A 'China Shock' to home prices: U.S. Federal Reserve study

Study used methodology deemed racist by some in Vancouver's housing debate.

Andy Yan is the director of Simon Fraser University’s City Program. | Submitted

A June 2020 study by the United States Federal Reserve that concluded the country’s residential real estate market experienced a “China Shock” of foreign investment utilized similar methodologies of a 2015 Vancouver housing study that has since been pilloried by developers and civil rights activists alike for alleged racist undertones. 

However, the reserve’s findings go to the root of public policy proposals by Canada’s three major political parties, which have all vowed to curb foreign investment in the housing sector — particularly in major cities — with taxes and temporary bans on foreign purchasers. 

The reserve’s discussion paper by reserve board members Sheng Shen and Calvin Zhang and Peking University HSBC Business School researcher Zhimin Li concluded, “residential real estate capital inflows from China significantly induce higher house prices and employment in the local economy.” Such impacts can buffer the local economy against downturns, such as the one in 2009, but also have negative consequences for lower-income residents and induce gentrification by forcing locals to move away. 

The study claims it was “conservative” in its findings as it acknowledged a data gap in determining the extent of foreign purchasers. However, it came to its conclusions by grouping non-Anglo-American names, which is exactly what housing researcher Andy Yan did in 2015 to estimate the scope of Chinese investment in Vancouver’s housing market. 

The study only used cash deals and eliminated purchases made with U.S. lenders, as foreigners are three times more likely to purchase in cash. The study adjusted for American residents with non-Anglo-American names as well as the known proportion of those with Anglo-American names who buy with cash. 

Yan’s 2015 research was a six-month snapshot of 172 detached home sales in Vancouver’s wealthy west-side area. It showed 66% of purchasers had non-Anglicized Chinese names. Some politicians, such as then-Vancouver mayor Gregor Robertson, developers and anti-racism activists publicly criticized the study as racially insensitive, or racist. 

Yan’s study came under fire again last February at the Commission of Inquiry into Money Laundering in B.C., from the BC Civil Liberties Association, whose claims appear at odds with the reserve’s study. The association asserts on its website that anti-Asian racism “played a significant role in public discourse about money laundering in British Columbia.” 

The association asserts online, “contrary to popular belief, foreign investment is not a major factor driving B.C.’s skyrocketing housing prices.”

To back its claim, it cites testimony from the BC Real Estate Association, which also admits it has no conclusive data on foreign ownership, nor has it produced any studies using the granular data produced in the reserve’s study. 

The association, an intervener in the inquiry, questioned Attorney General David Eby about Yan’s study, which he assisted (as an opposition MLA for West Point Grey) by providing property transaction records to Yan. Eby said he regretted that the study cast aspersions on the Chinese community. 

The association’s lawyer Jessica Maginot also asked a panel of housing researchers: “Would it be the view of the panellists that this 2015 study may not be able to tell us very much about foreign ownership in this area of Vancouver?” 

SFU professor Josh Gordon said the study aligned with a disconnect between average incomes in the area ($100,000) and average house prices ($7 million).

“I think subsequent data has borne out [Yan’s] contention that this might be indicative of funds flowing in from abroad,” said Gordon. 

Yan, director of Simon Fraser University’s City Program, did not have the opportunity to defend his study at the inquiry but told Glacier Media, tongue-in-cheek, that the reserve’s study must be “super racist, with a capital R,” if his is. 

“This work is documented. You look at the methodologies. They're using an algorithm from 2006. I mean, similarly, my research follows a particular chain of methodologies that you see has been established for over 20 years,” said Yan, who adds that both studies are largely a result of poor data collection by governments (although the reserve authors had a “much richer” data set than he did). 

The reserve’s study determined Chinese government home purchase restrictions and capital controls led to a surge in demand by Chinese nationals between 2007 and 2013. Whereas other foreigners slowed their buying during the economic downturn of 2009, Chinese purchasers only went up in numbers. And that demand was eight times greater in neighbourhoods with already established Chinese populations. The study used county property transactions and a home value index. 

It does not definitively draw a figure on the impact, other than to state a one standard deviation in foreign purchases from one zip code to the next contributed to a 15% increase in house prices. 

The study also found a negative relationship between foreign Chinese housing transactions and the number of tax filings. 

“The observation that foreign Chinese housing purchases are not accompanied by an inflow of migrants could be reconciled with anecdotal evidence that foreign Chinese tend to leave their houses abroad vacant,” the study suggests. 

Such a finding goes to the root of B.C.’s speculation and vacancy tax, which aims to do two things: make homes available for rent and cross reference home purchases with tax filings. 

The study found a positive correlation between Chinese purchases and the local service sector, or what’s called “non-tradable employment.” 

Finally, the study concluded “because low-income households are more likely to be renters, these results imply that foreign real estate capital inflows are more likely to push out local renters into less costly neighbourhoods. In other words, foreign Chinese housing transactions induce gentrification effects in local economies.” 

gwood@glaciermedia.ca