The slippery slope

DIFFERENT modified

On CBC Toronto Wednesday morning housing economist Frank Clayton argued for a heavy tax on foreign dudes in the GTA. Phooey, I said, in an articulate response. That would be thick.

Of course the CBC host was on the side of stiffing the out-of-country buyers. So are most people on this blog. And in Vancouver. Maybe everywhere. But they’re still wrong. Too much government diddling in the housing marketplace has distorted it. In fact for decades, there’ve been strong pro-real estate measures enacted by every successive group of politicians, leading us directly to now – when the average family can no longer afford the average home.

Artificially-low borrowing rates, government-backed mortgage insurance, legislated 5% down payments, RRSP homebuyer loans, first-timers grants, property tax rebates, land transfer tax exemptions – the list of interventions is endless. So now crap houses cost a million. Good job, government.

As a result of unaffordability (it takes 110% of gross income to carry a house in Van and 73% in Toronto – even with a huge down payment), governments want new taxes to try and correct mistakes already made. Thus by dumping big levies on foreign buyers they seek to soothe the locals, saying markets “will cool off.” So naïve.

Still, Ontario’s finance guy, Charles Souza, insists the province is closely watching the new Van Chinese Dudes Crash Tax saying, “I welcome what BC is putting forward and we’re certainly looking at whatever options can be made available.” This is significant, since both Sousa and BC’s wacky finance minister sit on the newly-minted federal task force on housing, set up by federal minister Bill Morneau.

In other words, dumping on foreigners has legs. Most people see this in the same light as new T2 taxes on the wealthy or slashing the TFSA contribution limit – a way to gouge others better off then they, without consequence. So cute and Millenialesque.

Here are the basic reasons why we’re now on a slippery slope every homeowner should worry about:

There’s simply no data showing foreign guys caused houses to go ballistic, and overwhelming evidence Canadians have done this themselves (with the help of politicians). Even the latest Van stats reveal locals and foreigners spent an identical amount per purchase, and Canadians outnumbered them by nine-to-one. Case closed. We’re reaping the harvest of our own house horniness, FOMO sniffing and debt snorfling.

Second, the market will find its own direction – which was already heading south. As this pathetic blog has documented with nauseating repetition, sales are falling, listings rising, sales ratios eroding and speculation spreading in 604. The Chinese-spanking tax will serve to remove some missing-out anxiety from the public’s mind, spread the meme of a cooling market and help ratchet a normal correction into something worse.

Third, taxes – especially ones imposed only on a narrow geographic area – are destined to cause more problems than they fix. If Chinese Money-Laundering Dudes (as everyone categorizes them) really want to wash-&-rinse in Canada, then they can do that as easily in Victoria or Kamloops as Vancouver or Burnaby. If Toronto brings in an eat-the-foreigner tax, then won’t money flow to K-W, Hamilton or London? In addition, people are clever little weasels. Already lawyers, realtors, accountants and advisors are plotting ways to avoid the head tax – so we’re on the way to a bloated bureaucracy which may cost more than it collects.

Fourth, the economy. It blows. Growth may be 1% this year if we’re lucky. Jobs are scarce, commodities weak and Alberta is pooched. Is this really the time to be shutting the door on foreign capital?

Fifth, Toronto’s not Vancouver. Six times bigger, far less anxiety over foreigners. Sticking a Chinese Dudes Crash Tax on the GTA would be nothing more than a tax grab in drag. Very bad idea, because…

Finally, real estate’s in big trouble already. Just about everywhere – even as most people are completely blind to the risks. Why else would the bank regulator ask financial institutions to stress test for a 50% property crash in YVR and a 40% drop in Toronto this week? At the same time CMHC is setting its pants on fire, saying there is (for the first time ever) “strong evidence” of problematic conditions in both Vancouver and the GTA.

“We now have sufficient evidence to raise our overall assessment of problematic conditions in the Vancouver market to high,” it shouts. “For Canada overall, we now detect strong evidence of overvaluation.”

Add it up. Bank CEOs warning about excessive borrowing. Two of them curtailing mortgage lending in YVR. The regulator worried about a housing Armageddon. CMHC sounding an historic alarm over too-costly houses. Every major US debt rating agency saying we’re nuts. Warnings from the IMF and World Bank. Prices wobbling dangerously higher on thinning sales. Unheard-of levels of household debt, while incomes flatline and the GDP groans. And now, an unnecessary, politicized assault on foreign investment.

The inflated, voracious, teetering housing market that sucked so many in was created in Canada by Canadians and their leaders. It constitutes a great risk. What a moment to push it over the edge, all because of myth and xenophobia.

We’re getting Trumped.

CHART

Chart by Gary Anderson, Blog Dog (click to enlarge)

The Crash Tax Crash Test

ANARCHY modified

Was it a coincidence BC brought in its new Crash Tax the same week Canada’s banks were ordered to simulate a 50% collapse in Vancouver housing values? Plus a 40% dive in the GTA?

Yeah, probably. But the writing is now on the wall. In fact it was on this blog in stark terms a few weeks ago, a message I repeated in the ever-reliable HuffPost and a blizzard of Tweets. Get out.

So, here’s the latest.

On Monday the BC government shocked everyone with a massive tax on foreign buyers of real estate within Metro Vancouver. Wow – 15% of the total transaction value, plus the usual land transfer tax. It’s the 2016 version of the Chinese head tax that the province just finished apologizing for 26 months ago.

“While the governments which passed these laws and polices acted in a manner that was lawful at the time, today this racist discrimination is seen by British Columbians — represented by all members in this legislative assembly — as unacceptable and intolerable,” said Premier Christy Clark in 2014, proving she can suck and blow like a killer whale.

Of course, if you believe that Chinese dudes are the No.1 cause of house prices nobody can afford, and locals have been victimized by this globalization, then taxing the crap out of them is probably going to down the market. Plus it might send foreign capital (if it is such a force) sweeping into unsuspecting little Victoria, or cute Kelowna, infecting citizens there with the same FOMO that’s ruining YVR. In any case, it’s a bombshell tax without precedent or known consequences. So if foreign buyers are in fact the market-movers, this is akin to a giant mortgage rate hike. Yes, what you just saw leaving town was your equity.

There’s more. The province sought to back up the Crash Tax with a flood of new data on Tuesday, this time almost doubling the estimates of foreign influence in local real estate. From June 10th to July 14th, 6.6% of all buyers in BC were from offshore, almost three-quarters of them in Vancouver, where they accounted for 9.7% of the dollar value of properties traded.

Hmm. Sounds like a lot, doesn’t it? Perhaps the assertion here that it’s mostly locals who are responsible for insane prices, speculation, over-borrowing, runaway leverage and visceral house horniness was all wrong. But wait. The data shows the average amount spent by Canadian buyers in Van was $911,425, while the average spent by the (allegedly) money-laundering, property-snorfling foreigners was $946,945.

In other words, over 90% of all the real estate deals were consummated by local families, who spent about exactly the same as the gazillionaires from you-know-where. This seems to cast in doubt the province’s assertion that foreign buying “represents an additional source of pressure on a housing market struggling to build enough new homes to meet demand. The Province’s additional tax on foreign purchases will help manage foreign demand while new homes are built to meet local needs.”

But it’s the locals who are 90% responsible, right? And removing 10% of the demand for a housing market has already been proven (in the US) to be enough to crash prices by 32%.

It’s all so confusing. Or blatantly political. Laws passed based on conflicting data, without study, suggesting unknown consequences and covered with a patina of racism by a government that should know better.

Anyway, now we have this – a Crash Test after the Crash Tax.

Canada’s bank cop, the Office of the Superintendent of Financial Institutions (OFSI), says it will order the Bay Street boys to do stress tests showing how their banks might withstand a massive 50% plop in property values in Vancouver and 40% in Toronto. Ouch. That would reduce the average detached house equity by about $700,000 in YVR, pushing an unknown (but growing) number of over-mortgaged locals (and Chinese dudes) underwater. At the same time the regulator wants the bankers to test for a 30% real estate correction taking place in other markets.

This is not a one-off request, by the way. The feds are clearly worried about the imminent nature of a real estate event, and the impact it could have on our all-pervasive big banks. Just weeks ago OSFI said it would be tightening up on its regulation of mortgage lending, given that household debt has been bloating again while house prices wobble higher.

Meanwhile, detached sales fall in YVR, listings creep higher, the sales-to-listing ratio deteriorates and the overall economy weakens. Not cool.

But nobody had a really good reason to expect a crash. Until yesterday.