Category Archives: 05. Where do Buyers get the money?

First hand accounts of where buyers are getting the cash for their downpayments. Financed by Mom & Pop? Grow-ops? Four jobs? Offshore funds? Robbed a bank? Commodity trades? And so forth..

Toronto Bursting? – “People need to ask themselves very carefully, “Why am I buying this house?”

During the first two weeks in May, according to preliminary data from Toronto Real Estate Board, home listings surged 47% from the same period last year even as sales plunged 16%. The average selling price dropped 3.3% from April – and this, after a 33% year-over-year spike in home prices in March and a 25% surge in April. Something is happening to Toronto’s blistering house price bubble.

It comes after Bank of Canada Governor Stephen Poloz warned in April that home prices are in “an unsustainable zone,” that the market “has divorced itself from any fundamentals that we can identify,” that there was “no fundamental story that we could tell to justify that kind of inflation rate in housing prices,” and that “It’s time we remind folks that prices of houses can go down as well as up. People need to ask themselves very carefully, ‘Why am I buying this house?”’

“We are seeing people who paid those crazy prices over the last few months walking away from their deposits,” Carissa Turnbull, a Royal LePage broker in the Toronto suburb of Oakville, told Bloomberg. She said they didn’t get a single visitor to an open house over the weekend. “They don’t want to close anymore.”
“Definitely a perception change occurred from Home Capital,” Shubha Dasgupta, owner of Toronto-based mortgage brokerage Capital Lending Centre, told Bloomberg.
“In less than one week we went from having 40 or 50 people coming to an open house to now, when you are lucky to get five people,” Case Feenstra, an agent at Royal LePage Real Estate Services Loretta Phinney in Mississauga, Ontario, told Bloomberg. “Everyone went into hibernation.”

In Canada, the theory has spread that real estate values can never-ever go down in any significant way – on the theory that they always go up – because they didn’t take a big hit during the Financial Crisis, and because the prior declines have been forgotten. So optimism about rising home prices had been huge. Now weekly polling data by Nanos Research for Bloomberg is showing the first signs of second thoughts. Two weeks ago, the share of people saying home prices would rise in the next six months was a record 50.1%. The following week, it dropped to 47.7%. In the most recent poll, it dropped to 46%.
But those who are able to sell at what appears to be the very tippy-top of the market are not complaining. Bloomberg cites business school professor Michael Hartmann who put his north Toronto home up for sale on May 17 sold it on May 22 for C$1.65 million, C$10,000 above asking price. He and his wife are planning to rent and see.

– from ‘All Heck Breaks Loose in Toronto’s House Price Bubble’, Wolf Richter, 24 May 2017

Prices haven’t started to drop yet, so can’t really say… But, could be.
I particularly like the BOC Governor’s suggested question from April: “People need to ask themselves very carefully, “Why am I buying this house?”
Exactly! Regular readers here will know we’ve been discussing this point for years.. If even part of the answer is “because the price will go up”, the buyer is a speculator.
– vreaa</em

An Economic Boom “In All The Wrong Places”

The Bank of Canada is keeping its key interest rate unchanged at 0.5 per cent as it weighs the clashing forces of falling inflation and a surprising burst of economic growth.
But the central bank warned Wednesday that both factors may be temporary.
The torrid growth in the first quarter – now on a pace to hit 4.7 per cent annual rate – will be followed by “some moderation” in the April-to-June quarter, the bank said in a statement. In April, the bank had forecast 3.8 per cent GDP growth in the first quarter.

Wednesday’s decision marked the 15th consecutive time since July 2015 that the central bank has left its key rate unchanged. Most economists don’t expect the bank to begin raising rates until at least early 2018.

“The main message is that the bank now clearly sees the balance leaning more to the side of raising rates, rather than cutting them,” Bank of Montreal chief economist Douglas Porter said.

The bank also acknowledged the hot Ontario and B.C. housing markets, noting that recent government efforts to stop speculation and risky borrowing “have yet to have a substantial cooling effect.”

“The Bank of Canada sees an economic boom in all the wrong places,” CIBC economist Avery Shenfeld said in a research note.
– from Bank of Canada holds rates amid boom ‘in all the wrong places’, G&M, 24 May 2017

Three-quarters of Canadian mortgage holders would be unable to manage a modest increase in interest rates.
Three. Quarters.

– El Ninja, on VREAA, citing this Vancouver Sun report

I’ll just leave this here:
An economic analysis released on May 4 by the Desjardins Group predicted that the central bank may increase its benchmark rate by 0.5 percent per year starting in 2019, bringing it to about 2.5 percent by 2021. According to the Desjardins paper, that could mean a two-percent increase in variable and five-year fixed mortgages.
“It will make it even more unaffordable to buy a property,” Kadi said about the prospect of higher interest rates.”

– BlaMmO, on VREAA, citing this Georgia Straight article

—-

Cheap money plus good story leads to housing bubbles.
Looks great on the way up, everybody loves it, especially the banks and the politicians. And owners, RE ‘investors’, Home Depot, kids with new trucks drywalling, [any poor value local item dependent on wealth effects].
‘Wealth’ is created out of thin air with every mortgage created. (Free money!)
Bonus extra level of juice if you’re importing some of the downpayments.
However, all pretty much a ponzi, and when you run out of air, what then?
The whole process in reverse really, really sucks.
– vreaa

A Few Charts

– from mybudget360.com

Sometimes charts say it all.
– ed.

A Reader’s Perspective

This via email from a reader, who prefers to keep their name out of it, so here shared anonymously:

“I like reading your blog. Thanks for the perspectives.

The perspective that the Vanc prices are a “bubble” and “will crash”, implies that “it is all froth, no substance”, and there are no fundamentals behind what is happening.

I like reading your articles. However, l remain unconvinced about lack of fundamentals. Such as:
Globalization (ie sort of free movement of capital, people, products, information).
Low interest rates (ie:prices are about selling mortgage payments).
Low Canadian dollar make Cdn “cheap” (tanked to support oil exports).
Vancouver is a safe haven for rich people (ie: income tax evasion, no extradition, free education & health care as no income taxes).
BCLiberals and Fed’s are wealth managers for corporations/real estate & construction industry/etc. (ie: bought and rewarded by).
Property ownership is a right (ie owners and buyers can sell/buy how they like; just like for your car/used computer/etc).
Vancouver and area is a nice place to live. (for many reasons, not perfect, but nice). Some net 50,000 people moving here per year creates demand for housing.
Declining inventory of detached homes relative to all inventory (gobbled up for condos/etc).
Prices will not crash and stay low; rather they will fluctuate, but generally will follow inflation as minimum.
Vanc is not some industry dependent town that booms and busts; it has it’s own appeal/demand.

Not to say there are not issues. There are:
Stalled incomes.
Tax unfairness.
Public policies not in Cdn public interest.
Hijacked democracy.
Unaffordable housing.
Other sectors crushed by unaffordable housing.
And many others too in education, infrastructure, congestion, cultural.

Our governments can/should be doing more:
Buying up land in advance of transportation development (that is then allocated to public housing at cost, like how Whistler does; keeps cost lower).
Advancing mortgage money at Provincial rates.
Builds are done at cost, and exclude developers who add 20% profit to cost.
Rules to keep this housing in “affordable housing pool” (not allowed to be sold for “market”; see Whistler model, or Coop model?).

As a taxpayer – l am not in favour of subsidies. One taxpayer paying another kind of taxpayer. Not fair. And then tax payers are subsidizing the profits to banks, land developers, developers, speculators, etc. Not fair.

We need to shake off the concept that the free market solves social policies. The evidence is they don’t. The free market (made up of banks, developers, real estate industry, construction industry) can never ever sell housing that is affordable – not when their goal is “what the market will bear” or “sell to the highest bidder”, and maximize profits. Only a controlled gov’t intervention, at zero cost to the tax payer is fair to both taxpayer and those in need of affordable housing.

That there will be a crash? I don’t think so. Not permanent. Too many rich people/corporations depend on prices where they are. So does the gov’t who is both the silent partner (makes money) and wealth managers for these industries.

I think looking at what is “fair” for the most people, and “good” for all constituents, would be a more compelling perspective to effect helpful change on affordability. My two cents.

Regards.”

Thanks for these thoughts, Anonymous Reader.
I have many thoughts, but I’ll share just one:
Market participants (whoever they are) “depending on prices where they are” have never prevented market crashes.
– vreaa

“B.C.’s economy relies on the selling off of real estate instead of actual jobs. It’s reached the point where we don’t have much to sell, other than the land itself.” – filmmaker Charles Wilkinson

Vancouver’s real estate market has attracted angry commentary from a wide variety of sources lately, and not just citizen activist groups rallying for affordable housing.

A couple of weeks ago, U.S. economist Michael Hudson sold out the Rio Theatre to talk about the city’s gone-sideways housing situation, which he compared to “a feudal society.”

Mother Jones magazine has a feature story about Vancouver in its current issue, Hedge City Blues: What happens when global elites invade your town?, which cautions that Seattle is next.

This week, local filmmaker Charles Wilkinson is releasing his film on Vancouver’s crisis, No Fixed Address, which opens May 2 at Toronto’s Hot Docs festival. The film will also screen at Vancouver’s DOXA Documentary Film Festival on May 6.

And in an unusual twist, a member of the region’s development community is incensed enough that he too is weighing in on our spectacular failure to regulate big foreign money.

Consultant Richard Wozny has been a key player in Vancouver’s development industry for 33 years and he just wrote a report: Low Incomes and High House Prices in Metro Vancouver. Mr. Wozny has, as he puts it, worked endlessly to make wealthy developers wealthier. Now nearing retirement, he says he wants “to give something back to society – a little knowledge the public should find useful.”

Mr. Wozny, whose company, Site Economics, has done the financial analysis and strategy for more than $120-billion worth of large-scale residential towers, shopping malls, suburban subdivisions and industrial parks, says he’s analyzed the financial feasibility of projects for all the major developers in Western Canada and the three levels of government.

He’s seen unprecedented financial windfalls in the Lower Mainland’s real estate market. Now Mr. Wozny wants to speak out on behalf of the losers: those residents who rely on their incomes to afford them a place in the property market, be it owning or renting.

He’s studied the situation and has come to several conclusions: that more supply is nothing but fuel for the unaffordability crisis; that house values that are wildly disproportionate to incomes indicate a high level of tax evasion; that government is failing to institute fair tax regulation to ensure infrastructure needs are met; and that all this “growth” is simply not paying for itself.

The result is that a basic necessity – housing – has become a low-risk profit-making tool.

“What would we think of someone who hoarded food? Why is real estate any different?” asks Mr. Wozny. Analyzing data from the Real Estate Board of Greater Vancouver and the Canada Revenue Agency, he found an odd inverse relationship between incomes and housing; the higher the house price, the lower the declared income; the lower the house price, the higher the income. In Vancouver, Richmond, West Vancouver and Burnaby, houses are routinely priced between $1.5-million and $3-million. However, taxpayers report “unusually low taxable median family incomes, well below the regional average.”

Richmond and Vancouver, says his report, are among the highest income-to-house price ratios in the world.

Meanwhile, in Port Moody, Coquitlam, Port Coquitlam, Langley and Maple Ridge, house prices are well below the regional average and reported incomes well above.

If tax returns are a guide, the suburbs are now the high-income earning areas of the region shouldering the greatest tax burden. Those closest to the central core appear to be scraping by with little income, despite their high-cost housing.

The only conclusion to reach is that incomes are not being reported, says Mr. Wozny. A segment of the population is effectively subsidizing a group that refuses to pay its taxes.

He makes the case that a home’s value is due almost entirely to its location within the city. It may provide shelter, but it is the roads and sidewalks, proximity to schools and amenities that determines its worth. The city, and public infrastructure, creates its value. But what of the buyers who capitalize on that value without putting anything back in?

“Over the past 30 years, private residential real estate has become more of an economic ‘free rider,’ enjoying speculative, low-risk increases in value generated by public investment, but avoiding making adequate contributions to the public realm which supports it,” he writes.

Because the majority of our infrastructure was built before 1990, we are continually drawing on that value with massive new developments. Government should be tapping the “vast fortunes being made in real estate” to ensure equal access to public infrastructure,” he says, echoing Mr. Hudson’s argument for far heftier taxes on speculative buying.

“The growth has not paid for itself. Much of the infrastructure is relatively dated and paid for by a generation that was far more generous, and we are drawing down on that, compromising the quality of life without growing the infrastructure. We are creating congestion, whether it’s traffic, or at the hospitals or universities, whatever. There is plenty of money in private growth, so the growth should at least pay for itself. Why should government and the people in the middle foot the bill?

“Somebody doesn’t spend $4-million on your house alone. It’s the region they are buying, not the house. It’s the community that makes it special. It wouldn’t be worth anything if the community were to decay. That’s what we don’t understand.

“Obviously something terrible is happening – the money flooding in is not a sign of a healthy functioning capitalist market.

“The only group at fault are politicians who want growth without having to pay the requisite cost.”

Another group might also be at fault: the general population.

Mr. Wilkinson, whose film will screen in Vancouver at Simon Fraser University on May 6, says a challenge he faced during the filmmaking was the general apathy of average people. He edited down discussion about big inflows of foreign money and corruption because the topic got the thumbs down from a mixed-demographic group he uses for feedback.

“Audiences don’t relate to it, they don’t get it,” says Mr. Wilkinson. “We had a bunch of stuff about corruption and money laundering and people kept saying, ‘I don’t get it. How does money laundering work?’

“Where we struggle with it is that people will often say, ‘So what? That’s just free money into our system, and money is good, right? Who cares if [buyers] are from another country or whoever comes here with $1-billion. It trickles down, right?’

“But they can’t get it in without breaking the law, which affects you,” Mr. Wilkinson says. “And there are people who say, ‘I don’t care if my community is disintegrating. I want to retire in Hawaii with an RV.’ I get that there are people like that and they are making a conscious choice.

“That’s the key focus of the show, for me, is the sense of community that I’ve always felt in Vancouver, and I see it’s under such assault.

“It’s been very frustrating.”

Instead of steering the viewer toward any conclusion, Mr. Wilkinson presents the facts of Vancouver’s affordability crisis in such a way that people can make up their own minds, according to their values. He includes interviews with David Suzuki, Bob Rennie, Raymond Wong, Seth Klein and Sandy Garossino, who is quoted saying: “We manufacture and export condominiums.”

Mr. Wilkinson became something of a media magnet when promoting the film in Toronto recently, because Toronto has entered the speculative frenzy that Vancouver has endured for years.

Toronto, he says, is even more vulnerable than Vancouver, because of its rich history of diverse ethnic communities. They will be crushed under the weight of gentrification, much the way Vancouver is losing its Chinatown.

B.C.’s economy, says Mr. Wilkinson, relies on the selling off of real estate instead of actual jobs, as a result of government inaction.

“It’s reached the point where we don’t have much to sell, other than the land itself. So when the Premier crows about how she’s created all these jobs, in a bizarre and macabre way, she has – by failing to impose any restriction on the real estate market. And of course it’s unsustainable, because there are no jobs anywhere else. When you drive past all these communities in northern B.C., everything is boarded up. Resources are simply gone.

“Jobs here are building speculative housing units.”

He wonders where this selling off of real estate to the highest bidder will eventually get us. Every time a home is sold for millions of dollars to a speculator, that home is likely forever lost to the local income-earner.

“Let’s assume everybody sells out and gets rich. What’s the plan – to build another city? But where am I going to go? This is my home,” Mr. Wilkinson says.

“I don’t feel the government really cares much about my interests, or anybody else I know, so everybody devolves into, ‘every man for himself.’ And that’s the antithesis of community.

“We’re Canadian. We weren’t supposed to be like this.”

– from ‘Housing talk gets louder and angrier in Vancouver’, Kerry Gold, G&M, 28 Apr 2017 [Whole article copied here, for the record. Hat-tip to The Auteur]

Strong feelings about RE are becoming more and more mainstream.
The ‘Anger’ factor is noteworthy. Extreme wealth inequality breeds anger. This is very, very bad for a society.
The mention of the ‘general population’ as a causative factor is good.
And don’t forget the banks allowing leverage with their mortgages, creating money from nowhere, fueling the speculation. Who needs to import money when you can create it from nowhere?
– vreaa

‘Poor’ Parenting – B.C. Liberal Housing Minister Rich Coleman – “My advice to my teens, start saving for the down payment.”

Under the B.C. Liberals, who are actually quite conservative, the gap between the super-rich and the rest of us has become a yawning chasm. For most, it has become harder to make ends meet. This demands fundamental change, not a softer tone. …

… B.C. Liberal Housing Minister Rich Coleman is laissez-faire about it: “My advice to my teens, start saving for the down payment. That is your future if you can build up that equity.”
With million-dollar homes, stagnant or declining wages and big student loans – good luck, kids.

Last week, Premier Christy Clark built on this train of thought at the leaders’ debate. “You know what you need to be able to afford a house? You need a job,” she said. Yet, unemployment is up everywhere but the Lower Mainland and Vancouver Island.

– from ‘Anger Brewing in unaffordable BC’, Garth Mullins, 24 hrs Vancouver, 23 April 2017 (with quote augmented based on Frances Bula tweet)

Meanwhile, who would benefit from the fruits of all that hard work?….

From Jan 2016:

Surging real estate values added $2.3 million to B.C. cabinet ministers’ personal wealth this year alone, as the government says coming measures to ease housing affordability won’t include any that lower prices.

One minister saw her four properties jump $765,000, more than five times a minister’s salary. Another saw gains on a portfolio of eight homes. On average, ministers made $103,000 – more than an MLA’s salary, according to a review of public records by CTV News.

It’s natural for those ministers to welcome their own wealth boost, but they have to realize how their eye-popping gains translate into tremendous hardship for young people trying to get into the notorious Vancouver property market, said UBC professor Paul Kershaw.

“We can’t start with the presumption that housing price increases are a good thing. Housing prices that have outpaced incomes is remarkably bad news. It’s turned Vancouver into a generational ghost town,” Kershaw said, referring to how hard it is for young people to buy in neighbourhoods where they grew up.

– from ‘Surging real estate makes $2.3M for B.C. cabinet as affordability worsens’, Jon Woodward, CTV Vancouver, 25 Jan 2016

Goya’s ‘Saturn Devouring His Son’ (1819-1823):

The Value Of The Dirt? – “In condo crazy Vancouver, downtown’s last gas station for sale”

“If you look at the value of the dirt, there’s just no possible way that just having a stand-alone gas station makes any kind of sense financially,” Tsur Somerville, director of the University of British Columbia’s Centre for Urban Economics and Real Estate, told CTV Vancouver.

Downtown Vancouver’s second last gas station was recently sold to a development company for a staggering $72 million. That sale prompted the owners of Downtown Vancouver’s last gas station, an Esso located at the intersection of Burrard and Davie Street, to put their property on the market too.

And while that may be good news for condominium developers, Stephen Regan, executive director of the West End Business Improvement Association, says that selling the station will come with consequences.

“Losing a gas station, and possible the last gas station in downtown, is going to have some significant impacts, I think, for locals and for visitors,” he said.

– from ‘In condo crazy Vancouver, downtown’s last gas station for sale’, CTV, 14 April 2017

The fact of the last fuel station in downtown Vancouver, here for the record.
BTW: If we were to make all decisions about what’s important in Vancouver based on the “value of the dirt”, where would that lead?
If we were to make all decisions about what we do with our lives based on maximizing income per time unit, where would that lead?
In a related sense, how does one measure success?
– vreaa