CTV Announcer: (Vancouver is the second most unaffordable city on earth, as per the eighth Demographia International Housing Affordability Survey.)
Citizen on the Street #1: “I was born here, and.. I can’t afford to buy here.“
—
CTV: “Why do you think it’s so expensive here?”
Citizen on the Street #2: “Uhmm.. It’s because of the free market system… so.. whoever has money, they come and invest in real estate.”
[(buzzer).. Sorry, wrong answer. The correct answer is: "It's because we are locked in a massive speculative mania: Locals have overextended themselves on ultra-cheap debt to bid up real estate to prices that are 2 to 3 times the levels that would supported by fundamental values, under the belief that those prices will rise indefinitely, while at the same time telling themselves "whoever has money, they come here and invest in real estate". -ed.]
—
Announcer: Do you think foreign ownership is the reason that we’re so unaffordable?
Tsur Sommerville (Economist, Sauder School of Business): “No, you know, we were ‘unaffordable’ in these studies 4 or 5 years ago before the great flood of people from mainland China.”
CTV: “[Sommerville] says restricting foreign ownership doesn’t necessarily make housing more affordable. Australia does it, and number three on the least affordable list is Sydney.”
Sommerville: “As I always think, having a ‘world class city’ and telling people not to come here is kind of a weird way to be ‘world class’.”
CTV: “The study’s author believes cities’ governments hold the key to affordability.“
David Seymour (Analyst, Frontier Centre For Public Policy): “Vancouver, like the other cities in the top five, has adopted a policy of trying to restrict the development of land to expand housing, and as a result you get a shortage and prices rise.”
Sommerville: “If you got rid of all zoning completely, and re-evaluated this, you know, Vancouver would still be up there at number one, two, three, four.“
CTV: “Because, [Sommerville] says, it’s such a desirable place to live.”
Sommerville: “We’re always saying that we want to be number one!”
- from CTV news 23 Jan 2012
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How can you have any kind of serious discussion about Vancouver housing affordability without at the very least mentioning the possibility that we are engulfed by a real estate bubble?
Even readers of ‘Maclean’s’ now know of that concern.
- vreaa
How can we discuss homosexuality without mentioning “gay”?
I like how they find a supply sider to add to (read: subtract from) the debate.
“add to (read: subtract from)”
LOL
When Tsur talks about removing all zoning completely (straw man or false dichotomy? you decide), I picture a giant favela marching up the sides of the North shore mountains and smile.
What Sommerville is stating, I think, is that removing restrictions to the point where the market can be flooded with inventory to suppress prices is unrealistic. Taking the argument in extrema is reasonable in this context, if only to argue that anything possible under the City’s temporal powers is unlikely to move the dial very much. Blanket rezoning is not going to happen.
I think actually Sommerville is enjoying the current state of affairs; it’s quite comical to have a mayor on one hand want Vancouver to be the most desirable place on the planet to live and on the other lament over how its current residents are finding it unaffordable. The paradox is juicy.
Of course that rents do not place Vancouver anywhere near the top of the most desirable places in the world to live but that’s beside the point. Some study of some magazine says different and who am I going to believe? Answer: the one that tells me what I want to hear.
Of course that rents do not place Vancouver anywhere near the top of the most desirable places in the world to live but that’s beside the point.
OMG, totally laughed out loud with that!
housing prices through the roof….
you cant explain that!
Interesting article about First Line’s decision to tighten eligibility rules, as VREAA posted yesterday:
http://www.moneyville.ca/article/1125067–mortgage-pullback-hints-of-housing-crisis-in-canada
I especially enjoyed this comment:
“If we keep making it harder and harder for people to get mortgages, and the rest of the lending community cuts out similar programs, this is going to have far-reaching effects and runs the risk of creating a made-in-Canada problem,” said Steve Garganis, a broker with The Mortgage Centre.
“It’s very misleading to suggest we have a subprime issue in Canada. We don’t. These things can have a destabilizing impact on the housing market.”
Got that? The realtors are already getting sharpening their arguments to blame tightening mortgage rules for the crash. Cuz you see, if we dare to even speak of the possibility that credit has been too easy, we risk a “destabilizing impact on the housing market.” So shhhhh everyone. You’re frightening the children.
Also telling was how even this bad news article was interspersed with links to RE pumping articles. (e.g., “Related: WHY IT’S A GOOD TIME TO BUY”)
And others are following…
Less credit availability is the needle that will pop this bubble…
http://wheredoesallmymoneygo.com/breaking-major-changes-in-mortgage-market-in-canada/
What this shows me is that either everyone they interviewed really has no understanding of what we’re dealing with OR CTV edited out those who were contrarian to their approach. As an aside I recently spoke to a guy who was thinking to get into the housing market (new high paying job, fresh out of MBA school, wife and new kid) and he had said I was the first one to voice any concerns to him. He was of the opinion that real estate o nly goes up, that far flung areas will soon be centralized with the endless expansion of burbs, that it is a great time to buy with low rates and that the high prices were secondary. Upon further discussion he acknowledged that debt levels were high for too many, that a rise in rates will lower affordability and could very well eat away his equity, and that if the likelihood of prices rising over the next 5 years is low then it may be best to wait, plus it was cheaper to rent than own.
I shared several “alternative” sources for him to digest. Not sure what he is thinking now.
The free market and speculative manias go hand in hand.
I suggest you read some of the Austrians, particularly Doug French in “Early Speculative Bubbles and Increases in the Supply of Money”
From http://www.amazon.com/Early-Speculative-Bubbles-Increases-Supply/dp/1933550449 book description:
“The Housing Bubble was hardly the first in human history. What’s eluded historians is the same issue that eludes commentators today: the underlying cause. This book is the first (and only) book to solve the mystery of the most famous bubble in world history: Tulipmania in 17th century Netherlands. It Is a legendary event but explanations have been lacking. People blame irrational exuberance, free markets, and an unleashed aristocracy. Douglas French takes a different route: he follows the money, to prove that the bubble resulted from a government intervention that dramatically exploded the money supply and fueled the tulip-price bubble – not altogether different from modern bubbles. Tulipmania was unique in that it was the sound money policy of the Dutch combined with free coinage laws that led to an acute increase in the supply of money fostering an atmosphere that was ripe for speculation and malinvestment, manifesting itself in the intense trading of tulip bulbs.”
In a truly free market, this bubble would not exist, because free market does not have a lender of last resort, nor does it have “too big to fail”.
“Locals have overextended themselves on ultra-cheap debt to bid up real estate to prices that are 2 to 3 times the levels that would supported by fundamental values”
this is an off the cuff assumption without any proof. In fact, any buyer needs to fall in line with the financial institutions mandate of no more than 32-35% home debt servicing. If you’d ever applied for a mortgage you’d know. Now, what happens after the home is purchased with respect to HELOC is another story…if the Fed wants to curb debt they need to cap HELOC, they don’t need to touch mortgage qualifying.
http://theeconomicanalyst.com/sites/default/files/article_inside/2011/05/vancouver_price_rent.jpg
If you believe house prices are reasonable because of GDS/TDS ratios, then you’re saying house prices move inversely with interest rates. It’s fine to equate an expensive house w/a 3% mortgage to a cheap house w/an 8% mortgage, IF the mortgage term equals the amortization. Here in Canada, home of the five year balloon mortgage, home buyers bear huge rate risk: They could be stuck with an expensive home AND have to renew a mortgage at a time of high rates, leaving them with crushing payments or worse. Cheerleaders say our wages will increase by renewal time, but average wages are gaining at 2-3%.
http://www.theglobeandmail.com/report-on-business/economy/housing/looser-mortgage-practices-matter-of-concern-flaherty/article2324057/
People need to get their perspective right. “A house is not a home”, as Burt Bacharach so wisely executed on his instrument. The Chinese bbs are active in discussions on what you may have read in National Post and Global BC yesterday.
http://vimeo.com/user8563208
The thing with these stories is of course starting from a false premise (and it’s not just CTV, it’s many caught up in the bubble thinking): they think there must be some reason for prices to be so high, so they reach until they find one (HAM, zoning, BPoE, whatever). Then having justified the situation, they shrug, say whatcanyoudo? and go ahead and buy… If instead you realize there is no good reason for high prices, suddenly you see the mania.
Austrians (economics) have a religious faith in “free” markets. Everything bad that happens is the result of government intervention.
And because there is no such thing as a market without intervention (and never will be), Austrians can always point to government involvement as the cause of the speculative mania.
But look at the 1946-70 era, during which regulation was stringent and government meddling in the free market system was unbearable compared to the 1920s. Yet it was the 1920s that contained a serious speculative mania.
The Austrian School would point to the abandonment of Breton Woods and the USD gold peg in 1971 as the cause of subsequent problems. When you look at the mess created by easy credit today, it’s hard to disagree with that. It’s true the Post-War era had plenty of regulation, but it also had a strict international currency regime (Breton Woods) in which everyone was pegged to the USD, which in turn was backed by gold.
No, Austrian economics provides an explanation of what conditions will prevail under a theoretical free market and a situation of government intervention. While many Austrians happen to be libertarian, that is result of ethical and civic choices, not “faith”. You can agree with Austrian analysis yet still support government interference when it results in a more “fair” outcome than the free market based on your moral code.
Further, Austrians would tend to characterize the 1920s situation not as a speculative mania but the result of inflationary policies carried out by a new institution created in 1913 (hint: rhymes with mineral preserve).
Can someone give an example of a city that is closest to having no concept of proper zoning? Just want to see how ugly it could get …
Houston, Texas
“But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions – hence “zoned” – makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.”
http://www.nytimes.com/2005/08/08/opinion/08krugman.html
Most European cities originally developed organically with minimal formal urban planning and are today, for the most part, beautiful and livable cities.
Wait, what? The medieval era had zoning. No one wanted to live downstream from the tanners and butchers. Post WW II had massive urban renewal and rethink in a lot of the cities you are probably thinking of…
The real effect on livability is and was expensive individual motorized transportation. Make that expensive, people procure less of it.
“There is a quality even meaner than outright ugliness or disorder, and this meaner quality is the dishonest mask of pretended order, achieved by ignoring or suppressing the real order that is struggling to exist and to be served.”
― Jane Jacobs, The Death and Life of Great American Cities
I was going to say Houston, but Bubbly beat me to it. Houston is famous for its lack of zoning. I don’t know if things have changed there now, but when the city was booming in the 60s & 70s, much of the talk was about the total lack of zoning. (Of course I’m not old enough to remember that, I’ve just read that.
)
Yup. And I wouldn’t call it ugly.
Just a question: What would the Median Income look like if we removed all those households in Richmond/W Van etc. that hide money overseas and declare no income here. $63,800 seems so low, not saying its wrong but wow.
Who knows? It’s interesting to see how little attention gets paid to the income part of affordability. Imagine the reaction, if the man on the street question was, “Vancouver’s affordability is at an all time low. Why do you think wages have been stagnant in this province for last twenty years?”
if anything it seems high, I’ve seen it listed allot lower than that
vancouver is not world class or in the top 5,according to who? some magazine that most people of the world don’t think about or care, are local there still that Brainwashed? The only people that say this crap are Vancouverites. When you leave BC and Canada not a soul on planet earth thinks this crap. Im simply so happy I left so I don’t have to hear this propaganda daily.It is is foreign investment. I sold condos there since 2001 and most were Asian buyers.
Well Uncle Z,
When a city has a Vision statement that begins with the line…
“Metro Vancouver seeks to achieve what humanity aspires to on a global basis -” http://www.metrovancouver.org/about/Pages/default.aspx
…you know the blinders are on, and the BullS*%T machine is set on high. But then again, what do I know.
In terms of income, B.C. is low, only Atlantic Canada comes close. Alberta is $83,500. Factor that in with the cost of housing. That is the “price” to pay for the “greatest place on earth”. Just had another ex-Vancouverite who got hired here in Calgary. She was living with her husband in his parents house in East Vancouver because of the unaffordability and they wanted to save money. She also was blunt and said her husband will make about 50K more working in Alberta compared to Vancouver!
OK, just for once people of Lower Mainland, speak your mind. Is the housing market in a bubble, well…
“If it looks like a duck, swims like a duck, and quacks like a duck, then it is a duck.”
In a true democracy, we can talk for years to the point where we cannot even agree on the exact definition of a bubble in real estate. Just ask the local residents that have an actual stake in their neighbourhoods. Here is how I see it:
1. Vancouver housing is in a bubble, whether compared to the Rent Equivalent or Price to Income ratios. Major organizations, such as The Economist and the IMF have written about this extensively.
2. We got here because of 3 reasons: First, foreign people love this country and specifically Vancouver. Where else can you get essential everyday benefits that this country offers for free, Healthcare and Education without paying federal taxes. Jason Kenney, the Federal Minister of Citizenship and Immigration, said as much. And lastly, easy money provided by the Bank of Canada monetary policy which is a hostage to the US almost zero interest rate policy.
The market for million dollar homes is dominated by off-shore buyers for one reason and one reason alone, that is to make money. Homes have been allowed to cease as residences and are more and more futures contracts. A very large number of them are sitting empty in Richmond, just like a huge number of “investor owned” condos are empty in the City.
They sit empty for months so he owners get to preserve their Principal Residence status, then make a big gain tax free.
Having owned in Canada, and now trapped in the US housing collapse a few lessons became apparent.
One basic lesson is the underlying source of housing inflation, that is increasing house prices with no change in the underlying value – the same house costs more and more. One very simple accounting identity directly answers the question. Since most purchases of inflated buying price are financed by debt, each increase in debt financed price is matched by an increase in lending. The only way for the price spiral to continue is for the debt spiral to increase due to the matching spiral of money to lend. It is the availability of money sloshing around that drives up prices. If no lender makes money available for increased price without change of value, and basically the buying price could not go up.
In terms of American real estate financing, it seems strange that Canada does not have the corrupting influence of government securitization like Freddie, Fannie, and now especially Ginnie Mae, although securitization may be increasing in Canada. Canada does not have the massive presence of FHA loans. It does not have 30 year fixed rate mortgages as standard. It does not have mortgage interest deductability, which in the long term has simply become embedded in the price of housing. The seller knows they can increase the price to balance the buyer’s tax subsidy. Although drastically overstated in importance, Canada does not have as many flaky sub-prime loans. Beware of this red herring because the vast bulk of price declines have not happened to sub-prime real estate, there just isn’t that much of it relative to the larger market to account for the overall decline.
But…Canada does have massive banks relative to the size of the economy with truly massive capital at their disposal. Secondly it has short term balloon payment as the standard mortgage. This shifts the risk onto the borrower thus encourages lenders without the need for government securitization, but either way it allows those giant financial institutions to flood the market with the money to power the inflation of housing prices. Canada has universal medical care which protects lenders from the leading cause of personal bankruptcy in the US – unbearable medical expenses. Most importantly all of this encourages the financial “animal spirits” (and home buying borrowers) to act with the expectation of infinitely rising prices, which is literally impossible. The greedy anticipation of never ending compound interest does that. But finally there comes the resource limit – which is the unsustainable high debt to income ratio and the slightest disturbance to the economy.
Eventually income and all the other things being devalued relative to the price of housing assert a barrier to how far housing prices can be pushed upwards out of line. The game becomes ever more fragile to the slightest disturbance in the economy, salaries, and levels of employment. It wasn’t all that long ago that Canada had persistently higher relative unemployment and deficit problems. Having clean up some of that gives Canada some room for breathing. But the trend to dump manufacturing in favor of raw natural resources extraction and financial hi-jinks is a deal with the devil that must eventually come due. The Canadian economy will hit hard times in the not unimaginably distant future because commodities always move in cycles. Worse yet, long term high level of debt leveraging leads to drastic drops of deleveraging (long bubble run up, fast bubble bursting – this has been true of monetary finance since the times of the Roman empire). When it does come the high debt leverage will devastate those “incredibly good quality-assets”. The apparent high capitalization of Canadian banks will prove to be a mirage in the face of the deleveraging financial carnage. The longer this is delayed, the harder the landing will be.
I don’t personally agree that Chinese money can account entirely or even for the majority of overpriced housing in Vancouver and places like Toronto. It may account for some sectors of the real estate market, but not every house in Canada is being bought by foreign money. Strikes me there is a touch of racism in those charges. What foreign money does do, however, is make even more capital available to the Canadian financial institution to power housing inflation. Ironically I would suggest that the US bubble was driven in no small part by government intervention that privatizes profit and socializes loss through the shenanigans of securitization. The HUD empire of FHA-Ginnie Mae newly rejoined with Freddie and Fannie is an awesome tale of private interests plundering government resources. But in Canada, I would suggest the mechanism is much more the destructive tendencies of the private sector driven by huge financial institutions. Thus the Canadian story will ultimately prove to be more a failure of unrestrained private enterprise and the US one of excess government involvement! Ideological stereotypes of both countries notwithstanding.