- the source for market opinions


November 9, 2017 | Mush

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Unless I have mush for brains, or enjoy recreational flogging, this will be the last blog for a while on why young people can’t afford to buy or rent houses in Van or T.O.

It’s not because armies of 1%ers scoop and hoard those places, keeping the condos dark and the houses vacant. No evidence of that. Besides, it doesn’t pass the smell test. Why would they? But it’s a convenient myth for the 99% to brandish on a stick as they march to the palace gates.

Foreign buyers? We’ve debated this one to death. In Toronto they’re an absolute non-event, according to every piece of data published, private or public. And yet the government brought in a 15% foreign buyer’s tax. It accomplished little, of course. The motivation was 100% political. It’s what politicians do.

In Van the evidence is that offshore money in concentrated areas has impacted some local prices. But the province’s own data shows most foreign buyers come to stay as residents and buy mid-priced houses. The Lambo set exists, of course, but seems not to be a market-maker. Overwhelmingly, housing markets are dominated (90% in the Lower Mainland and 95% in the GTA) by locals.

This brings us to the real reasons house prices are stupid.

Speculation. It’s rampant as real estate has become the one-asset strategy of the masses. Just read the comment section here for a week or two (then seek therapy) to ascertain that. We’ve become a nation of house-lusty automatons, drooling over listings and measuring each other in the crassest of ways – by the property acquired. The boasting over how much a house has inflated is endless, and the very notion of this blog – that greater fools buy from lesser fools – is trounced daily by the vast majority of Canadians. They’re horny for more.

If government wanted to end this, a speculation tax would be quick and efficient. Ample precedent exists. Tax short-term windfall gains as income, and stop diddling with stress tests, anti-foreigner bias, empty-house levies or mortgage regs.

Leverage. You can’t buy a $1 million investment portfolio with fifty grand, but you can buy a million-dollar house with $50,000. The ascendance of property values began in earnest when traditional 25% down payments become 10%, then finally 5% (and briefly, 0%). By trying to make real estate more accessible to people who can’t actually afford it, governments have contributed to price escalation. That would reverse if CMHC did the wise thing, and insured only those with 10% or more in their jeans.

Hoarding. Yeah, happens. But not as the tax-empty-houses crowd believes. These days an astonishing 15% of all families in the GTA, for example, own multiple properties. Overwhelmingly it’s a principal residence and an ‘investment’ condo, bought on spec. Key to this strategy is leasing the unit to try and carry it (good luck), which actually increases the pool of rental housing. It also inflates prices by creating more demand.

CMHC wipes away risk. No element of government has done more to create bubble prices and dis-entitle young buyers. By providing blanket mortgage insurance to cover every high-risk, high-ratio borrower, Canada Mortgage and Housing Agency has removed lender risk. Thus, a kid with little to put down is offered the same rate as a move-up family with a 70% down payment, even though the first-timer poses a far greater risk of default. In fact, CMHC-insured borrowers often get a better rate, since lenders know the feds are standing in the wings to bail them out. This distortion has translated into rising prices and dropping affordability. It’s time lenders shared the risk.

Unrealistic rates. An entire generation of house-horny moisters has matured knowing only the lowest money costs in history. What were ‘emergency’ rates in 2009 to save the economy from crisis became commonplace within a couple of years, then completely normal. As a consequence, we engorged on cheap money and now disbelieve interest charges might rise because, “nobody could afford it.” Household debt has surprised $2 trillion and two-thirds of that is mortgage borrowing – leveraged against house prices which have never been higher. What a massive risk. Ironically, low rates were sustained to encourage borrowing so people could afford houses. As rates fell, prices rose. Debt swelled to fill the gap. Genius move.

So, rents are high because prices are high. Duh. Not because Chinese dudes bought mansions that don’t live in much, but because house lust, speculation, cheap loans and pliant lenders made them so. By extending gobs of low-cost credit to people with scant means, governments have pimped real estate to this sad conclusion. As housing became more valuable, leasing costs have risen, too. Whacking people who own homes and keep them empty some or all of the time won’t bring prices or rents down. Believing otherwise is evidence of the real reason we have irate Mills at the gate…

Financial illiteracy. It is naïve and simplistic to believe first-time buyers should be able to afford real estate within bicycle distance of downtown gigs in cities like Toronto or Vancouver. Whether their parents could or not is irrelevant, given the pace of urban growth over a generation – plus all of the policy mistakes detailed above. It is toxic to put all of your net worth into a single asset, in one location, in one city. It’s dangerous to borrow a huge amount of money on terms that allow the lender to increase the cost every few years. It’s irresponsible to start a family and not have liquid assets to deal with reversals or educate your kids. And the last entity you should ever trust with your financial future or your long retirement is the government.

Tax others because they own things you want? If you buy that, you’ve lost your way.

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November 9th, 2017

Posted In: The Greater Fool

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