Vancouver “an international housing-affordability basket case” with “RE bubble risk the worst in the world” – Maclean’s

“It was such a lovely picture that the City of Vancouver managed to paint of itself over the 10 years that Gregor “Happy Planet” Robertson was mayor that it’s no wonder so many people believed it. A thriving and happily multicultural Pacific metropolis of bike lanes and balmy weather. Diversity and eco-density and backyard chickens, high-tech startups, and the ski slopes on the mountains just across Burrard Inlet.

Now, with Robertson on his way out, and his Vision Vancouver party a ruined brand, whoever comes out on top in the October civic elections will be left to deal with what’s become of the place. Vancouver is now a kind of free trade zone for gangland money launderers, absentee offshore real-estate speculators, Chinese princelings on the lam and globe-trotting tax frauds. Metro Vancouver is an international housing-affordability basket case and the epicentre of Canada’s fentanyl overdose crisis. Over the past decade, homelessness has doubled, at least 4,000 people are sleeping rough in the streets, and there are now 70 homeless camps across the region. …

For now, the job of sorting everything out has fallen mostly to David Eby, B.C.’s 41-year-old Justice Minister and Attorney-General. Two months ago, in a speech at a conference co-hosted by Transparency International Canada and the International Centre for Criminal Law Reform, Eby described Vancouver and British Columbia in the most accurately unflattering terms.

“We knew there was something strange going on, but, my God, we had no idea it was this big,” Eby said. British Columbia had become reduced to “a jurisdiction where the rules do not apply to white collar crime, fraud, tax evasion and money laundering, where even if the rules do apply, enforcement is absent.”

Over the past 10 years, the B.C. Securities Commission had collected less than two per cent of more than a half a billion dollars in fines levied against a rogue’s gallery of fraudsters, swindlers and ripoff artists. Among the beneficiaries of the previous Liberal government’s opaque “Advantage B.C.” head-office tax shelter scheme: PacNet, a collection agency the U.S. Treasury Department had listed as a transnational criminal organization with a sordid track record in money laundering and mail fraud, and China Poly Group, a shady Chinese state-owned enterprise with a payroll of 76,000, intimate ties to the People’s Liberation Army, and a portfolio that ranges from real estate development to arms and explosives and art exhibits. Advantage B.C. is now shuttered.

Among the sleazier aspects of the Liberal legacy was a peculiar toleration for dirty money being laundering through B.C.’s licensed casinos. Provincial officials were aware of the nastiness as far back as 2009. In January of that year, the Integrated Illegal Gaming Enforcement Team (IIGET) conducted a threat assessment focusing on organized crime in licensed casinos and asked the Crown-owned B.C. Lottery Corporation for expanded powers to tackle the problem. Six months later, the IIGET unit was disbanded because of “funding pressure.”

Last September, Eby appointed former RCMP deputy commissioner Peter German, an authority on money laundering, to come up with a series of recommendations on how to cut the flood of dirty money into B.C.’s casinos, Metro Vancouver’s overheated real estate market and “other areas of B.C.’s economy.” German’s report is due next month.

In the meantime, Eby has instituted a simple rule change aimed at preventing drug money from being loaned out by underground “banks” to visiting high-stakes gamblers. The change was recommended to the Liberal government in 2016 in a report by MNP LLP, a national accounting, tax and consulting firm. The Liberal government kept the report secret. Among its findings: over the course of a single month—July 2015—Richmond’s River Rock Casino accepted $13.5 million in $20 bills from mostly “high roller Asian VIP clients,” in transactions that sometimes exceeded $500,000.

The MNP LLP rule change that the Liberals ignored, but which Eby has put in place: You will no longer be able to drive your Lamborghini from your $10 million Point Grey mansion across the Oak Street Bridge to Richmond, stroll into the government-licensed River RockCasino and buy your chips with a half a million dollars in $20 bills stuffed into a duffel bag, then cash out on the same day.

It’s a start.

Last month, Vancouver showed up as the third most unaffordable city on Demographia’s list of 92 cities around the world, behind Hong Kong and Sydney. When it comes to cities undergoing a deterioration in housing affordability, Vancouver ends up the worst. Demographia classifies a property market with median home prices five times the median income to be “severely unaffordable.” In little more than 10 years, Vancouver’s housing affordability predicament worsened from a home price multiple of 5.3 to 12.6 by last year.

Andy Yan, an urban analyst with Simon Fraser University’s city program, has been tracking the deterioration in Metro Vancouver’s housing affordability for several years. In 2014, 28 per cent of detached homes in Metro Vancouver were valued in excess of $1 million. In 2016, the percentage had jumped to 43 per cent. As of July 1 last year, 73 per cent of detached houses in Metro Vancouver were assessed at $1 million or more. The 15-per-cent foreign-buyers’ tax imposed by the B.C. government in 2016 as a sop to public outrage caused only a slight pause. Within weeks, the upward climb in house prices resumed.

Back in 2011, when the average price of a Vancouver home was roughly 11 times the average household income, Mark Carney, who was the Governor of the Bank of Canada at the time, warned in a speech to the Vancouver Board of Trade that Vancouver real estate was taking on characteristics of financial asset markets that become trapped in “the classic market emotions of greed and fear—greed among speculators and investors—and fear among households that getting a foot on the property ladder is a now-or-never proposition.”

The greed and the fear took hold, compounded by a real estate spending spree of billions of dollars’ worth of capital spirited out of China by a variety of illegal, semi-legal and circuitous routes around Beijing’s currency controls.

The disastrous federal immigrant investor program contributed to this state of affairs by effectively selling Canadian citizenship to millionaire investors, mostly from China. The federal program was shuttered after assessments determined that the millionaires were contributing less to the federal treasury in tax returns than refugees. But the Quebec immigrant investor program continues in the form of a type of racket. Quebec skims an $800,000 interest-free loan from the investors as soon as they arrive. Most of them never settle in Quebec. Roughly half of the Quebec immigrant investors (28,000) have moved to Metro Vancouver, another 22,000 established residence in Ontario and elsewhere. Only 6,000 have stayed in Quebec.

A South China Morning Post analysis last December concluded that only about half of the primary breadwinners of immigrant-investor households remain in Canada after they settle their spouses and children here.

Meanwhile, detached houses and condominiums in Vancouver have become assets in a shadowlands protected by Canada’s lax money control policies. The British-registered charity Tax Justice Network, in its most recent Financial Secrecy Index, pegs Canada’s financial system as even less transparent than the setup in Russia or China.

Something is clearly rotten in Metro Vancouver’s property market. Household incomes reported to the Canada Revenue Agency in Metro Vancouver’s swankiest neighbourhoods are equivalent to incomes reported in the deeply impoverished Downtown Eastside. The disconnect between declared income and apparent housing wealth persists across Metro Vancouver “until you get out to the distant suburbs,” Eby says.

Two years ago, when the average detached home price within Vancouver city limits had soared to $1.4 million, the South China Morning Post crunched some numbers tallied up by the mathematician Jens von Bergmann at the Vancouver data firm MountainMath Software. What the data showed was that one in 10 Vancouver households were reporting a household income that was less than the amount required just for property taxes, mortgage payments, utilities and so on. That’s 24,960 households claiming to earn less in a year than they were spending on accommodation.

Another confounding figure: an almost equal number of homes within Vancouver city limits were empty last year. City of Vancouver staff identified 25,497 homes either vacant or occupied temporarily or by foreign residents. Of those, 21,820 homes were empty, year round. Mayor Robertson’s remedy was to apply an empty homes’ tax of one per cent of the home’s value. The program cost $4.7 million to set up and an additional $1.5 million in annual operating expenses.

It’s gotten so that it is practically impossible to determine how much of Metro Vancouver’s real estate is owned by Canadians, or even by local residents. A recent Transparency International study found that because of the presence of shell companies, numbered companies, trusts and proxy owners (students, spouses) listed as title holders, it is impossible to know who, exactly, owns about half of Vancouver’s pricier homes.

Last month, Statistics Canada released data showing that roughly five per cent of residential properties in Metro Vancouver appear to be directly foreign owned, but that figure may reflect only “the tip of the iceberg,” according to Haig McCarrell, director of StatsCan’s Canadian Housing Statistics Program. SFU’s Andy Yan crunched StatsCan’s numbers to discover that one in five of Metro Vancouver condos valued at $1.5 million or more (a typical three-bedroom condo lists at about $1.62 million) are foreign owned.

Among the items Vancouver housing activists want to see at the top of David Eby’s to-do list is the closing of the “bare trust loophole,” a tax dodge that Ontario outlawed in the 1980s. The loophole obscures the actual owners of a property and facilitates the evasion of various federal and provincial taxes.

On Feb. 20, B.C.’s New Democrats will unveil their first provincial budget in 17 years. The Union of B.C. Municipalities has put forward 32 proposals to address homelessness and clear up the housing horror show—mainly steep speculation taxes and investments in rental housing (Metro Vancouver’s rental vacancy rate currently stands at one per cent). There’s high hopes for the new $15.9-billion federal “co-investment fund” that Ottawa announced last year. Green Party leader Andrew Weaver wants B.C. to take a page from New Zealand’s playbook and ban foreign ownership of real estate outright.

Whatever B.C.’s new government does, deflating Metro Vancouver’s obscenely bloated real estate bubble should be expected to provoke stiff, big-money resistance. Vancouver’s real estate “bubble risk” is the worst in the world, according to the Global Real Estate Bubble Index compiled by the Swiss bank UBS. But at some point, Metro Vancouver’s property bubble is just going to have to burst.

And when that happens, there will be hell to pay.”

– from ‘The battle to clean up B.C.’, Terry Glavin, Maclean’s, 7 Feb 2018 [hat-tip El Ninja]

In our years of Vancouver RE Bubble-watching, we can’t recall a more adamant mainstream article… With this degree of shrill realization reaching voices like Maclean’s, the end has to be in sight. – vreaa

Vancouver Economy Over-Dependent On Debt Spending


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.
Chart above from Ben Rabidoux.

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

Amen.
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