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November 8, 2018 | The Trap

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.

Real estate taxes are wealth taxes. Envy taxes. They’re all about governments fleecing cash, not making properties accessible to first-time buyers. In fact, they have the opposite effect. It’s time the politicians were called out.

This includes the so-called BC ‘speculation’ tax, foreign buyer taxes in Ontario and BC, uber property (luxury) taxes, plus Van’s crazy ‘empty house’ tax.

By whacking non-residents, as the example posted here yesterday proved, locals are effectively prevented from selling to willing buyers. Realtors, lawyers and movers make nothing. No land transfer tax is paid the city.  Folks who want to live and invest in Canada are repelled. It doesn’t mean sellers will drop prices. That’s not the way markets work. Instead, the non-resident will probably shop in a lower price range to reduce the tax load, increasing competition among those looking for more affordable housing. First-time buyers lose.

Like the B20 stress test, which reduces credit by creating a higher bar for borrowing, government actions like these distort the market, push buyers down the price scale and thereby inflate the cost of cheaper homes. First-timers lose again.

Simply put, governments should not set prices nor seek to tell you who can buy your property. Not their job.

Taxing secondary residences, recreational properties or business-use condos as BC is doing is a tax on assets bought with after-tax dollars, disguised as a measure to make real estate more affordable. There’s no evidence it is working, while penalizing those who have owned properties for years, paid their way and played by the rules. There is no evidence taxing lightly-used properties has increased the rental stock. But we’re sending out a message that Vancouver is a high-tax, high-cost, unfriendly, capricious place. Cost-conscious tech/AI startups ultimately drift off to cheaper locations. The young pay the price in lost opportunity.

Calling a tax on cottages, cabins, ranches and vacation homes a levy on ‘speculation’ is bogus. Speculating is flipping – short-term ownership – where gains are involved. All governments need do in order to curb true speculation is ensure the proceeds of flips are taxed as income or subject to a valued-added levy. But the tax is not about speculating. It’s merely a revenue-generator. And by taxing real estate more, housing becomes more costly.

Sadly, opportunistic politicians seeking public office have turned foreigners into scapegoats for our own house lust. Because 80% of people in Van, for example, think prices are high because of Chinese dudes, politicians like the current crop of Dippers mine that myth. Stats Can, however, shows just 3% of detached houses are owned by non-residents. CHMC nailed it with this conclusion:

“…the narrative around foreign investment in Vancouver with an endless flow of funds has created a compelling story encouraging residents to enter the market. The actual size of foreign investment in Vancouver would therefore not matter if the narrative were compelling enough to alter households’ beliefs and therefore encourage exuberant expectations of future prices.”

Exactly. You’ve been had by those with a vested interest in endless price escalation, feeding FOMO among the masses. I do not need to tell you who.

Moreover, you are being deluded by dishonest or dumb politicians into believing real estate ownership is a right, and government’s job is to protect that. In truth, in an open society, such a right does not exist. It never will.

The market was rolling over before these taxes were introduced. Rising interest rates combined with over-valuations were correcting the market. Government overkill risks creating a climate in which people don’t buy because they fear loss. It’s human nature. Just as ill-conceived pro-housing policies (RRSP homebuyer plan, first-time buyer grants, land transfer tax breaks, 0/40 mortgages) artificially inflated housing values, so this bevy of taxes will artificially depress them and distort forces.

Mr. Market eventually solves mispricing. And correctly. The stress test means buyers have less to spend. Rising rates make that debt more expensive to carry. Prices therefore adjust lower on their own until there are enough buyers to find and maintain balance in a community’s housing market. But also realize time does not stand still. The hood your parents could afford to buy into sits in a larger urban centre where competition for housing has increased. It’s a fantasy first-time buyers will now, or ever, be able to get a detached house within walking or biking distance of a downtown job. Give it up, or fail trying.

Finally, let’s not forget falling real estate values nail people who parked most of their net worth in their properties. So when politicians come along and arbitrarily change zoning, allowing a duplex next door, or jack property tax just because you live on a leafy street, or prevent you from selling your house to a dude from Washington State, or depress the entire market with a new, unjustified wealth tax, innocent people are victimized. Almost always they’re not rich, greedy or deserving of it. They have families, mortgages and tight budgets like the rest of us. There are consequences when so many millions are taken away from households and diverted to government.

The experiment thus far is a joke. Expensive houses remain too expensive for average families to afford. Cheaper homes now cost more. Money, employers, jobs and opportunities are actively seeking lower-taxed environments. And nothing has become more ‘affordable.’

So, go ahead and be angry. But be careful what you wish for. Be even more careful who you vote for. It’s a trap.

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November 8th, 2018

Posted In: The Greater Fool

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