As Vancouver’s manifold attractions decrease, witness the appearance of a sign that we haven’t seen in these parts for a while: Foreign investors are met with a cold shoulder in the form of the contention-breeding 15% land transfer tax instituted without warning in July. Hard on the heels of this tax is yet another one, this one aptly named the Empty Homes Tax, courtesy of the City of Vancouver. This tax targets the close to nil rental vacancy rate. The result of tax upon tax? Total home sales in September plunged 32.5% from a year ago. This includes a vertigo-inducing plunge in sales of detached homes of almost 47%, according to the Real Estate Board of Greater Vancouver. Apartments and townhomes hardly fared better with sales dropping respectively 20.3% and 32.2%. The benchmark home price remained flat compared to August but was still up nearly 29% from a year ago. But consider the words of William Wat, the realtor for a neighbour’s house, which sold after two weeks on the market: “The housing market in East Vancouver has collapsed.
That was two months ago.” Selling in less than a week over asking is apparently sooo last season. This almost 50-year-old house, which listed for C$1.35M, was well maintained but by no means renovated. Nor does it have an existing rental suite in the basement as “mortgage helper,” necessary for mere real-estate mortals. Final selling price: C$1.17M. This is what that million-dollar palace looks like: Guess the buyers didn’t get the memo from Swiss Bank UBS, which last week belatedly joined the bubble-calling-party, pointing out that Vancouver has the bubbliest housing market in the world, with the highest likelihood of a property price decrease, a dubious distinction of being in first place: If sentiment turns nastier on Canada’s west coast, where might the hot money flow next? Try Toronto, Canada’s other glittering city, nicknamed HogTown. Though Toronto does not appear on the UBS bubble city list, and the average home price is not nearly as eye-watering as Vancouver’s, since last year it has still jumped by 20.4% to C$755,755.
Sales were up by 21.5% year over year. “The sustained lack of inventory in many neighbourhoods across the Greater Toronto Area continued to underpin high rates of prices growth for all home types,” says Toronto Real Estate Board President Larry Cerqua. The respective realtors associations of Toronto and Ontario raised hue and cry against the possibility of a foreign buyer tax similar to Vancouver’s in Greater Toronto, precisely what Bank of Montreal chief economist Douglas Porter advised Ontario’s government to “take a long look at.” In Ontario, home buyers’ citizenship is not yet documented, a move British Columbia necessarily implemented the same month as its foreign buyers transfer tax for Metro Vancouver. Just this Monday, Finance Minister Bill Morneau ended the opportunity of tax-free capital gains by closing the tax exemption loophole meant for those purchasing their principal residence. This was thought to be taken advantage of by some wealthy foreign buyers installing “homemakers and students” as principal homeowners.
In BC, it was recently found that their presence there was made possible by generous yet suspicious “gifts,” enough to buy swank multi-million dollar homes on the tony West Side. In September, two of Canada’s “Big Five” banks, the Bank of Montreal and Bank of Nova Scotia, put restrictions on foreign buyers, who must now have their wealth and income origin verified as legitimate. This previously allowed newcomers to Canada to leverage their money from whatever source, legal or otherwise. It was originally meant for those without Canadian credit history who arrived in the last 5 years. Though it’s only a policy change and not even across the entire banking industry, it’s another step toward calming the real estate frenzy. Will these measures keep those oh-so-easily created currency units at bay or send them closer to Bay Street, the business hub of Toronto? Avery Shenfeld, Chief Economist at Canadian Imperial Bank of Commerce (CIBC), is hopeful that, for Toronto’s sky-rocketing prices, a “gentle end” can be brought about.
Is there such thing as a soft landing? “An end” to this golden age of real estate is the last thing those with vested interests want to hear about, and only a very distant possibility while the strategy of kicking the can is continued ad infinitum (we’re looking at you, Bank of Canada, and those low interest rates.) Mr. Shenfeld’s idea of cooling off the market “without killing the Toronto or Ontario economies in the process” is by increasing the supply side of the equation. Indeed Toronto is familiar with subdividing heritage mansions and building high rises behind them. The prices of those urban shoe boxes in the sky however, may be prohibitive for those 56% of Canadians who would experience a euphemistic “negative cash flow” if their monthly debt increased by a paltry C$200. In another city on UBS’s bubble list, San Francisco, there’s a new phenomenon. Owners at “Leaning Tower of San Francisco” Knock Condo Values to ZeroCreate the ultimate Raptors home and office with licensed Toronto Raptors Pennants, Home Decor and Office Supplies.
Show your team pride with Raptors Wall Hangings, Stationery and School Items. Your Raptors Home and Office Decorations are ready to ship from the hardwoods to your home from the ultimate sports store.According to data from the TD Bank, housing prices in Canada from 1980 to 2012 increased at an annual rate of 5.4 per cent, Toronto and Vancouver a full point higher. The Dow Jones Industrial Average calculates its average annual return for the same time period was 8.9 per cent. The Toronto Real Estate Board says the average price of a house in 2014 was $566,726, an 8.4 per cent increase from 2013. It adds that “we should not expect current price increases to continue.” TD concurs, forecasting that over the next couple of decades, real estate should grow three per cent annually, while stocks will grow seven per cent. What should you invest in? That should be enough, but come to think of it, 10 lines of common sense arithmetic is not likely to come close to dispelling the most indestructible urban myth of all time.
Robert Shiller, Nobel Laureate and author of the classic analysis of behavioural economics, Irrational Exuberance, has determined that going back to 1890, U.S. housing prices have risen faster than inflation only twice. Once in the generational boom after the Second World War and again only in the run-up to the sub-prime mortgage crisis of 2008. To which we may now add, price levels in Toronto and Vancouver the last few years. Otherwise, the rate of return, in real dollars adjusted for inflation is with extremely rare exceptions, zero. On the other hand, in The Apprenticeship of Duddy Kravitz, Duddy’s grandfather advises, “A man without land is nothing.” As Canadians pile up record debt levels to get into the housing market, they are apparently subscribing to Zayde’s Nineteenth Century Shtetl School Investment Strategy. Shiller, and others are working to figure out why the bias to ownership persists in the face of a growing body of overwhelming evidence. “Irrational exuberance” is how former Federal Reserve Chair Alan Greenspan described the stock market’s self-destructive, lemming-like behaviour in the dot-com bubble at the turn of the century.
Shiller applies it to the real estate market driven by cultural and psychic motivations that transcend traditional economic explanation. Operating costs alone can add up to hundreds of thousands of dollars, leaving the Canadian dream home a money-losing proposition He uses the simple example of a house sold in 2005 for 10 times its 1945 purchase price as a symptom of so-called “recency bias.” “Simple return from such a transaction is 900%. In addition, the claim of selling for ten times more appears impressive. However, this transaction yields a real annualized return of less than 1%, before factoring in operating costs.” Those operating costs, such as taxes, maintenance, repairs and in Canada’s case, mortgage interest can add up to hundreds of thousands of dollars leaving the Canadian dream home a money-losing proposition, painted in several coats of red ink. Yet, as Shiller notes,“the widely-held impression that single family homes have historically shown high real capital gains when in fact over the last century the gains overall have been only nominal and hence illusory (and) can only be explained by using other social sciences like psychology.”
With data like that why are people incurring Frankenmortgages and crawling over broken glass to buy? Shiller’s answer, simply put, is that they’re crazy. Whether it’s tulip bulbs in Holland in 1637, dot-com stocks in Silicon Valley in 2000 or homes in Toronto in 2015, people are terrified of not having one, whether they need it or not. Homeowners angrily deny this. “It’s a good place to park your money” is one comeback. “Better than throwing money away on rent.” Both seem wise observations. Except if they ever actually sat down and did the math, they would choke. And they never have. They just repeat the accepted wisdom. Just take a look. As simple as possible, leaving out details such as reinvesting dividends, estimates of growth in property taxes or even having a mortgage subject to rate hikes (which frankly only make the case for owning look even worse). , so if he can figure it out … Put $400,000 each into A) a house and B) a stock portfolio while renting.
TD forecasts an annual growth rate of three per cent for housing, well above the historic rate. So after 25 years, it’s worth $837,511. More than double, congrats. But the Bank of Canada forecasts inflation at two per cent, so in real dollars it’s down to $656,242, a net ROI of 2.6 per cent. Assume operating costs even at estimates ridiculously low by Toronto or Vancouver standards. Fees and taxes of $5000 per year, as well as maintenance and repairs of $7,000 and the net worth becomes $356,242, a net loss of almost $44,000. As a columnist at The Week recently observed: “If median-income people borrowed hundreds of thousands of dollars to speculate on the price 30 years hence of a single, highly illiquid asset that wasn’t a house, they would be called financially insane.” As for throwing it away on rent, your down payment invested in the market (at a conservative five per cent return) gets you about $1.34 million, call it $1.25 million after fees. Another $181,000 is eaten by inflation.
Even at an average rent of $2,000 per month, the cost over 25 years would be $600,000 leaving $469,000. You do the math. Shiller does concede there are “implicit dividends” to ownership that can’t be measured. “There is no way to put a dollar figure on the psychic benefit one gets by owning and living in one’s own home.” But then, he argues, it becomes not an investment or even a good place to park your dough, but the consumption of a luxury good, which should be left to those who can afford it. But recent research in British Columbia and elsewhere has found there are diminishing returns to those psychic benefits as prices mount and the lifestyle sacrifices necessary to meet mortgage and other costs keep mounting. “People are making so many trade-offs in order to have that home,” according to, associate professor of psychology at the University of British Columbia, Elizabeth Dunn, who studies consumerism and happiness. She finds that people are highly unlikely to admit any fault in past decisions.
They are in fact even more convinced buying a house is the only way to go. Like a reformed smoker, they are militantly evangelical. Read & DebateFind Full Comment on Facebook It could well be that people are happier spending on vacations and lifestyle than being house-rich, cash-poor. Or worse still, they could further erode their dismal rates of return by taking on lines of credit to try to have their cake and eat it too. The important thing is not to be critical of people for their investment decisions but rather to correct a dangerous economic distortion. Real estate is a huge business, bigger even than oil and gas. Do we want a significant portion of our GDP dependent on fundamentals that a Nobel laureate has called “illusory?” Have you ever heard a bank manager or real estate agent say, “You know at these prices, you may want to hold off and rent til you grow your down payment?” They make billions selling people mortgages and products they would be better off without.