is huge. The Bank of Canada bank rate was 6% at it's peak of the tech bubble (2000)! then the tech bubble burst and the Bank of Canada started slashing the interest rates to as low as 0.5% (2009); a swing of 5.5%! The bank variable rates are a bit more than that, I'm getting 2.2% which is about the lowest they've ever gone. So let's say 2% and 7.5% for a spread of 5.5%. To make things even crazier, throw in the 40 year mortgage which was available for a little while:

Effect of amortization period and interest rate for a $500,000 home:
$3650 monthly payment (at 7% for 25 years)
$1500 monthly payment (at 2% for 40 years)

That's with no change to down payments. Add in the effect of lower down payments (increased leveraging) due to lower requirements + CMHC default insurance, people owning multiple properties (more leveraging and speculation), and people buying more house than they can afford (if interest rates increased but they assume house value will only go up), and you have a recipe for the bubble we have today.

Finally, Vancouver has experienced the same growth in housing prices that the rest of Canada has.

All figures below are from (which actually measures same house sale pairs over time, not just "average home prices"). I downloaded the spreadsheet and calculated the total percentage increase in the index from early 1999 (data is spotty before then, some cities go back to 1990, others don't).

Winnipeg 305%
Edmonton 290%
Quebec City 285%
Vancouver 276%
Calgary 272%
Montreal 259%
Toronto 242%
Victoria 231%
Hamilton 229%
Ottawa 225%
Halifax 217%

So is the "foreigner effect" happening everywhere in Canada? Or maybe the increases are due to something other than foreigners? During a bubble people are often quoted as saying "it's different this time" or "it's different here." They always end up being wrong.


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