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July 2, 2018 | Everybody knows

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.

The bulk of people buying million-dollar properties in Toronto and Vancouver carry debts equal to, or exceeding, 450% of what they earn. Gulp. That should answer the question oft posed: how can the average income-earner afford the average house?

Answer: they can’t. So the average family has borrowed excessively, or cashed in existing real estate and added in more mortgage financing, to move up the property ladder. This is why a household in Van with the median income of $80,000 can’t afford a $1.6 million house without existing savings, equity or a rampant disregard for debt. It’s also why BC has a negative personal savings rate. Last year the Bank of Canada crunched the numbers and concluded 8% of the national population – those with borrowings of more than four times income – were at high risk if interest rates ever increased. Which they are.

By the way, when 8% of Americans became over-extended and wobbly, the entire market grew unstable. Then crashed.

The housing market being what it is, each sale sets the floor for prices on a street, in a hood or an entire city. So when some fools decide to borrow a huge amount and spend their brains out, it drives the entire thing skyward. This is why prices escalate – a cycle of moronic behaviour, cheap credit and FOMO.

However, most folks don’t see it that way, because they don’t want to. It’s easier and more comforting to blame others for a situation which is now largely untenable. So, enter the bad guys. They are (alternatively) Chinese dudes, temporary foreign workers, Albertans (or anyone with truck nuts), gangs or money launderers.

Lately it’s the latter who are much in vogue following a sketchy report done for the BC Dippers alleging $100 million in dirty money was laundered through BC casinos over the past decade. Wow. A hundred mill. Sounds like a lot. And so everyone thinks (a) it all went into residential real estate and (b) that’s why houses cost a pile.

But, alas, it’s a myth.

Over the past ten years there have been $1 trillion worth of residential real estate transactions in BC, most of them being in YVR and the LM. Because math is hard, let’s spell out what $100 million is as a component of one trillion dollars: 0.01%. Yup, statistically insignificant. Even if were all concentrated in Vancouver, still meaningless. Last year $37.8 billion worth of properties sold in that one city alone. So, if $10 million of that came from money laundering, it would account for ten properties, or 0.029% of all deals.

But, ask the average dude if dirty money/gangs/casinos is responsible for the stupid price of a house in Kits, and the answer will be the same, ten times out of ten. “Plus the Chinese,” he’ll tell you, nodding. “Everybody knows that.”

Well, almost everyone. Last week CMHC released an interesting study on market perceptions. What impact, it asked, do you think foreign buyers are having? In Vancouver 68% answered “a lot of influence” while in Toronto 48% agreed foreigners are driving up house prices.

But there is zero statistical evidence to support this. Every study has found remarkably similar totals for foreign buying of domestic real estate in these two cities. StatsCan numbers are typical: 4.8% of transactions in Vancouver and 3.4% in Toronto.

“What is striking,” says the crown corporation, “is the significant gap between perceptions of the public and available data, so much so that the perception of non-resident ownership takes centre stage when discussing the drivers of price growth.” You bet. And it’s safe to say the comment section will soon be filled with angry posts from people alleging foreigners hide their buying through corps, kids or casinos. No matter what facts are trotted out, people believe what people believe. Ask the North Koreans.

By the way, CMHC also found that almost half of all buyers in Vancouver and Toronto end up spending more on their home than they budgeted for. Because, of course, some money-laundering Asian predator is just around the corner ready to offer cash.

Without a doubt, the perception of foreign buyers, illicit funds and offbook deals has done much to turn housing booms into gaseous, bloated and unstable bubbles. That’s been fed relentlessly by individual realtors and local media, when the real culprits have been cheap rates, lax lending, financial illiteracy and buckets of house lust. Now we’re pickled in debt with an extreme home ownership rate, more vulnerable than ever to higher money costs, trade wars, economic torpor or Trump.

Ground zero, as you might imagine, will be Vancouver. Governments there have the bulk of people believing they can chase away foreigners, Albertans, and other cheaters while taxing the rich as never before.

They won’t. But all politicians need to do is change perceptions. Then the correction will be epic.

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July 2nd, 2018

Posted In: The Greater Fool

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