New Wealth Seeks a “Home”: The Rise of the Hedge City

 Jessica Dorfmann  April 15, 2015  36(3) Spring 2015, Economics, North America, World in Review

Cherry blossoms line a residential street in Vancouver. The average detached home on Vancouver’s west side is valued at $1.8 million CAD.
Photo by Wendy Cutler. [CC by 2.0]

Vancouver is a city in flux. A stroll through one of its residential west-side neighborhoods reveals blocks and blocks of construction sites, for-sale signs, and ostentatious new mansions, often left vacant. The west coast Canadian city is North America’s least affordable urban housing market. Local incomes and property prices are extremely out of sync—Vancouver has the median income of Reno (roughly $70,000 CAD) and the skyrocketing property prices of San Francisco (the average detached home on Vancouver’s west side is valued at $1.8 million CAD). Vancouver’s imbalance may reek of a domestic housing bubble, particularly in the wake of the US real estate crash of 2007, but its story is quite different. The city’s property prices have been inflated by massive foreign investment from Mainland China. It has become a “hedge city”, a safe financial haven for China’s wealthiest investors. The Vancouver experience speaks not only to the globalization of the world’s real estate market, but also to the political structure of China and other large countries, most notably Russia, that pair capitalism with authoritarianism. Real estate markets in Vancouver as well as Sydney, London, Hong Kong, and Singapore have been transformed by Chinese and Russian money as investors seek to protect themselves against risk at home. What does the future hold for these hedge cities? And does this movement of capital represent a vote-of-no-confidence in the stability of capitalist authoritarianism?

Vancouver, at first glance, appears an odd choice of city for large-scale investment. The city of two million is Canada’s third largest metropolitan area and consistently ranks amongst the top five cities in the world for livability and quality of life, but it lacks a major industry or the cultural significance that draws foreign capital to cities like San Francisco, New York, and London. By all accounts, Vancouver appeals to investors for more mundane reasons—the city is socially and politically stable, comfortable, and in close proximity to Asia. According to Vancouver urban planner Andy Yan, who coined the term “hedge city”, Chinese investors are not on the lookout for the most profitable cities, but rather “places where they can park some of their cash and feel safe about it.” After all, the security of capital in China is uncertain—economic freedoms abound, but the government maintains the power to expropriate property at will. Just last summer Chinese President Xi Jinping launched a massive anti-corruption campaign that some accused of targeting the assets of political competitors and wealthy critics of Beijing’s elites. Chinese real estate purchases in Vancouver are not intended to produce enormous returns, but to hedge against crisis. In fact, Yan claims that the prospect of property investments losing value is not a major concern for Chinese buyers. Losses of 10 or 20 percent on foreign properties still beat losing everything at home.

But hedge cities are not just about storing money. There are many locations and assets outside of China where capitalists could choose to stash their savings, but there is particular prestige and pragmatic benefit to owning a home in Vancouver and other hedge cities. Home ownership is a form of “conspicuous consumption”–owning an extravagant mansion in an exclusive neighborhood is a more visible display of wealth than a Swiss bank account or a safe of gold. Hedge cities tend to be places the ultra-rich in China and Russia are inclined to visit and even live. These individuals could afford to stay in the Four Seasons penthouse suite, but a permanent vacation home in a desirable city offers significantly more status. Not only that, but Chinese capitalists will often follow their wealth to Vancouver, Sydney, and Singapore. They invest in residential properties because these allow them to split their lives between China and a foreign city. Vancouver’s real estate boom is correlated with a steady stream of foreign immigration of a very globalized nature. Wealthy immigrants will live part of the year in Canada while maintaining their lives and lucrative business ventures back in China. This explains how Vancouver home prices have become so out of step with local incomes–homebuyers are generating their wealth outside of the country. It has also become common for wealthy capitalists to settle their children in a hedge city while continuing to live and earn money in China, the so called “astronaut family” phenomenon. In a sense, astronaut parents are using foreign cities to protect their families along with their capital. The children can learn English and take advantage of the educational opportunities in a Western city while the parents support them with the high salaries they earn back in China.

With this in mind, it becomes easier to understand why Vancouver is an appealing hedge city. Not only does it routinely top the aforementioned rankings for livability and quality of life, but it also has the mildest climate of any Canadian city, strong grade school and university systems, and a large, preexisting Chinese diaspora community. All of these factors, paired with a stable housing market, make it an ideal location for investors to cache their money and live out a portion of their lives. Singapore and Sydney share many of these qualities–both cities have long had significant Chinese populations and are attractive places to live and attend school. London also has a large Russian community and many Russian language schools that allow Russia’s ultra-rich to settle there comfortably. Investors could store their money in many stable assets, but owning a luxury home in a great city offers perks that other value stores simply cannot.

A home under construction in West Vancouver, BC.
Photo by Pacific Northwest Regional Architecture. [CC by 2.0]

But what is life like on the receiving end of Chinese and Russian investment? Masses of foreign capital bring both good and bad to hedge cities. On one hand, foreign investment in real estate is a boon for existing property owners. Vancouverites who purchased homes in the early 2000s or prior are now sitting on land worth, on average, three times as much. Many are choosing to sell and downsize or head to the suburbs with a hefty lump sum payout. The construction boom has also stimulated the Vancouver economy and provided ample tax revenue for the municipal government. However, Chinese investment has created an affordability crisis for what should be the next generation of local property owners. The Vancouver housing market has become prohibitively expensive for young people and families to buy into. Vancouver now has the world’s second highest housing prices relative to local income, trailing only fellow hedge city Hong Kong. Rental properties are also becoming more and more pricey, and new house construction is eliminating basement suites and rental units needed by students. While many foreign investors live at least part of the year in Vancouver, a growing portion of homes are purchased and left empty. This trend has disturbing consequences–certain neighborhoods are emptying out as new properties are left unoccupied after construction. A survey done in one wealthy downtown neighborhood found a quarter of purchased condominiums to be uninhabited. This is perhaps the most damaging form of investment as it inflates real estate prices and reduces available housing without contributing to the community or economy.

It is unclear whether foreign real estate investment is on balance good or bad for hedge cities. But the different cities have reacted to it in a variety of ways. In response to Russian investment, London introduced a special levy on homes left vacant. Hong Kong, Singapore, and Sydney have all enacted tax or legal barriers to property purchases by foreigners. And Vancouver has considered new methods of densification to address the lack of affordable housing. For better or worse, no city has found a way to halt the flow of foreign capital and the massive changes it brings. So long as the push factors in China and Russia remain strong, the money will continue to come.

These push factors themselves warrant examining. The hedge city trend says just as much about Chinese and Russian politics as it does about Vancouver, Sydney, and London. The late 20th century saw the rise of a new regime type that paired a capitalist economy with authoritarian politics. In both China and the Soviet Union it became evident that centrally planned socialism could not effectively compete with capitalism. China under Deng Xiaoping and Russia after the fall of the Soviet Union opened up to global economic competition and permitted individual citizens ownership of assets, allowing them to amass wealth. Economic freedom increased greatly, but political freedom continued to be stifled. Citizens in China and Russia are allowed a degree of economic autonomy and other private freedoms (for example, the rights to travel and emigrate freely), but denied public freedoms or legal recourse against the government. In a way, the economic reforms have actually contributed to the legitimacy and popularity of China and Russia’s governments by generating prosperity and development to shield against discontent. But the rise of hedge cities may indicate a crack in the armor. Simply put, it hints at doubts about property rights under capitalist authoritarianism. Human Rights scholar Michael Ignatieff has described the legal situation in Russia and China as “rule by law” as opposed to “rule of law”. There is enough procedural regularity for capitalist economics to function – business deals can be made and contracts are generally honored – but there is no protection against arbitrary government crackdowns or property expropriation. Capital can never be completely secure under authoritarianism and, as such, Chinese and Russian capitalists are scrambling for security abroad.

By pairing capitalism with authoritarianism, China and Russia have ended up with imperfect versions of both–property owners don’t feel secure and the regimes have lost some of their dominance.

Hedge cities signify a potential source of discontent amongst the most affluent members of Russian and Chinese society, and they also reveal the trade-off that authoritarian regimes face when they embrace free market capitalism. By entering the global economy, illiberal governments sacrifice a degree of control over their citizen’s wealth. The very fact that Chinese and Russian capital owners can offshore their money is a mark of government weakness. Will this weakness spell the end of capitalist authoritarian regimes? Probably not. But it is a genuine source of vulnerability that these governments should find alarming. A recent survey of high-net-worth individuals by Barclays found that almost half of Chinese respondents planned to emigrate within the next five years. By pairing capitalism with authoritarianism, China and Russia have ended up with imperfect versions of both–property owners don’t feel secure and the regimes have lost some of their dominance.

In the era of globalization, the challenges and contradictions of capitalist authoritarianism cross oceans and are reflected in cities half a world away. Vancouver today bears little to no resemblance to the city it was 20 years ago. Whole neighborhoods are under construction. Each year nearly 20,000 new homes go up, a number that far outpaces the city’s population growth. All this change begs the question—how long can Vancouver sustain these levels of growth and investment? And what will a sudden crisis in Beijing mean for Vancouver and other hedge cities around the world so closely tied up in Chinese politics? Across the Atlantic, Russia’s recent economic woes have created mayhem in the London housing market. As the ruble tumbled in value at the end of 2014, Russia’s super-wealthy panic-bought London real estate, while moderately wealthy Russians scrambled to pull out of the market. As a result, demand for London’s most expensive properties—homes worth £20 million or more—has skyrocketed just as the market for mainstream properties has crashed. This chaos in London may be a glimpse into the future of cities like Vancouver, Sydney, and Hong Kong. Hedge cities can hope for the best, but in a truly globalized real estate market, their fates are out of their hands.