Tuesday, March 4, 2014

Tues Post #2: Chinese Millionaires In Beijing Upset Canada Terminating Investor Program, Threaten to Sue

Last month, while we were enjoying a bit of a break, one of the bigger news stories was the fact that Canada axed the Immigrant Investor Program (IIP).

The announcement, delivered by Finance Minister Jim Flaherty as part of the government's new budget, meant that an estimated 45,500 mainland Chinese in the queue for visas in Hong Kong would have their applications "eliminated" and their fees returned.

The program had been in a state of limbo since 2012, when applications to the scheme were frozen.

Under the scheme, would-be migrants worth a minimum of $1.6 million loaned the government $800,000 interest-free for a period of five years. The simplicity and low relative cost of the risk-free scheme made it the world's most popular wealth migration programme.

But as Flaherty noted in his budget speech which axed the program:
"For decades, [the investor scheme] has significantly undervalued Canadian permanent residence, providing a pathway to Canadian citizenship in exchange for a guaranteed loan that is significantly less than our peer countries require."
The Immigrant Investor Programme, which has brought about 185,000 migrants to Canada, was instrumental in facilitating an exodus of rich Hongkongers in the wake of the 1989 Tiananmen crackdown and in the run-up to the handover. More than 30,000 Hongkongers immigrated using the scheme. About 67,000 mainlanders have migrated to Canada under the IIP.

Many believe that influx flowed largely to Vancouver and was instrumental in rapidly inflating our current housing bubble.

Ian Young, who writes for the South China Morning Post, attempted to quantify what the elimination of the program might mean for Vancouver real estate:
High property prices are the defining factor of life in this city. Yet despite a wealth of punditry, few have tried to actually calculate the potential impact of the demise of the millionaire migration scheme, which has brought tens of thousands of rich Chinese and others to Vancouver. 
So here goes.

From 2005 to 2012, the federal IIP brought 36,951 rich people to British Columbia. That’s an average of 4,619 per year, representing 1,340 households at current averages under the scheme. A 2011 study showed 90.4 per cent buy homes, suggesting 1,211 actual purchasing households per year have been removed from the Vancouver market by last week’s decision (since almost the totality of BC investor migrants live in its largest city). This is equivalent to only 4.25 per cent of the 28,524 residential sales in greater Vancouver last year.

At this stage it’s crucial to note that reducing the sheer number of sales doesn’t necessarily move a market down (the worst week of the 2008 stock market crash saw record trading volume in New York). But extracting buyers who pay above prevailing prices certainly does.

And I can think of six “known unknowns”, five of which will undoubtedly increase the impact of those 1,211 lost households.

First the relatively good news - for owners, anyway. We don’t know how many would-be IIP arrivals will find some other way of getting to Vancouver. Some will. Most probably won’t, because if options other than a years-long queue for the costly IIP existed, they would have taken them.

And now for the five scary bits, that will assuredly magnify the impact of those lost purchasing households.

  • 1. Investor migrants are rich, so they buy more costly properties, and it’s the price of expensive detached homes that fuel Vancouver’s market. Condo and townhouse prices rose by a third from 2005 to 2012, but detached prices doubled. Under the most recent IIP benchmarks, principal applicants must have been worth a minimum of C$1.6 million. Compare that to the Vancouver average household worth of C$662,600 (Environics Analytics).  
  • 2. Some IIP households buy more than one property in Vancouver. 
  • 3. Some high-value purchases have a cascade effect through the market. For example, when a Chinese investor immigrant pays C$3 million for an elderly widow’s rancher on Cambie Street, that sale triggers the purchase of a three-bedroom townhouse in Kitsilano and down payments on condos for her two adult children. Such things happen - not always, but sometimes.  
  • 4. Now for one of the two biggest concerns. Our calculations so far only cover actual arriving immigrants. But how many of the 65,000 would-be immigrants who were dumped from the IIP queue last week had already bought in Vancouver? Of the applicants from 2009-2011 who made up the bulk of the backlog, 62.8 per cent were bound for BC. That’s an estimated 11,866 households. Not only have these households been removed from the pool of future purchasers, it’s reasonable to assume that some will soon be liquidating existing Vancouver holdings.  
  • 5. The final unknowable is human nature. Already talk of an impending disaster in the market is a feature of Chinese-language forums. How many non-IIP owners will head for the exits too, and how fast will they do so? 
To be sure, there is no way of telling how much these five factors will come into play. But let’s make some conservative assumptions regarding the first three. Imagine that homes bought by IIP households cost twice as much as the average residential sale; considering that the rich Chinese who make up 81 per cent of Vancouver’s investor migrants are concentrated in expensive neighbourhoods of Richmond and the Westside, that’s not a stretch. Now imagine that each home-purchasing IIP household buys not one, but two properties (over how many years? Irrelevant, since the effect will be annualised over time). And let’s say that an IIP purchase triggers another purchase that would not otherwise have occurred in 25 per cent of cases.

The annual effect of the extraction of those 4.25 per cent of sales doesn’t look so insignificant anymore. On a dollar basis, our scenario balloons the figure to 21.25 per cent in lost sales per year. This estimate applies across the entire market; the effect will be magnified in the Westside and Richmond.
The actual impact remains to be seen and it's a story local real estate watchers are following very closely.

Which brings us to todays developments (and you gotta love this).

At a news conference in Beijing yesterday, 10 IIP investor applicants pleaded to the Government of Canada not to dismiss the 45,500 applications that had been frozen in the system.  Their desire?  Process those applications before terminating the program.

It seems while waiting for their approval, many of those 45,500 applicants had already come to Vancouver, bought homes and had enrolled their children in schools here.
Father-of-two Yu Qingxin, who manages commercial buildings, schools and hospitals in China, said he had already bought a house in west Vancouver for nearly $2 million Canadian dollars ($1.8 million) in preparation to emigrate… 

Another applicant, Du Jun, said he had moved his child out of the Chinese school system to a Canadian school near Beijing. Now, after two years studying at this school, it is almost impossible for his child to return to the Chinese education system, he said.
But now, with the termination of the IIP and the pending applications terminated, investor applicants (some of whom had applied five years ago) are discussing their options with lawyers in Canada and whether to claim compensation for the years they had been waiting.

Immigration consultant Larry Wang said that Canadian government's policy was "unjustified" and the investor applicants want Canada to "correct its mistake."
"They are not refugees. They can have a very good life in China. They just want to have a better life in Canada," said Wang, a Beijing-born Canadian.

Wang said it was Canada's right to stop its investor program, but it should not disqualify candidates who had already applied.
Umm… perhaps the issue here is that those applicants shouldn't have considered their application a fait accompli?

If you moved to Canada before being approved and then you application was, in effect denied, is Canada really to blame for your gamble?


Email: village_whisperer@live.ca
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  1. If I buy a lottery ticket and don't win can I sue?

  2. Such hubris from the rich! Too bad, so sad!

  3. No doubt the government (ie. us) will pay them a fortune, either as an out-of-court settlement, or as restitution once our legal system rules in favour of the plaintiffs. Why is it that the Canadian taxpayer getting screwed over by the one-two punch that is our own 'justice system' (...urrrppp..) and government is 'business as usual' here? And they come up with new stuff and new ways every day.

  4. LOL !!! - hey Chinese this is what any country can do. Makes me smile that " China wants justice". Australia simply restricts foreigners to by real estate, Canada opened the door and now we have a gas bag of debt ready to implode. I've seen too many folks in Vancouver that came here as "investors" flipped 2-3 houses over last 10 years without any income tax paid, educated kids as residents and then moved back to Hong Kong. Not exactly an asset to Canada.

  5. Straight from the government's mouth:

    “There is little evidence that immigrant investors as a class are maintaining ties to Canada or making a positive economic contribution to the country”

    "immigrant investors pay significantly lower taxes over a lifetime than other categories of economic immigrants."

    There are no grounds to sue on. Canada doesn't owe foreigners anything. Its just a bunch of rich people crying because they didn't get their way.

  6. All I can say is "Tough SH*T"

  7. These people give the word "opportunist" a bad name. Take-take-take is all they know. Why don't they stay in their own country and try to make it better for themselves there?

  8. My tip to the poor IIPs don't stare directly at the sun, or pet a burning dog

  9. Boo hoo. Because these guys went on a housing binge, people who actually work and pay taxes here have to dedicate 90%+ of their income to crappy old houses on slivers of land. Bad trade. A better life for them looks to be equaling a crappier life for those already here.

  10. A lot, if not most of these Chinese millionaires made their money off the backs of their fellow countrymen; either by direct corruption (stealing) or by running sweatshops where their employees make $1.50/hour. They also pay very little tax in China which also shortchanges those who are less fortunate. Then they want to emigrate to Canada where they can take more from us while contributing nothing all the while protecting their ill-gotten gains.

  11. they can just put it into bitcoin. problem solved:D ???

  12. If the applicants do not lie on their application and when they come to Canada, they would stay and contribute. I am sure IIP will not be gone.

  13. To be fair, there is a huge spillover effect every time a property changes hands; hardware is purchased, renovations take place, and trades are engaged and yup, real estate commissions too! That helps out the economy.
    But it is difficult to surmount the feeling that wealthy offshore homebuyers pay little but property tax here. Were there a method by which a resident would be deemed to have earned an amount equal to the amount required to sustain a conventional mortgage on their property as Canadian income, these folks would at least have to pay some income tax equivalent to their residential lifestyle.
    Our Income Tax Act never contemplated that an offshore spouse would generate tax free income to send over as a tax free gift to his other half living in a large house. It was never in the contemplation to have a policy which discouraged a unified family under our legal system. But hey, what's legal is legal and if foreign families want to break up to take advantage of our tax laws which are governed by residency, then they are able to do so.
    Interestingly enough, a Canadian trying to exit to a tax haven country, and leaving his family behind, would not likely be as successful in being able to avoid Canadian Taxation. So the system is more fair to the Chinese offshore income earners than it would be to Canadians who elect to move offshore.... at least for a period of time!

    1. IIP immigrants settling in metro Van only averaged 3,000 per year. Last year there were 45,000 home sales in Metro (north and south of Fraser). 3k amounts 7% of sales. Not a big loss.

  14. So many posters are obviously mad at the peole who take advantage of the program...why is there no anger toward the sad sack government that put it in place, and the inept bureaucracy that let it run wild? Is racism a more motivating emotion than caring that your own country is being run like a backwards banana republic?

  15. Well its a step in the right direction. Now if we could just deport all the junk that came here, used all our services, built ugly houses, raised ICBC rates and paid no tax.

    Nice to see the Harper Govt get it right for once...could be a game changer. They need the white man's vote.

  16. Good, now maybe homes will be more affordable for our kids in the near future!!!!!!!!!!!!

  17. great to see our gov.finally standing up to these greedy little dicked hellions!!!!!! maybe...just maybe my kids can have a house with a nice yard in the loser mainland!

  18. ​It is senseless to accept investor immigrant applications if there is no program in place that can predict how many will be processed and/or process those accepted. Limiting intake of applications may make sense, instead of accepting limitless numbers and ending up disappointing thousands of people.