Why 5% Is More Than It Sounds

Today, Finance Minister Mike de Jong released nineteen days worth of real estate transaction data. In it, there were a total of 5,118 transactions. 260 (5.08%) of these properties were purchased by foreign nationals.

Now, five percent might not sound like a lot, but consider this. When a resident buys a property, they will almost always sell another or vacate a rental — leaving total housing supply unchanged. When a foreign buyer acquires a property, they probably don’t. In light of the huge surge in Chinese capital flight recently, it’s safe to say most Chinese purchasers are buying properties without selling another.

That indeed seems to be the case, as pointed out in my last post.

Further, if those foreign buyers leave those homes empty, or only use them as vacation properties, available housing supply shrinks.

It’s impossible to say how many of those homes will remain unoccupied, but even if we assume that only half of them are,  housing supply effectively decreased by 130 over those 19 days in June. At that rate, available housing supply could decline 2,500 over the course of the entire year.

When you consider housing starts for the Vancouver metro area have been averaging 20,000 the last few years, if 2,500 homes are effectively removed from total supply, this is equivalent to a 12.5% drop in housing starts. That’s very significant.

About That Supply Problem…

Looking through the latest Housing Market Insight report from CMHC, I found some interesting data on foreign buyers.

In 2014, foreign residents owned 2.3% of Vancouver’s 203,824 condominium units — 4,688. In 2015, they owned 3.5% of 210,696 units — 7,374. For the year, total supply increased by 6,872, while foreign owners increased their total by 2,686.

This means foreign residents bought 39% of added condominium supply! It also looks like a similar situation happening in Toronto.

This explains why, even though housing starts have been strong for several years, current housing market inventory is very low.

It’s foreign demand, stupid.

Is it supply? Are we stupid?

Many involved in the Vancouver housing affordability discussion think the problem is that we aren’t building enough homes. They look at active listings — which are indeed low — and conclude we have a supply problem.

Last month, B.C. Finance Minister Mike de Jong said,

“I don’t believe the answer is to try and artificially constrain demand whether it is from within the country, within the province or internationally. I think the answer is for us to work together as governments and increase supply.”

On June 2, at the UDI Luncheon, Bob Rennie went as far as saying, “only supply will cool the market”.

Over on Twitter, urban development specialist Bob Ransford’s favourite hashtag is #ItsSupplyStupid.

Well, is it supply? Are we stupid?

Here are the housing start numbers from CMHC. It certainly doesn’t look like a supply problem!

Maybe this supposed supply problem is really a demand problem? When housing markets are overheated, sellers are reluctant to sell and fence-sitters jump into the market because of their fear of missing out. Just look at what happened to supply in Phoenix in 2005 when their market went nuts. Inventory dropped to historic lows, from over 25,000 to under 10,000 in less than a year.

I’ll bet the Bob Rennies and Mike de Jongs of Phoenix were complaining about a supply problem too. But once the market slowed, look how fast supply magically appeared!  From under 10,000 to over 40,000 in a year. That’s what happens when a market turns. Buyer’s fear of missing out turns into fear of losing money. And developers, thinking more supply is needed, ramp-up activity. As a result, sales numbers fall and inventory takes off.

What might have looked like a shortage was really excessive demand. Based on the housing start numbers, it’s reasonable to conclude the same is true today in Vancouver. Maybe it’s demand, stupid?

The Speculative Episode

Bubbles — like the current Vancouver housing bubble — are nothing new. Contrary to the views of some, markets are not efficient and are frequently irrational.

Few understood this better than John Kenneth Galbraith. Over twenty years ago in, A Short History of Financial Euphoria, he gave an excellent summary of how they occur.

And as the following section presciently concludes, “There will be occasion to see the operation of this rule frequently repeated.”

Chapter 1 – The Speculative Episode

That the free-enterprise economy is given to recurrent episodes of speculation will be agreed. These–great events and small, involving bank notes, securities, real estate, art and other assets or objects–are, over the years and centuries, part of history. What have not been sufficiently analyzed are the features common to these episodes, the things that signal their certain return and have thus the considerable practical value of aiding understanding and prediction. Regulation and more orthodox economic knowledge are not what protect the individual and the financial institution when euphoria returns, leading on as it does to wonder at the increase in values and wealth, to the rush to participate that drives up prices, and to the eventual crash and its sullen and painful aftermath. There is protection only in a clear perception of the characteristics common to these flights into what must conservatively be described as mass insanity. Only then is the investor warned and saved.

There are, however, few matters on which such a warning is less welcomed. In the short run, it will be said to be an attack, motivated by either deficient understanding or uncontrolled envy, on the wonderful process of enrichment. More durably, it will be thought to demonstrate a lack of faith in the inherent wisdom of the market itself.

The more obvious features of the speculative episode are manifestly clear to anyone open to understanding. Some artifact or some development, seemingly new and desirable–tulips in Holland, gold in Louisiana, real estate in Florida, the superb economic designs of Ronald Reagan–captures the financial mind or perhaps, more accurately, what so passes. The price of the object of speculation goes up. Securities, land, objets d’art, and other property, when bought today, are worth more tomorrow. This increase and the prospect attract new buyers; the new buyers assure a further increase. Yet more are attracted; yet more buy; the increase continues. The speculation building on itself provides its own momentum.

This process, once it is recognized, is clearly evident, and especially so after the fact. So also, if more subjectively, are the basic attitudes of the participants. These take two forms. There are those who are persuaded that some new price-enhancing circumstance is in control, and they expect the market to stay up and go up, perhaps indefinitely. It is adjusting to a new situation, a new world of greatly, even infinitely increasing returns and resulting values. Then there are those, superficially more astute and generally fewer in number, who perceive or believe themselves to perceive the speculative mood of the moment. They are in to ride the upward wave; their particular genius, they are convinced, will allow them to get out before the speculation runs its course. They will get the maximum reward from the increase as it continues; they will be out before the eventual fall.

For built into this situation is the eventual and inevitable fall. Built in also is the circumstance that it cannot come gently or gradually. When it comes, it bears the grim face of disaster. That is because both of the groups of participants in the speculative situation are programmed for sudden efforts at escape. Something, it matters little what–although it will always be much debated–triggers the ultimate reversal. Those who had been riding the upward wave decide now is the time to get out. Those who thought the increase would be forever find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality by selling or trying to sell. Thus the collapse. And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang. There will be occasion to see the operation of this rule frequently repeated.

Market Still Driven By Foreign Money

One year ago, I made the case Vancouver’s housing market was being driven by foreign money. My evidence was the fact high-end properties were appreciating more than low-end properties. This doesn’t happen when local buyers are fueling large price gains with borrowed money.

Over this past year, the real estate market in Vancouver has gone to a whole new level of insanity.

The question is, are we still seeing higher-priced properties appreciating faster than entry-level homes. If so, that would demonstrate that the Vancouver market is still being primarily driven by foreign capital. The answer is an obvious ‘yes’.

Condo Prices Exploding – Part 2

Just Sold: 101-1168 Richards Street
Last Sale: March 2015 – $975,000
Assessed: $952,000
Asking: $1,399,999
Sold: $1,500,000
Sold in 5 days for 54% more than previous sale 14 months earlier. There were some renovations, but nothing major. Here are the before and after pictures:

101-1168 Richards – Before

101-1168 Richards – After

Just Sold: 1501-428 Beach Crescent
Last Sale: December 2012 – $1,950,000
Assessed: $2,270,000
Asking: $3,080,000
Sold: $3,280,000
Selling price 68% higher than previous sale 3 years and 5 months ago, 44% higher than assessed value. Sold in 2 days, no pictures provided in listing. Why bother?

Just Sold: 2003-918 Cooperage Way
Assessed: $893,000
Asking: $1,399,000
Sold: $1,350,000
This one actually went for less than asking, but still 51% higher than assessed value. Sold in 13 days.

Condo Prices Exploding

Just Sold: 1000-1675 Hornby Street
Assessed: $3.29M
Asking: $4.5M
Sold: $5.06M
Selling price 54% higher than assessed value.

Just Sold: 2806-583 Beach Crescent
Assessed: $994,000
Asking: $1,468,000
Sold: $1,681,800
Selling price 69% higher than assessed value. Lots of eights in those numbers, I wonder where the buyer is from…

Two “02” floor plans at 939 Homer Street
2702 – Sold January 25, 2016 for $561,000
602 – Sold May 9, 2016 for $685,000

In less than four months, the same floor plan (771 sq. ft. 2 bed/1 bath) on a much lower (no view) floor sold for 22% more than the previous unit. Assessed value on #602 is $404,000 — sales price was 69% higher.

The Entitlement Generation

One of the more disturbing criticisms of the housing affordability discussion is coming from some pretty obnoxious baby boomers. They are telling younger Canadians to “stop whining” and accusing them of “entitlement”. Talk about irony!

The typical boomer was raised in a home where mom stayed home and dad worked an 8-hour day. Back then, the average Canadian family could afford a comfortable middle-class life in a single-family home with only one income and little household debt (less than 30% of GDP). Today families are weighed down by record-high household debt which is approaching 100% of GDP.

When it came time for university, boomers graduated without the need for large student loans. Their parent’s generation picked-up the tab thanks to a top tax rate of 80%. Now, university students are being asked to finance their own education, so boomers can enjoy the lowest tax rates since the Great Depression. The situation is especially bad in BC, where the 2013 BMO Student Survey found students here graduating with almost $35,000 in student debt.

When the boomers started working, they enjoyed good starting wages and generous retirement benefits — thanks to strong labour unions. As they moved up the income ladder and as some of them took over positions in government, they gave themselves huge tax cuts, greatly weakened the strength of labour unions, and put in place plenty of other perks that they disproportionately benefited from — like income splitting and TFSAs . In a report from earlier this year, the parliamentary budget officer concluded that TFSAs overwhelmingly benefit older, wealthier Canadians. Did I mention the TFSA was first proposed by one of Canada’s most prolific millennial-mocking boomers, Garth Turner?

As the baby boomers stock holdings grew, corporate income tax rates fell. Since the 1980s, the Canadian corporate income tax rate has been cut in half. This has done wonders for after-tax profits, and been yet another windfall for the boomers.

Ask any millennial if they expect to get the same generous government retirement benefits that older boomers now enjoy. The age for OAS is already going up. Sorry, you young entitled whiners, but there’s a good chance you’ll be working many years more than the boomers had to.

When it comes to housing, boomers were able to buy a single-family home on one income. Then they got to enjoy decades of falling mortgage rates, giving them a nice bonus every time they renewed their mortgage. The outlook for millennials is much less rosy. As hard as it is now to buy a place, it’s likely to get much worse when they renew as interest rates have nowhere to go but up.

One of the regional perks enjoyed by boomers has been the Agricultural Land Reserve. In the mid-1970s, after many of them bought cheap land for their homes, restrictions were put in place on future development. As a result, the ALR helped ensure that the homes of baby boomers would appreciate handsomely. We got ours, tough luck future generations! Now stop whining!

And one of the most outrageous examples of boomer entitlement comes courtesy of the BC Liberals. For homeowners over the age of 55 — most of whom are equity rich — the BC government will now give you a super-low 1 per cent loan. The only requirement is that you don’t pay your property taxes. Meanwhile, the whiners get to pay over 5 per cent on their student loans.

I don’t think there’s been a generation in history that’s had it as easy economically as the baby boomers. They’ve enjoyed economic tailwinds their entire life.

Now that millennials are rightfully complaining that their prospects are much worse than baby boomers enjoyed, some of those boomers now have the audacity to call millennials entitled?

Emergency Town Hall Meeting

RSVP for tickets to David Eby’s Emergency Town Hall on Housing Issues here: https://ebyemergencyhousingtownhall.eventbrite.ca

What: Emergency housing affordability meeting
Who: Everyone who believes there is a problem in Metro Vancouver’s real estate market
When: Wednesday March 16, 2016 at 7 p.m.
Where: St. James Community Square, 3214 W. 10th Ave, Vancouver

Join MLA David Eby and local experts for an Emergency Housing Town Hall

This meeting is to discuss the causes of, and solutions to, an out-of-control real estate market in the Lower Mainland that has little or no connection to average household income. Issues of international speculation in our housing market, shadow flipping, real estate agent accountability, and other concerns will be addressed. Bring your stories, questions and concerns. The media, along with MLAs from both sides of the legislature, both BC Liberal and BC NDP, will be invited.

This is a meeting to hear stories, demand answers, and send a message to the Premier and the government to start to value the people of Metro Vancouver who make the communities we call home possible.

Wednesday March 16 from 7-9pm at St James Community Square. Doors at 6:30pm.

Vancouver – 34th Most Livable For Millennials

Here we go again…

Mercer recently came out with their 2016 Quality of Life Survey. As usual, the media misused the survey to brag about how Vancouver is the bestest of the best. What they failed to point out is what the survey is actually trying to determine.

When executives are temporarily relocated to another city, they frequently will receive a hardship allowance. For example, when an executive in a city like Vancouver is assigned to Jakarta, Indonesia, Mercer recommends a 25% hardship allowance.

In calculating their index, Mercer considers these ten categories:

1. Political and social environment (political stability, crime, law enforcement, etc.).
2. Economic environment (currency exchange regulations, banking services).
3. Socio-cultural environment (media availability and censorship, limitations on personal freedom).
4. Medical and health considerations (medical supplies and services, infectious diseases, sewage, waste disposal, air pollution, etc.).
5. Schools and education (standards and availability of international schools).
6. Public services and transportation (electricity, water, public transportation, traffic congestion, etc.).
7. Recreation (restaurants, theatres, cinemas, sports and leisure, etc.).
8. Consumer goods (availability of food/daily consumption items, cars, etc.).
9. Housing (rental housing, household appliances, furniture, maintenance services).
10. Natural environment (climate, record of natural disasters).

Because these executives will continue to earn their base salary plus any hardship allowance, and will be housed by their company, local incomes and housing prices are not even considered. The idea that incomes and house prices have no bearing on quality of life is absurd. Any true measure of livability would need to consider both of these factors. This would be especially true for young families who are just starting out.

So, in light of the deficiencies of livability surveys that only consider temporarily relocating corporate executives, I’ve adjusted Mercer’s numbers to take into account incomes and house prices. For example, if Mercer thinks City A is 5% better than City B, but pay is 5% higher in City B, they would tie in my adjusted index. The same would be true if housing in City A is 5% higher than City B.

I’ve taken the latest available data from Mercer (for English-speaking cities), and adjusted the index to account for incomes and house prices. Here are the results.

Vancouver is without question a great place to live for visiting executives, home-owning retirees and the super-wealthy. But for young families just starting out — not so much.