Evil

Don’t be surprised real estate’s collapsing in BC. Sales have fallen by 40%. Prices in some hoods are down by a third or more. Realtors are retraining as payday loan guys, trying to improve their image. What lies ahead for markets in Van, the LM, Victoria or the Okanagan could be spectacular.

Unique to that troubled province is a government made up of political amateurs, ideologues, socialists, financial illiterates and incompetents. The Dippers, led by Comrade Horgan, have embarked on a campaign to destroy the real estate market because, inherently, they equate property ownership with being rich. And rich is, like, evil.

The trouble is, it’s backfiring. And the biggest mess is about to happen.

On top of a withering 20% anti-foreign buyer tax, the empty houses tax and the big-house tax is a ‘speculation’ tax which has nothing to do with speculating. It’s just a tax on wealthy people who might own a second home, for business or retreat. This affects almost two million residents and covers Victoria, Van, Nanaimo, Kelowna and some surrounding turf. There’s nothing else in Canada like it, forcing people to pay .5% of the assessed value of their property every year. If you happen to live in Alberta or Ontario and have a BC retreat, the hit is an astonishing 2% annually. The message: don’t come here. You’ll regret it.

The majority of people affected are BC residents, however, who already pay income tax, sales tax, property tax and bought their second properties with after-tax dollars. In this wealth redistribution scheme, they’ll now hand over more – $5,000 extra every year on a $1 million residence. It might be a traditional family cottage owned for decades, a condo in downtown Van used for business, or a future retirement home in the Okanagan. No mercy. All taxed.

The NDP logic is nobody should own more than one house, so people with two must be punished, to”help identify speculators and empty homes, allowing the government to crack down on speculation and make housing more affordable.” Seriously. They believe that. Or perhaps it’s just a ruse to raise money.

After all, the BC Assessment Corp. just finished sending out notices across the province indicating a big surge in property values at the same time market prices are falling. And now a tax bill is about to be mailed, based on that inflated assessment. Makes you wonder…

But there’s something else rotten here. This isn’t just a tax. It’s a tax trap.

The Dippers have chosen to use a negative-option implementation, likely for the first time in Canadian tax history. Every single property owner in all of those municipalities will have to pay the assessed tax unless they apply for and are granted an exemption by the end of March. So citizens have to swear their real estate is a principal residence or leased out for at least six months of the year (or they are disabled, or sick or being divorced) in order to escape.

“Good grief! I shudder to think of the huge number of applications that won’t be submitted by the less savvy part of the population wrt gov’t forms and applications,” says blog dog Susan. “I particularly feel this will marginalize the less-well educated and those whose first language is not English. Huge bureaucratic mess.”

You bet. As planned. Negative-option billing has largely been banned in Canada for exactly these reasons (see the federal legislation here). Ontario has strict laws against it. When telecommunications giant Rogers tried to use negative-option marketing a few years ago, it was slapped down and publicly humiliated. This is the sleaziest of methods to force products onto unsuspecting or inattentive consumers. It’s unconscionable to implement a tax in such a fashion.

But, this is BC. Run by people with an agenda, and scant experience and thin ethics. To date the NDP anti-house campaign has toppled property values in more affluent neighbourhoods, done nothing to increase the vacancy rate or reduce rents and  helped make affordable entry-level homes less affordable. With local real estate markets now suffering serious sales declines and a flood of listings about to hit in the next six weeks, falling equity is a threat to middle-class families, many of whom have put all their net worth into those homes.

Now every one of them has to be vigilant to ensure they get the Speculation Tax notice, complete it correctly, submit it on time and gain an exemption – or face a fat tax bill due on July 2nd. Imagine what that will do to the market.

And, even worse, homeowners must go through this exercise every single year, to ‘prove’ to the government the real estate they own is being used for purposes the government favours. Yes, in Canada.

“Vancouver is in full-blown correction mode,” RBC economist Robert Hogue said this week. “Prices are poised to depreciate more — potentially a lot more considering the degree to which they are still unaffordable to average buyers.”

No doubt the Dippers and their eat-the-rich rabble of supporters will cheer this. But forcing a market collapse in a province where a third of the GDP is real estate-related, where the savings rate is negative because people strained their finances to buy, and families have gambled everything on one asset, is not exactly progressive. Nor will it ever mean the average worker will afford the average house in Vancouver. It just means overall economic collapse, in which the little guy always gets squished.

Thank God there are mountains.

The irresistible

Will the federal budget blow up HELOCs? What a surprise that would be to three million little debt-snorfling voters.

Big fanfare this week for a new report by a federal agency that frets over people’s finances. Needless to say, they have a lot to worry about. Most of us are basket cases when it comes to money. Almost half couldn’t survive missing just a paycheque or two. Nine in ten haven’t maxed their TFSAs. Family debt tops $2 trillion – bigger than the entire economy. Mortgage loans shot higher last year even though house prices went down. Quelle mess.

Home equity lines of credit have been the hottest banking product of the last decade. No wonder. People have stored most of their net worth in a single asset – their houses. So far we’ve borrowed more than $300 billion against residential real estate, half of it spent on the same properties, to finance renos. This doubling down is insane, of course, when home values have peaked and interest rates are rising. But, there ya go. More for Ottawa to worry about.

The new report confirmed what this blog reported last year – a quarter of all the HELOCers are paying nothing on their loans. Only interest. And most of them are using the lines themselves to get the interest money itself – so the debt keeps expanding until it hits the limit. The feds also found half of Canadians have no clear idea how these lines work or the risks involved.

And, yes, the dangers are real.

HELOCs are demand loans. The bank can call you any day of the week and demand the thing be repaid. If real estate crashes or your financial situation hits the skids, that phone call is not so unlikely. And home lines of credit are almost always variable – so every time the Bank of Canada raises its benchmark rate, your borrowing cost goes up. (There are two more increases expected in 2019.) Lenders can also decrease your line’s limit arbitrarily – which sucks since a third of all borrowers say they often or always use HELOC money to make other debt payments.

So every year more people with houses borrow against them, and the HELOC balloon grows. Currently about $100 billion is not being paid off – at all. Meanwhile the cost of carrying all this debt has increased substantially over the last year, in which the central bank jacked rates three times. Home equity lines have turned into quasi-mortgages, a form of debt which will typically last decades or maybe forever – draining off cash flow and eroding real estate equity.

So why do people do this?

Simple. HELOCs are like me – seductive and irresistible, but dangerous when abused. They’re also cheap – prime plus a half for most borrowers. Banks dole them out like lollipops – up to 65% of the equity in a home can be borrowed. They’re open – no term – and can be borrowed against or paid off at any time without penalty. And if you use the money to invest, the interest may be deducted from taxable income. But, sadly, since three-quarters of folks take the money for renos or debt payments, they entirely miss this benefit. Once again, financial illiteracy on full display. No wonder most people live on the edge. By the way, Ottawa’s survey also revealed those aged 25-34 would seriously struggle if their monthly payment increased by just a hundred bucks.

Bankers have been routinely offering people equity-based lines when they take out mortgages. Yep, debt and more debt. Plus there are financial products increasing the limit on a HELOC as the principal on a mortgage is reduced. So overall indebtedness never really falls – you just swap a fixed-rate, stable borrowing for a demand, variable-rate one. No wonder Bay Street loves this stuff.

Was this report, coming just weeks before the next federal (pre-election) budget, timed to set the stage for changes?

I hear it’s under consideration. The 65% equity-borrowing limit could become 50%, then reduced further in subsequent years. Plus, interest-only payments could be banned, with a requirement for banks to adopt blended payments, as with mortgages. Such changes would be prudent and in the public interest. But they’d obviously shock more than a million people who pay nothing against their loans and steadily increase their level of poochedness.

Your neighbours, in turning their homes into banking machines, have created a $300-billion bomb. Ottawa, for its part, has turned a blind eye. Do you think politicians will now do the right thing?

Me neither.