It's interesting how this seems to play out politically.
- Wealthy foreigners purchase property primarily as an investment.
- Said property is left vacant or only used infrequently.
- Locals that would otherwise have lived in these wealthy neighbourhoods start purchasing elsewhere.
- A chain reaction occurs putting pressure on prices down through the market.
- This is interpreted as a shortage of homes.
- Poorer immigrants are blamed for the increased demand.
I'm certainly not suggesting that this is sole reason for rising property prices (I think buy-to-let is probably a bigger issue), but I think that the simple assumption that most people make - i.e. that there is simply a shortage of homes is lazy and likely incorrect. There are two sides to the supply and demand equation and the typical focus on the supply side as the underlying issue is problematic.
In my opinion, more attention should be given to the demand side of the equation. A speculative boom creates demand - not for homes but for 'investment' opportunities.
There is a survey carried out each year in Melbourne (a city with similar property market problems to London and Vancouver) by an organisation called Prosper Australia. It is called the 'Speculative Vacancies Report' and is conducted using an interesting methodology.
Typically, the vacancy rates you hear about in the media are sourced from the real estate industry and are collected by asking agencies what percentage of properties on their books are currently vacant. A typical response is something like 3%.
The Prosper Australia report instead looks at water usage per property and shows much higher vacancy rates (close to 30% in some areas of Melbourne). Interestingly, higher vacancy rates correlate with areas that have higher price appreciation. This is not at all intuitive if you assume a simple relationship between supply of residences and demand for homes. It is more understandable if you consider that the demand side is in large part driven by people seeking speculative investment opportunities rather than homes.
Given all of this, I think that the solution is not to be found in building more homes (likely to make any crash worse) but in making property less attractive as an investment. In many markets, this wouldn't mean punitive measures but instead removing existing incentives and possibly better regulation of lending so as to ensure banks and investors are left in no doubt that the risks they take when speculating (especially leveraged speculation) are their own responsibility and the taxpayer will not prop up the market for their benefit when prices stop rising (I say 'stop rising' and not 'fall' here because in a speculative boom that should be sufficient to lead to a fall if it lasts long enough).