Canada's 'housing bubble' deemed close to bursting

[bless-u]

Originally Posted by geotag277

I do wonder how many individuals who cash out even stay in Canada. Consider the case of Pinion who is planning on cashing out and moving to Australia, in which case, Canada loses both capital gains taxes on primary residences and the benefits of injecting that money into the economy.

A lot of them do remain in the country, in fact, in the same city. Some choose to lease the house back from their buyers. They reckon it is cheaper to rent than shoulder a huge amount of mortgage debt in this crazy market. It is especially true when the interest rate is moving up. They prefer to have greater liquidity instead. It's better than being house poor. Major cities around the world like London and Sydney are having the exact same problem as that in Vancouver and Toronto. Same cause, same outcome. If I am correct, Australia has a better and stricter policy in place in comparison.

[Pinion]

.

[ssiguy]

The Chinese money launderers have taken the usual supply & demand scenario out of the real estate market.

In normal cities people sell their house due to work, divorse, change in family size etc as has always been the case and if there are many listings and demand is low then inventory rises and prices decline but this no longer happens in Vancouver. Vancouver & all of BC has been living off this dirty money since the fall of Hong Kong in 1989 with the Chinese buying multiple homes with cash to park their money, avoid taxes, and flip at a later date. Now there are so many Chinese who own so many houses that supply & demand no longer applies.

A family may own 10 houses but are no need of selling so when they don't get the price they want they simply take them off the market greatly reducing supply and hence even in years of relatively slower sales, prices continue to rise due to lack of inventory. This unfortunately will continue as the NDP doesn't seem to have to stomach to do anything about it because Vancouver and all of BC has become so dependent on real estate for economic growth and government revenue that any major changes would sent the province into a very steep recession.

Greatly curtailing the money laundering in real estate in Vancouver is now like asking the Ontario government to shut down the auto plants in Windsor. The problem of course is that those auto plants are productive and actually produce something while housing produces nothing but money cha nging hands.

[ssiguy]

In 2016 BC's real estate/construction sector accounted for a whopping 18.4% of GDP compared to 11% for Quebec, 12% for Alberta, and 13% for Ontario. This puts them grossly out of touch with the rest of the country.

This 18.4% is compared to oil & gas in Alberta making up 17% of GDP but even this is misleading when considering the vulnerability of BC when it comes to real estate. BC has a NEGATIVE savings rate of 1% per year which it has had nearly every year this millenium while across the Rockies Alberta has a savings rate of a whopping 9%. BCers are not only more reliant on real estate for their jobs than anywhere else in the country but also, by far, and the most exposed to a downturn in the economy due to having no savings and being the most indebted people in the country all at a time of rising interest rates. and tighter CHMC rules.

This is the dilema that the NDP are facing. Even if they wanted to crack down on real estate speculation {which I am increasingly starting to doubt} they can't because any major slow down in the flow of dirty money could throw the province into a severe recession resulting in huge job losses and due to BC"s government relying on property tax sales, a major hit to government revenue.

[lio45]

Originally Posted by geotag277

I do wonder how many individuals who cash out even stay in Canada. Consider the case of Pinion who is planning on cashing out and moving to Australia, in which case, Canada loses both capital gains taxes on primary residences and the benefits of injecting that money into the economy.

True. In fact it greatly depends on these percentages: how many pack up and leave versus how many stay and move somewhere else.

If for each Pinion we have a someone123 who, if offered $4M in cash for his condo, might move back home to Halifax, buy a nice $300,000 condo in the heart of the downtown, and use a few of his spare million to launch a high-tech startup that would employ Haligonians, we're overall likely winning. (Basically adding one link to create a little chain: while as previously discussed the Chinese multimillionaire is understandably not interested in investing in anything productive themselves, the Van-property-selling Canadian who gets their hands on those Chinese millions may step up to the plate and do just that with them.)

But yeah, obviously, my argument about the net result being a substantial infusion of external money into Canada totally crumbles if we've got data that shows that all Canadians who get their hands on such foreign money that falls from the sky (from Canada's POV) pack up and leave the country with the aforementioned money. We're back to square one AND we've replaced people by absentee owners, so, net negative for sure.

However, just a feeling, but I'm pretty sure most Vancouverites cashing out are 1) Canadians and 2) boomers. Both these characteristics together mean they're unlikely to leave the country, IMO. You don't want to uproot yourself at that age, and their kids are likely in Canada (maybe there's one or two in Calgary or Ottawa or Toronto, making it even more of a no brainer to leave Van after winning the lottery and use the opportunity to move closer to a kid).

[lio45]

Originally Posted by ssiguy

In 2016 BC's real estate/construction sector accounted for a whopping 18.4% of GDP compared to 11% for Quebec, 12% for Alberta, and 13% for Ontario. This puts them grossly out of touch with the rest of the country.

This 18.4% is compared to oil & gas in Alberta making up 17% of GDP but even this is misleading when considering the vulnerability of BC when it comes to real estate. BC has a NEGATIVE savings rate of 1% per year which it has had nearly every year this millenium while across the Rockies Alberta has a savings rate of a whopping 9%. BCers are not only more reliant on real estate for their jobs than anywhere else in the country but also, by far, and the most exposed to a downturn in the economy due to having no savings and being the most indebted people in the country all at a time of rising interest rates. and tighter CHMC rules.

This is the dilema that the NDP are facing. Even if they wanted to crack down on real estate speculation {which I am increasingly starting to doubt} they can't because any major slow down in the flow of dirty money could throw the province into a severe recession resulting in huge job losses and due to BC"s government relying on property tax sales, a major hit to government revenue.

Originally Posted by ssiguy

The Chinese money launderers have taken the usual supply & demand scenario out of the real estate market.

In normal cities people sell their house due to work, divorse, change in family size etc as has always been the case and if there are many listings and demand is low then inventory rises and prices decline but this no longer happens in Vancouver. Vancouver & all of BC has been living off this dirty money since the fall of Hong Kong in 1989 with the Chinese buying multiple homes with cash to park their money, avoid taxes, and flip at a later date. Now there are so many Chinese who own so many houses that supply & demand no longer applies.

A family may own 10 houses but are no need of selling so when they don't get the price they want they simply take them off the market greatly reducing supply and hence even in years of relatively slower sales, prices continue to rise due to lack of inventory. This unfortunately will continue as the NDP doesn't seem to have to stomach to do anything about it because Vancouver and all of BC has become so dependent on real estate for economic growth and government revenue that any major changes would sent the province into a very steep recession.

Greatly curtailing the money laundering in real estate in Vancouver is now like asking the Ontario government to shut down the auto plants in Windsor. The problem of course is that those auto plants are productive and actually produce something while housing produces nothing but money cha nging hands.

By the way, this kind of argument implies I'm right with my feeling that it's been a net positive...

"We can't do too much about it, because then the BC economy would decline back to what it would have been without Chinese money, and that would be bad!"

That's analogous to, say, me arguing that oil has been a net positive for Alberta's economy, while someone else insists that it's not true, while still admitting we can't realistically shut down the oil sands because otherwise Alberta would revert to approximately having the still-decent-but-lower population and economy of a farming/ranching prairie province without oil, and that wouldn't be acceptable...

Basically if everyone agrees that shutting down X would cause major economic damage, then it follows that everyone should agree that X is overall economically positive even if it may have other perverse side effects, whatever X is.

[geotag277]

Well, another morbid angle to boomers dominating the demographics is they are getting old and dying off. We also have to remember that Canada doesn't have an inheritance tax either, so if boomers are cashing out 1 million in capital gains, you also have to assume they will spend the majority of that and not park it in safe, secure retirement funds and live out the rest of their days maintaining their non-rock star lifestyle, even if they don't leave Vancouver.

IMO in most cases the main beneficiaries will be the boomer's children, these people on average aren't going to blow through a million dollars in 10 years, in which case the mobility equation changes dramatically.

Just to throw some numbers out there, if 50% of the people cashing out end up departing Canada, ala Pinion, then even if we assume the other 50% end up spending 100% of their capital gains in Canada, that means with an average of 1 million capital gain on cash out, Canada only really realises 500k of capital gains on transactions. If the average capital gain amount was 600k instead of 1M, and that difference caused people to remain/spend money in Canada, that would be a net benefit to Canada as a whole.

Purely theoretical numbers, but we might be approaching a scenario where it isn't too far off.

[someone123]

Originally Posted by lio45

If for each Pinion we have a someone123 who, if offered $4M in cash for his condo, might move back home to Halifax, buy a nice $300,000 condo in the heart of the downtown, and use a few of his spare million to launch a high-tech startup that would employ Haligonians, we're overall likely winning. (Basically adding one link to create a little chain: while as previously discussed the Chinese multimillionaire is understandably not interested in investing in anything productive themselves, the Van-property-selling Canadian who gets their hands on those Chinese millions may step up to the plate and do just that with them.)

From the perspective of BC and to a lesser extent Vancouver this is pretty bad though. I won't get into how much I pay in taxes but it's a lot and it's almost all income tax (I do pay property taxes but they barely register in comparison). My employer pays taxes because I work here too. I assume the $4M cash buyer would have a declared income of $0 or so, and might spend very little in the local economy. Most of the policy decisions we talk about are province level decisions so this provincial analysis matters.

I don't think I would leave if I sold a place for $4M. But I might retire or semi-retire at the ripe old age of ~30 and travel a lot, which has its own implications for the economy.

By the way, if you owned a $4M condo in Vancouver you would probably not be very happy with a $300,000 condo in Halifax. A comparable one would likely be more in the $1M range. Halifax isn't that cheap by conventional measures of affordability, it's just cheaper than Vancouver and Toronto. It also has a lot of low value outlying areas with effectively infinite housing supply. The nice neighbourhoods are in shorter supply though and they cost a lot more.

[lio45]

Originally Posted by geotag277

Just to throw some numbers out there, if 50% of the people cashing out end up departing Canada, ala Pinion...

50% seems awfully high, no? Is that the feeling you Vancouverites have locally? If it's indeed so I can understand you would find that alarming.

If I were to guess I'd say most aren't leaving BC, let alone Canada. Many of these retiring Lower Mainland boomers cashing out are probably ending up in places like Kelowna.

[someone123]

Originally Posted by geotag277

Just to throw some numbers out there, if 50% of the people cashing out end up departing Canada, ala Pinion, then even if we assume the other 50% end up spending 100% of their capital gains in Canada, that means with an average of 1 million capital gain on cash out, Canada only really realises 500k of capital gains on transactions. If the average capital gain amount was 600k instead of 1M, and that difference caused people to remain/spend money in Canada, that would be a net benefit to Canada as a whole.

I alluded to this in my post but it's also worth thinking about the lifestyles of rich boomers versus younger people who can't afford anything and are leaving.

I was talking with friends last night and a bunch of them have wealthy parents. Most of them didn't really work much beyond 40 and their favourite activites now are things like cruises and 🞵🞵🞵🞵🞵🞵🞵🞵 trips to Las Vegas. They are usually gone during the winter. The net effect of the housing windfall is often to reduce labour force participation and increase the amount of money spent abroad even if the people themselves don't move away.

The younger person on the other hand has to work, so they have to pay income taxes and more importantly they are generating a surplus of economic activity beyond their salary. The amount of money they spend abroad is usually much more modest. A lot of these people ended up in Alberta when the economy there was still booming. Even with Alberta's not so great economy now the participation rate there is 7.3% higher than BC.

[Pinion]

.

[ssiguy]

Originally Posted by lio45

By the way, this kind of argument implies I'm right with my feeling that it's been a net positive...

"We can't do too much about it, because then the BC economy would decline back to what it would have been without Chinese money, and that would be bad!"

That's analogous to, say, me arguing that oil has been a net positive for Alberta's economy, while someone else insists that it's not true, while still admitting we can't realistically shut down the oil sands because otherwise Alberta would revert to approximately having the still-decent-but-lower population and economy of a farming/ranching prairie province without oil, and that wouldn't be acceptable...

Basically if everyone agrees that shutting down X would cause major economic damage, then it follows that everyone should agree that X is overall economically positive even if it may have other perverse side effects, whatever X is.

There are however 3 VERY big differences between BC's real estate and Alberta's oil & gas:

First, Alberta's economy is not based on dirty money, tax avoidance, immigration fraud, and real estate speculation.

Second, oil & gas actually is productive while flipping real estate creates money but doesn't grow an economy in a sustainable manner and requires very low technology.

Third, oil & gas is a commodity that people can live without while housing is a necessity of life and BC has been selling this necessity of life to the highest bidder and the fact that's it's dirty money means nothing.

[GlassCity]

Originally Posted by Pinion

As I've said before most of my high school friends got engineering degrees at UBC and fucked off to Alberta ASAP. My Chinese friends went back to Hong Kong. No one came back.

At very least the few remaining survivors have moved out to Surrey and beyond, which might as well be a different city. And this is from a wealthy area (just east of British Properties).

Let's not get too carried away with this line of thinking. Not that you're doing this, but I get concerned when people say that people should all be able to afford to live in (the City of) Vancouver. Not everyone can afford to live in the city - that's what the suburbs are for. If Vancouver was so expensive that lots of people were moving to Surrey or even Abbotsford or Chilliwack, I wouldn't really be concerned. The fact that people are moving to Alberta and Ontario is what has me more worried.

[whatnext]

Originally Posted by Pinion

Housing is not nearly as bad in Australia as Vancouver. Sydney/Melbourne should be some of the most expensive places on earth, as some of the best cities all around to live in.

Vancouver being expensive doesn't make any sense.

Im travelling in Australia right now and Sydney didn’t appear much cheaper than Vancouver. And Lots of Chinese money obviously at play in both Sydney and Melbourne.

[giallo]

^ Yeah, Sydney tops Vancouver at second place, but falls below Hong Kong in the '13th Annual International Demographia International Housing Affordability Survey' from last year.

Definitely worth a read

http://www.demographia.com/dhi.pdf

[casper]

Originally Posted by Pinion

.....
At very least the few remaining survivors have moved out to Surrey and beyond, which might as well be a different city. And this is from a wealthy area (just east of British Properties).

This is part of the problem when talking about Vancouver and affordability. The distance between Downtown Toronto and Downtown Mississauga is about the same as Vancouver to Surrey.

Surrey is part of metro Vancouver and affordable.

If we were in Alberta, Ontario or Qurbec you would expect that Burnaby, New West and Vancouver would have already been amalgamated and would be one municipality. If start to look at the average housing prices across the three it is a slightly different picture.

[GlassCity]

Originally Posted by casper

This is part of the problem when talking about Vancouver and affordability. The distance between Downtown Toronto and Downtown Mississauga is about the same as Vancouver to Surrey.

Surrey is part of metro Vancouver and affordable.

If we were in Alberta, Ontario or Qurbec you would expect that Burnaby, New West and Vancouver would have already been amalgamated and would be one municipality. If start to look at the average housing prices across the three it is a slightly different picture.

It's part of Metro Vancouver, but it's not affordable. I just looked - the cheapest you can get a house for is $600,000. Sure it's more affordable than Vancouver, but still not exactly an attainable starter home for all that many people.

Again, if this was isolated to Vancouver proper, it'd be one thing. But it's the entire region. It's not just that people have to suffer through long commutes to Vancouver, it's that many have to leave the entire area entirely for affordability.

[Pinion]

.

[someone123]

I commute about 10 km within Burnaby, from a densely built up residential area to a large office building, and my trip is either 25-50 minutes by car or 75-95 minutes by bus and train. When I used to go downtown on transit between two points within a 10 minute walk of a SkyTrain stop it took me 50 minutes. The SkyTrain is topologically challenged; even if you are travelling along the lines the connections you have to make are often very inefficient.

The transportation system in Vancouver is such that it's not feasible to commute from one end of the metro area to the other. Crossing just one bridge from Surrey is bad. Crossing two bridges would give you a 2-3 hour commute on many days. Yet another factor that makes affordability issues worse. People are willing to spend a lot of money to live in closer in to the city because the alternative is wasting hundreds of hours per year commuting. Not much housing can be built in these areas because of zoning controls.

[lio45]

Originally Posted by Pinion

As I've said before most of my high school friends got engineering degrees at UBC and fucked off to Alberta ASAP.

Again though: if it's injections of Chinese money into Canada that made this happen, that's obviously a net gain for the country.