‘Money For Nothing’ – Vancouver Economy Dependent On Mortgage Magic

When a mortgage is issued, money is injected into the economy from… nowhere.
Most people don’t realize this. Most think that mortgages come from money that originated in the real economy that is actually deposited in the bank, but that is most definitely not where mortgages come from. This ignorance is very widespread… poll intelligent people you know… you will find that most do not understand that commercial banks have the power to create new money. (A recent survey of UK Members of Parliament showed that the majority of them (85% !!) did not understand the source of mortgages… stunning information).

If somebody borrows $2 Million from a Canadian bank to buy a $4 Million Vancouver home, that $2 Million is created from nowhere. Nobody earned that money; the economy gets an artificial boost unrelated to any actual economic productivity within our society.

Vancouver has seemed to do well economically over the last 15+ years, largely because of the issuance of new debt. Vancouver has ‘imported’ money… from foreign sources, yes, but also from fresh air (and the latter source is greater and more important).

RE and closely related economic activity makes up 25% of BC’s GDP (2016). Construction is by far the largest new job generator in BC. Our economy has become highly dependent on an ever expanding RE sector (and ever increasing prices).

There were $38.4 Billion mortgage loan approvals in BC in 2010 on new and existing residential properties. (At 4.7 Million population this is $8,170 per capita per annum). We’d imagine more recent figures are considerably higher.*
BC has a GDP of $250 Billion (2015), so GDP per capita is $53,250.
Some of the newly issued mortgage debt must lead to the retiring of some old mortgage debt (when a sale completes) but we do not have figures regarding net new mortgage debt, which would be interesting (any readers have that?). That figure would represent the actual amount of newly created money released into the society from mortgages.*
When one considers that the ‘new money’, now in the hands of the seller, can then be used to be invested back into local RE (and leveraged again with more mortgage debt), one starts seeing how the RE ponzi can expand so malignantly.

Furthermore, if even a fraction of the new money is spent in other areas of the local economy, this makes our economy even more dependent on RE debt issuance. Add to this the ‘wealth effect’ of RE owners saving less and spending more because they believe their home is worth more and more, and one sees how dependence on RE price-expansion can spread deeply and broadly into an economy.

We don’t see any evidence that any real economic engines supporting Vancouver RE prices have fundamentally changed. There has not been growth in non-RE local economic activity anywhere near commensurate with the increases in RE prices. All evidence is that RE prices are still in a speculative bubble, fueled by debt.

This last year has seen a stalling in detached home prices and a 25% blow-off in attached prices.
If prices blink and lenders pull in their horns (with or without rising interest rates), the superficially virtuous cycle of a speculative debt-fueled bubble will implode, prices will plummet, mortgage debt will remain, and the cycle will become very vicious.

With Vancouver’s economy so overdependent on RE, we expect the inevitable reconciliation to lead to a deep local recession and many consequent adverse stresses on our society. Let’s hope we can weather the storm.

– vreaa

*PS: we’d welcome any updated figures from readers, especially info re net new money from mortgages.

hat-tip to El Ninja for links to these images:

Vancouver City Councillors Wake Up To ‘Fierce Speculative Demand’ – “There is significant evidence speculative investment has the biggest impact on housing costs in the city.”

“Speculative investment, the purchase of property based on anticipated price growth, has the biggest impact on housing costs in the city, according to Dan Garrison, a senior planner for the City of Vancouver. Some councillors feel this problem isn’t adequately addressed in the Housing Vancouver Strategy.

“There is significant evidence of speculative investment in our housing market that is driving housing costs,” Garrison said.
Gil Kelley, general manager, planning, urban design and sustainability for the City of Vancouver, said a lot of it has to do with excessive amounts of local and global capital from small and large investors looking to shelter their money and grow their equity.
“Vancouver is a very attractive city [as] a safe harbour for both B.C. residents and foreign investors,” Kelley said. “That coupled with low interest rates make for a pretty fierce speculative demand.”

– excerpt from ‘Vancouver to curb “fierce” demand by local and foreign housing speculators’, Thinkpol, 29 Nov 2017

As we’ve been saying for… oooh… the last decade.
Solution to Vancouver Housing Conundrum:
Price crash to the point that all speculative interest is flushed out;
property prices then return to actual utility values as determined by actual ready money in our economy.
Problem solved.
– vreaa

The Dance Around Foreign Ownership of Vancouver RE

“..the City of Vancouver wants to collaborate with the provincial and federal governments to explore the viability of “restricting property ownership by non-permanent residents.”

That line appears in Vancouver’s 10-year housing strategy released Thursday, a comprehensive plan seeking to address all elements of the city’s housing crisis.

Upon learning the city’s new housing strategy proposes looking at restricting foreign ownership, Andy Yan told Postmedia: “It’s interesting … It’s the admission that you have a problem. As with many things in life, that’s the first step.”

“This does mark a bit of a sea change,” said Yan, now the director of Simon Fraser University’s City Program. “From the accusations that observers and critics are racists, to the realization that Vancouver does indeed sit in this global marketplace for residential real estate, through which local incomes can’t compete.”

The idea to investigate foreign ownership restrictions is one of a number of “tax and financial regulations to limit the commodification of housing and land for speculative investment” proposed in the city’s report, along with ideas like introducing a speculation and flipping tax, reforming federal and provincial tax regulations and seeking to “close loopholes.”

These proposals are designated as “high” priority in the city report, to be addressed in the first year of the 10-year plan.

Dan Garrison, Vancouver’s assistant director of housing policy, said Friday: “Our thinking on that has evolved in the last number of years … Whether it’s foreign ownership or investment from other sources, certainly that piece around investment driving housing costs is something that’s really ramped up in the public mind in the last couple of years.”

The city report raises the idea of investigating the examples of Australia and New Zealand, two countries where foreign ownership has been a red-button issue, that have both taken steps to limit foreign ownership.

B.C. Finance Minister Carole James is “reviewing the tax system and evaluating existing and proposed housing tax measures,” including the role of speculation in B.C.’s housing market, as part of the planning for the 2018 budget, James said Friday in an emailed statement.

“However,” James said, “a ban on foreign ownership of homes is not being considered as part of Budget 2018 planning. British Columbians are proud to welcome thousands of newcomers each year who help strengthen our province.”

– excerpt from ‘Sea change’: Vancouver considers ‘restricting property ownership by non-permanent residents’, Dan Fumano, Vancouver Sun 25 Nov 2017

Information From Outside The Vancouver RE Bubble – U.S. Senator Lives In (don’t laugh) $500K Home

The story ‘Rand Paul is tackled from behind and ATTACKED by his Democrat-voting doctor neighbor while mowing the lawn at his home in exclusive Kentucky gated community’ [Daily Mail, 4 Nov 2017] is weird from a number of perspectives, but, viewing it from the epicentre of the Vancouver RE cult, one truly bizarre piece of info leaped out at us… Rand Paul is a US senator, and his “exclusive Kentucky gated community home” (photo above) “is worth around $500,000”. Surely this cannot be correct! Somebody must have dropped a zero. Embarrassing.

“The Position Remains Unfilled”

“I have spent time in New York, London, San Francisco, Boston, as well as worked and interviewed in each. I also have discussed the experiences of multiple friends who used to live here and who now live in these places. Forget not being in the same ballpark. Vancouver isn’t even playing the same sport. All of those cities have far, far more opportunities than here – and far better compensation. The only thing Vancouver shares with them is high real estate prices.

Most people who have worked with executive search firms or are attempting to staff a mid-to-senior-level positions with non-local talent are having a devil of a time doing so. The most recent story I heard was at a friend’s company, where they were trying to staff a VP vacancy. The assessment of the outside international executive search team was that the proposed salary – based on the desired skill-set, the size of the organization, and the cost of living here – was around half a million short of where it needed to be. Yet the company simply didn’t have the ability to go higher. Thus, the position remains unfilled. I’ll grant you that there can be some alchemy that goes into the numbers used in these executive searches, but I have heard this same sort of shortfall in multiple other instances now.

You take a growing number of stories like those, stories about being unable to hire bar staff at $18/ hour, and everything in between – and you’re left with a failing community. The moment sharks start circling and making an actual concerted movement to entice young locals away – showing them just how much better they can do – this goes from being a gradually escalating problem to a full blown crisis in the private and public sector.”

Royce McCutcheon, commenting at VREAA, 6 Nov 2017

Jessica Barrett – ‘I Left Vancouver Because Vancouver Left Me’ – “Like Living On An Abandoned Film Set.”

“I was, by many standards, the definition of success in Vancouver. I had a permanent, full-time job at the top of my field as senior editor of Vancouver Magazine, I had a rich network of professional connections, a solid group of close friends, and stable, albeit cramped and expensive, rental housing. Yet my entire life felt like a struggle. …

I quickly found the city I’d returned to had changed — and not just in the way that condo towers had supplanted even more vacant lots, old houses or beloved music venues. The tone had turned hostile. Property values, ever the stuff of shock and awe, had begun to skyrocket, defying even the most bullish predictions. Then the “million dollar line” moved out of Vancouver, erasing the division between east and west on the affordability scale. The revelation gave rise to a #donthave1million social media campaign which, for about a minute, became something of a millennial rallying cry. The response from the city’s powerbrokers — developers, newspaper columnists, etc. — was by and large blunt and cruel: if young people couldn’t afford it here, they should just leave. I shot back with a column detailing the absurdity of a city that is simply OK with the fact that its young cannot afford to live there and mused about whether it was time for me to leave for more welcoming pastures. …

My year away had opened my eyes to the fact that other cities also offered the uber-modern urban experience that Vancouver — ever narcissistic in its examinations — likes to think it has a lock on. …

This time, finding a place for my newly formed family of three —my boyfriend, me and his dog — was defeating and degrading. My place didn’t allow pets so staying put wasn’t an option. It took us four months to find a dog-friendly apartment in our price range with a reasonable amount of space (i.e. more than 450 square feet). In the two years since my last search, the rental market seemed to have gone completely insane. Half the listings we came across were scams, and apartments in once-affordable areas of the city, like the West End, or Main Street, were going for nearly $2,000 a month. Landlords seemed to demand everything just short of a claim on your firstborn child to consider you a serious contender. One woman refused us because I wouldn’t hand over my unredacted bank statements as proof of income to a total stranger.

While we searched we sublet, put our stuff in storage and lived out of boxes and slept on blowup air mattresses in bare rooms. My boyfriend started looking for work as a graphic designer and found the average pay in Vancouver to be $10,000 to $15,000 less than the same kind of work in Calgary, which, it bears noting, was in the middle of a recession at the time. Meanwhile, I had started my new job, which I loved, but the stress and instability of our housing situation made it difficult to focus on the demands of this new, high-stress position. …

My own collapse came when my partner declared that, although he did not wish to end our relationship, he couldn’t stay in Vancouver. I couldn’t fault him for a single reason he gave. We had finally landed in a 600 square foot coach house behind a mansion in Shaughnessy. It had a fancy address but the place itself was falling apart. The windows, which had been painted shut when we moved in, were now wedged open and wouldn’t close; the dishwasher (a major luxury we were excited to have) had broken and become a mildew factory, the door would only close when locked and would only lock if I heaved on it with my entire body weight. The heater in the bedroom buzzed so loud that I had to wear earplugs while I slept and we didn’t have a smoke detector. There was no storage, no place to put a kitchen table and nowhere else for us to go. For this, we paid $1,700 a month to a woman worth millions who clearly didn’t need the rent. It was obvious we were paying her to be onsite security for the winter months she spent in California.

The neighbourhood itself was like living on an abandoned film set. Aside from our landlord, we only ever saw construction workers, landscapers, and on occasion, the squatters who lived in the empty mansion across the street — just a line on someone’s investment sheet somewhere.”

– excerpts and photo from ‘I Left Vancouver Because Vancouver Left Me’, Jessica Barrett, The Tyee, 30 Oct 2017 [hat-tip Keith]

The whole Tyee piece is a must read.
Even for those of us familiar with all of the themes, this is a gutting story. The city really is hollowing itself out.
Greed and influence seem to have taken an even firmer grip of the reins and all momentum now is towards more and more and more of the same.
Perhaps a phoenix will rise out of the aftermath of a massive price crash.
Perhaps, later, Jessica and her family will come back. But I suspect she won’t, even if Vancouver miraculously becomes more hospitable, because she will have built a good life in Calgary (and Calgary will be the better for it).
– vreaa

“I’ve thought since early 2010 that Vancouver housing was in a bubble, and have refused to buy a house for this reason. I’ve felt that the risk of mean-reversion was far higher than the risk of missing the upside.”

“It’s all a speculative bubble. End of story. This includes housing prices in Vancouver (and elsewhere in Canada), as well as The Everything Bubble.

Any fool can lease a high end car. It doesn’t make you rich. It makes you fake – you live in a world of make-believe, which has been working out fine so far. But, all the wealth effect of rising housing prices here can be reversed in a heartbeat.

All bubbles mean-revert. Always. And the results are phenomenally painful, especially to the late-comers who thought the party would go on forever.

I’ve thought since early 2010 that Vancouver housing was in a bubble, and have refused to buy a house for this reason. I’ve felt that the risk of mean-reversion was far higher than the risk of missing the upside. Of course, I didn’t foresee interest rates staying at emergency levels for so long, and more stupidly, being actually lowered in 2015. I don’t really feel badly for having not bought, as it’s impossible to time the market and we could easily have been buying right at the peak at any time in the last 7 years. But, emotionally, I very much want to buy a house, so that my kids can grow up with better stability (my 7 year old is already living in her third rental house). Not that owning a house is a sign of stability, and our family’s/our marriage’s stability have not really been impacted by renting, but moving frequently is a huge drain of time and money. (and our credit scores are 832/850, with six figure investments/retirement savings, so we could buy if it made sense).

Now that Canadian (and Vancouver) real estate appears to have peaked and to be dropping though, I’m questioning if I even want to buy in the Lower Mainland in the foreseeable future. That would be buying into a declining asset class, which could even drop below the mean and stay there long term, due to upcoming structural demographic problems. I know this is considered impossible by the vast majority of Canadians, but if they would read about (1) asset bubbles, and (2) Japan’s economic situation for the last 20 years, a few might understand what I’m talking about.

My opinion is that, while both overseas buyers and local speculators have been absolutely desperate to get into the Vancouver housing casino game, that solid and sustained drops in prices here will have an ice water effect on their FOMO. I think that, like speculators everywhere, they will not want to actually lose money, and will do their very best to get their money out if at all possible. Those who can’t will ride it down. As it drops, the flood of speculative/store-of-value foreign “investors” will run, not walk, away from Vancouver and into safer markets in other countries.

Although I’m a 3th generation Canadian, born in Vancouver, I have lived in 4 other countries, and I understand there’s nothing magical about Vancouver. There are many special places around the world. Our ease of money laundering, ease of bypassing inconvenient and toothless taxation laws, and perceived strong laws and banking system have made us a magnet for all kinds of stolen money worldwide, money that in fairness should be helping to increase living standards in the countries of origin, not enriching a lucky corrupt few who managed to smuggle it out.

Please don’t see this as racist or against any particular ethnic or country group – I’m strongly opposed to corruption worldwide, and while I’m under no illusions, one of the things I love about Canada (and most of the other developed countries) is that levels of corruption are far lower here. You can be pretty sure that the police will help you when you need them, (without incentive payments), and not let you get away with things you shouldn’t, just because you’re rich. I welcome productive, honestly-earned foreign investment in Canada, and welcome productive, committed immigrants.

All those flashy cars bought for cash, top end clothing and jewellery being bought, dollars splashed around by young “rich” people? Well, when the money comes from dubious sources from one’s parents, it’s easy come, easy go. Or, it’s fake – the truly rich would not need to mortgage their purchases of Vancouver property, or lease those high end cars. But then, the truly rich don’t feel the need to buy such flashy excess.

Additionally, I am horrified at the massive expansion of credit and therefore debtload of all levels, worldwide – individuals, households, corporations, municipal and provincial governments. It is unprecedented and shocking — and unrepayable.

I see the result as nothing short of total economic collapse. The party simply can’t go on forever. “You can’t cure debt with more debt”. And, you can’t really inflate your way out of it, when trillions of QE mysteriously has not resulted in more than very minimal inflation. No matter how governments worldwide may try, I can’t see any way to avoid collapse, deflation, and depression. This is a terrible future vision, and I’m very saddened for the fate of my young children, and their possible children and so on. I worry so much that they won’t have health care when they need it, and that their safety will be at risk from desperate idiots who didn’t have the forethought to plan ahead and not consume beyond what they could afford. I worry about what we’re going to do when faced with seeing neighbours’ children going hungry – I can’t stand to see children hungry, but I can’t possibly feed them all.

It comes at a very bad time already, with climate change (yes, eventually the naysayers will have to admit it’s happening, whether they ever admit to the anthropogenic aspect of it or not) becoming an existential threat to populations worldwide. All it will take is one epidemic virus, with no money left to fight it, to devastate a large swath of humanity (not to mention the huge damage that so many billions of humans have already caused to every other form of life on this planet).

I’m sorry to be such a doom-and-gloomer, but I wish I could see a way forward for humanity that didn’t have this outcome. Yes, humans are incredibly adaptable and clever, especially in coming up with insane financial weapons of mass destruction (like CDOs, CDS, derivatives, rehypothecation, and all the other things that keep me up at night). These are nothing more than clever ways to transfer money from large numbers of middle class people/taxpayers to a small set of people who know how to play the game very well.

I’m not left wing, nor right wing, just somewhere in the middle like most Canadians, but I’m appalled at what we are doing to ourselves by taking on unrepayable debt just to keep up with the Joneses, to pretend we have lifestyles which we haven’t actually earned. This debt is merely pulling demand from the future, and it won’t be there when we need it – in the future, we can’t rely on the “consumer” to support our GDP growth or increasing quality of life. (and, nor is infinite growth in a finite world a real solution either)

Sadly, I can only see a return to a much more hand-to-mouth existence for much of the population of the developed world, and an even worse existence for the bulk of the world’s already poor and starving populations. The can can only be kicked down the road for so long. We just can’t extend and pretend forever, as much as our politicians don’t want to admit. I sure hope I’m wrong though.”

– ‘JCH’, commenting at VREAA, 28 Oct 2017

Many thanks, JCH. – vreaa