Capitulation II

The politicians giveth. They taketh away. They also screweth over.

One day after BC’s tax-tax budget, with reflection, thought and a few single-malts, it’s clear government has crossed a line. Elected officials have purposely, deliberately, set a course to crash a housing market. And they admit it.

When Finance Minister Carole James was asked, bald-faced, if the Dippers are attempting to engineer a price plop, she said, “Yes.” Then she admitted the province brought in $500 million in new annual housing taxes without actually knowing the consequences. “We’re take some very bold steps. There are firsts here and we’re going to track it carefully.”

Legislation without modelling. This must be a first. To its credit the BC realtors’ association had a stark response: “I can’t imagine a government telling homebuyers who bought a home in the last year that we are purposefully trying to put you under water.” And under the waves could cover a shocking number of people.

If prices in Van drop just 25%, which suddenly seems like a no-brainer possibility, a stunning one quarter of all households with mortgages go into negative equity. That means their mortgages are greater in size than their property is actually worth. Yikes. And not only would they have a monster debt and have shed their savings/downpayment, but mortgage rates are guaranteed to increase this year and next, completely diddling the family balance sheet.

It gets worse.

A politically-driven market decline – now almost certain with the spec tax, the 20% go-home tax, the higher property tax, the empty houses tax plus the expansion to most of the province, along with rising loan rates and the borrower stress test – will mean lower appraisals, decreased lending limits, reduced mortgage originations, job loss and (most significant) less building. So fewer new homes. Just when the populace is screaming for ‘more supply.’

If private construction slows (count on it) the $6 billion in public money the NDP is committing to build ‘affordable’ homes will seem like one widdle finger in a bursting seawall – leading to more spending and more taxes.

But it gets even worse.

The ‘speculation tax’ – 2% annually of a property’s value by next year – isn’t a tax on speckers or flippers at all. It’s just another hit on the wealthy. And the definition of rich is anyone owning two properties. While most BCers support this because they think it pokes a stick in the eye of well-off foreigners, the biggest impact could be on Canadians, and the locals whose cottages, cabins, ski lodges and recreational properties are about to be creamed.

Far more ‘second’ properties in BC are owned by folks who live in Alberta or Ontario than in China. There are thousands of resort homes in the mountains or the Okanagan which for decades have been in the possession of families in Calgary or Edmonton, while a prime market for Victoria condos has always been southern Ontario. Now those people – the Dippers have confirmed – will be slapped with a 2% tax that will cost $1,000 a month on a property assessed by the province at $600,000.

Only by renting the property out continuously on a one-year term, moving in full-time, or getting a job and paying income tax in BC, can this Hoovering be stopped. Meanwhile the owners from other provinces pay local property tax. They pay income tax. They pay sales tax, gas tax, utility bills and spend millions on goods and services while at home in BC. “This changes the economics of buying and holding real estate,” says BeeMo economist Robert Kavcic. And as a result, you can expect a wave of sales – and the same downward pressure on prices in the rural areas as will occur in YVR, Victoria, Kelowna and the LM.

It’s a sad Balkanization of the country. Now dudes from the GTA are just as unwelcome on the Left Coast as dudes from Guangdong. The incentive to dump assets in BC is huge – exactly what the NDP and its supporters seem to cheer for.

So, put it all together. Scary. A forced market meltdown. A debt crisis in an untold number of households. Reduced economic activity. The expulsion of fellow Canadians. Tax, tax and more tax. And yet, if Vancouver real estate prices dropped by 50% – plunging the province into recession – 98% of the population still could not afford a detached house.

Higher mortgage rates, new borrowing regs and moronic household debt levels were bringing a market correction anyway. Political incompetence might make it Biblical.

Capitulation

Has this blog capitulated? Stopped snarling? Rolled over for a tummy rub?

That was the allegation yesterday in the wake of the tax-tax BC budget and the silly expectations fostered by the Dippers there that they’d crash real estate values so every moister could have a home. On one side, the politicians are out to punish non-residents who buy or own real estate (as in Ontario), thinking that will lessen demand, while they promise to pump $6 billion into the market  – increasing demand. Suck. Blow.

Being prickish, this blog said:

Real estate values will inevitably moderate as the cost of money rises and household debt goes from critical to moronic. But nobody should expect 40% declines in YVR or the GTA, especially in the urban areas always in demand. Even at that level, most people would find it unattainable without committing 100% of their net worth to a single asset. Unwise.

This may need more ‘splaining – because in no way has the view altered that housing is entering a grind that will push valuations lower over a prolonged period of time. Every market is unique, so some will be impacted more than others, even as sales struggle everywhere. Places like Fredericton, Lloydminster, London or even Montreal will fare better, since price-income ratios were not blown to extremes. Slaughtered could be swaths of the 905 or the LM – Richmond Hill, Vaughan, Ajax, Burnaby, Abby or PoCo – where prices swelled as the stupid money sloshed out of Toronto or Vancouver.

As far the urban cores of those cities, as mentioned, there’s no 40% drop on the horizon, given the paucity of listings, building constraints and the fact the largest demographic in society (Boomers just passed the torch to the Mills) think work needs to be within an easy bicycle ride of home. This is the most downtown gen in Canadian history, now creating its own frenzied market, driving up condo prices 24% a year even while detached values crumble by 9%.

Besides, we now know government attempts to protect moisters from themselves have failed. Mortgage amortizations were hacked from 40 years to 25. Down payment thresholds were raised. CMHC premiums were jacked. Insured buyers were stress tested. And, after the mills ran to the Bank of Mom to avoid it, that test was applied to everyone. Meanwhile mortgage rates have snaked higher with the Bank of Canada pulling the trigger three times in the last few months.

And still they buy.

So addled with real estate horniness is this cohort that any noticeable, Tweetable drop in house prices will likely result in swarming. If the kids would just go on strike for a couple of years, house appraisals would fall faster than a Conservative’s pants, but alas, won’t happen. This forms the core of why demand hoods of Van and TO will remain that way – and why anyone who can’t play should either stop bitching, or move.

As for the outlying exurbs, or places which never deserved to inflated (Niagara, Langley), the story’s completely different. Risk abounds. The next couple of years will really shock people who were in feeling safe in their Huggies the last time mortgage rates went north of 6%.

On Wednesday US central bankers said things are awesome. Corporate profits are up double-digits. Donald Trump actually did something about guns. Bond yields are fat. And now everyone expects interest rates to go up two or three times more in 2018. Again next year.

The shift continues from that low-rate, low-growth, cheap-money world that wildly inflated house prices and family debt, into something far different. Nothing affects real estate more than the cost of money, since almost everyone uses extreme leverage to get it. For eight years rates fell or sat in the ditch, and house prices inflated insanely. Now we’re on the path to normalized rates and property values will respond the same way. Worse, after that orgy of buying Canadians carry record loads of mortgage debt, plus $220 billion in home lines of credit, and most of that borrowing will be refinanced this year. Ouch.

So the direction of real estate overall is down. Obviously. All that kneejerk, tax-crazed politicians like those in BC and Ontario will do is acerbate the decline. However in pockets where the moisters like to gather to drink Chai, eat kale and look at their phones, the bets are off. They can’t help it. Terminal house lust. They’re doomed.

Capitulation blog?

Not even close. But about that tummy rub…