How to measure foreign money effect to real estate?

There could be a lot of measures telling us why locals can’t afford to buy a home in Vancouver, but here could be the closest answer: buyers with foreign funds generally don’t need bargaining. Which is why sellers can, literally, ask for any prices they desire for sales. And what would sellers do after gaining so much capital gain? Likely the money goes back into the real estate market, and the prices are like a snowball rolling down the hill, bigger and higher.

However, has foreign money necessarily been the most contributing factor to affordability problem in Vancouver? We don’t know. The more comparable sources of money are from gambling, where a jackpot can be as high as $40M+. So, why do we all blame foreign money for mishap of affordability problems here? Let’s first look at a possibly right approach to measuring “foreign money effect”.

We may assume the types of buyers who don’t need bargains are the ones responsible to lifting housing prices, and these types are 1) Inheritance, 2) competitive amount of foreign money, 3) gifts (including gambling proceeds), 4) local wealth, 5) capital gains, 6) corporations. By assuming so, we can eliminate those non-accelerators, who actually need bargains.

If we focus on foreign money along in these 6 types of buyers, we’ll also need to include all the capital gains accumulated after the initial foreign money inputs. Further, corporate buyers likely attract foreign funds as wealth management, so we’ll need to use percentage of foreign shareholders for this purpose.

Now that we established these buyer types, we can then limit our scope to those actually generating capital gains to sellers or developers, because there could be chances when buyers purchased at a bargained price, which didn’t contribute to the rise.

After these two steps, we then look at all the capital gains within a specific time frame, say, 2002 onward. And then we compare these two figures: the total foreign money effect in this time frame, and the total rise in values of the entire market in the same time frame.

Why wouldn’t I choose the difference in assessed value instead of capital gains? Two reasons: the pricing model of assessed values isn’t accurate at all; here we’re using fund/gain base comparison, as opposed to estimate market value analysis. In other words, we can only compare apples to apples, not apples to oranges.

So, how will this approach fare? I’m curious to find out, if I had data, which is very hard to get. However, this could be one of the candidates that have fewer problems in using proxies too many times, if it’s not too ideal. After all, it demonstrates how complex to reach the right numbers, and how many different ways we look at seemingly simple subjects.

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