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August 16, 2018 | The Wall

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.

Just over 4.5 million people live in New Zealand, a weird little place of beauty. That’s twice the population of Greater Vancouver which is, well, beautifully weird. In Auckland (1.6 million) the average house costs $800,000, and the average family’s median income is $91,600 (NZ$). That’s a ratio of 11.6 – seriously unaffordable by international standards.

By the way, the home ownership ratio in NZ is 63.2%, the lowest in 66 years. It’s not a happy place when it comes to real estate, especially with five-year mortgages at 5.7% and floating rates even higher. No wonder the new government got elected in part last autumn by promising to “do something meaningful” about the cost of houses.

Vancouver? Just over 2.6 million people there, with an almost identical rate of home ownership – 64%. The median household income in the region is almost exactly the same as Auckland ($72,000 C$), but the average property sold last month for $1,093,000. The ratio of price-to-income is 15. Off the charts.

One reason may be the dramatically lower cost of credit in Canada. Five-year mortgages are available here at little more than 3%, and floating-rate loans below that. However, the household debt-to-income ratio is almost identical for the two countries: 166% in NZ and 168% here. Of course when it comes to the GTA or YVR, we know the majority of people buying $1 million+ properties have a ratio topping 450%.

In short, both societies are addicted to real estate, speculate in it and seem willing to pickle themselves in loans to get it.

But there’s another similarity worth mentioning. The wheels are wobbly.

Sales have stalled in Auckland (830 last month) and average prices have fallen 2% year/year. Says the major bank, ASB: “Auckland continues to look more like a buyers’ market every month. We see a risk that annual house price growth in Auckland slips into negative territory as uncertainty and affordability constraints continue to crimp activity.” The decline has been attributed to tighter government regs, including lower alllowable loan-to-value ratios and curbs on speculation.

In Van, well, it’s a tough time to be a realtor with an Audi lease hanging over your head.

“Both average and median sale prices are now down 10% from a year ago, but it is the complete cratering of actual transactions – to the lowest level in DECADES – that is the real point here.  Remember, price leads volume…,” says local venture capitalist and blog dog Hans Knapp. “So… the back half of this year could be where reality finally overtakes the misplaced expectations of would-be sellers, and material price cuts ensue.”

The numbers tell the tale. Lately this blog reported the desolation, moaning and gnashing on the Westside. Elsewhere, the same. In Kits, sales have tanked 46%. In North Van they’re down 22% with average prices off $250,000 in the past year. In West Van last month there were 37% fewer deals struck, while listings are up 32% and prices down 11.6%.

Like NZ, tighter regulations (including the mortgage stress test) are taking a toll. But, mostly, houses are unaffordable to the average family, resulting in cascading sales and (inevitably) falling values – exacerbated by local and provincial housing taxes which are extreme by national standards.

Yes, there’s something else citizens of Auckland and Vancouver share. That’s a deep, ingrained, visceral belief they’re not actually to blame for the prices of houses they sell each other. Nope, it’s evil foreigners. In BC recent polls have found 80% of the locals think offshore buyers are ruining house prices, even though 95% of BC sales are among existing residents. In NZ the foreign buyer rate is 3.8%, but climbs to about 20% in certain Auckland neighborhoods (about the same as in select areas of YVR during 2017).

In both jurisdictions (BC and NZ) governments were elected in 2017 largely on a populist pledge to make homes affordable, and do so by wielding the blunt hammer of xenophobia. They catered to public sentiment – assuaged it, amplified it, milked it, and won. In BC the NDP-Green coalition goosed the tax on foreign buyers to 20%, extended its scope brought in a new speculation tax on non-resident owners. In NZ, as of this week, something more radical – a ban on outsiders.

All this is consistent with the times in which we live. The forces of nationalism, populism and protectionism are alive as never before in several generations. Many people crave walls, distrust those not of their tribe, and believe barriers will restore things that have been erased. Like one-career households or affordable homes on leafy streets. It’s at the very root of Making America Great Again, embodied by the us-and-them American president.

Will it work?

If foreigners were truly the main cause of too-expensive properties in Auckland or Vancouver, then probably. If they’re a sideshow, minor influence or shameless political scapegoat, probably not. The real estate market will go down if people expect it to, and vice versa. What will be indelible is the stain.

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August 16th, 2018

Posted In: The Greater Fool

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