Borrowed from LinkedIn and Kenneth Pazder

In our real estate law practice we have seen houses steadily rise over the past seven or eight years and jump drastically since January of this year.

For example, homes in Vancouver on Connaught Drive which were selling for $3-4,000,000 a few years ago are now on the block for $10-15,000,000 (a client of mine recently turned down an offer on her home in this area at $15.8M.  The home was purchased for $6M!)

Correspondingly, homes which were $1-2,000,000 are now $4-5,000,000.

Even condominiums which were valued at a half a million dollars a last summer are now worth $800K to $1M.

Prices are rising so fast, one has to buy a property BEFORE putting one’s own property up for sale, for fear of being priced out of the market!

Before the completion date occurred, another client of mine who bought a home in North Vancouver for $1.5M was offered $250,000 by the seller NOT to complete the purchase!

In my view, this lunacy is being fueled to a large extent by foreign money which is pouring into the Lower Mainland at an unprecedented rate and pulling the prices UPWARDS from the top end.

This inflow of money (Chinese principally, but there is also a lot of Iranian, Indian and American capital coming in, as there is still a very substantial discount on the Canadian dollar for those who deal in USD), is destabilizing the BC real estate market for everyone who lives and works here.

Tragically, the only people who can’t seem to see this are the provincial and federal politicians and the many pundits who make a living commenting on things they t know nothing about (newspaper columnists, economists, business school profs and other so-called experts).  

They remind me of the referees at a World Wrestling Entertainment match. Everyone in the stands is screaming that the bad guy has a concealed weapon and the only one in the building who can’t see it is the referee!

However in the WWE the refs are paid to look clueless.  

Our politicians are paid to govern in the interests of Canadian citizens, not foreign speculators -but looking at their behavior, one would never guess that.

While it is reported that foreign ownership may be as little as 3-5% of the housing stock that is more than enough to affect the entire market adversely -and it has done so in spades as few can now afford to own a house in Vancouver and even condominium ownership is becoming a stretch.

WHAT TO DO?

1. Make foreign buyers confirm the source of their funds

Right now any foreign buyers can wire any amount of money into  their lawyers’ or notaries’ trust accounts from any bank in the world to buy a property in BC with no questions asked.

Realtors and mortgage brokers are required to fill in a bunch of useless FINTRAC forms and obtain client identification documents, but NO ONE is asking where the money came from in the first place!

I have heard many stories from realtors of bidding wars where a property is listed at a certain price and then a half a dozen or more offers come in steadily bidding up the price by fifty or one hundred thousand dollar increments and then the final offer comes in at a half a million dollars over everybody else’s!

A lawyer in our office recently had the same experience in BC Supreme court on a foreclosure sale.  The offer the court was asked to approve was $1.5M and a six or seven other buyers showed up at the hearing.  As is the court’s practice, everyone  was advised of price of the original offer and given the opportunity to bid or re-bid in a sealed envelope.  The Master opened the sealed bids at $1,55M, $1.65M, $1.725M, $1.9M and the WINNER was $3.1M!

It would appear that the winner wanted to pay AS MUCH AS POSSIBLE. 

It has been our experience that much like locals, foreign buyers usually don’t want to pay a penny more than is necessary to purchase a property here (much less an extra million dollars on a foreclosure purchase).

As most foreign buyers have local realtors who are well aware of the market prices, the only explanation which seems to make any sense is that some foreign purchasers are using the Canadian real estate system to launder their money.

Once a house is purchased in BC the seller has effectively washed it and it can be moved anywhere in the world easily by selling the property (as the seller then has the contract of sale and all the documents necessary from the lawyer’s office to “prove” that his funds came from the legitimate sale of Canadian real estate). No foreign country will look past the most recent transaction to confirm the legitimacy of the funds.

In the criminal world, the fee to launder money can be 50% or more.  In Canada, it seems to be NIL.

I believe that many foreign buyers when confronted with a requirement to show where their funds came front would balk and refuse to complete the purchase.

Stemming the flow of dirty money into Canadian real estate would terminate a number of high end purchases, which may push down some of the prices at the $10M – $15M range which would in turn push down the medium high end prices and so on.

2. Increase taxes significantly on those who purchase property in Canada but do not live here or pay taxes here. 

It is commonplace for foreigner investors to park some of their money in Canada (as they do not trust their own governments).  They typically put the title of a property into the names of their wives or children (it is always interesting to look at the occupation listed on the titles to high end real estate like “worker,” “student” or “home maker”).  The wife and kids live in the property as their principal residence and pay no taxes as they have no income.

The father, who is a non-resident, continues to make money in a foreign state at a much lower tax rate.  Canada taxes income on the basis of RESIDENCY, so the father pays NO CANADIAN TAX.  The family enjoys the benefits of the Canadian health care system, school system etc. while paying nothing other than property taxes.

The misguided view of the premier of this province is that the above situation constitutes FOREIGN INVESTMENT IN BC, to be encouraged at every step.  

With all due respect, that is nonsense.  

As the BC government is perpetually short of money for every worthwhile endeavor (hospitals, schools, pubic housing, seniors, homeless shelters, transit, mental health, child poverty -the list is endless), it would seem obvious that one source of revenue which would be virtually unopposed by BC taxpayers would be to increase Property Transfer Tax and municipal property taxes on foreign buyers who are simply taking advantage of the laxity of the current legal and regulatory framework in BC.

An appropriate rate would be perhaps 20% Property Transfer Tax and triple current property taxes for those who choose to evade paying Canadian income tax (or pay only a token amount for appearance purposes) or simply leave their BC homes vacant.

A sale of a residence so occupied (or unoccupied as the case may be) should also attract income tax on any increase in value (not capital gains tax).  

A capital gains exemption for a principal residence should also be disallowed for such owners (these two changes would of course require an amendment to the Income Tax Act which is a federal statute).

These  even for so-called “legitimate” off-shore funds would also dampen foreign demand for Canadian real estate, however to the extent that it does not, then at least there is SOME benefit flowing back to the Canadian tax system.

Are these measures discriminatory?  Absolutely!  They discriminate against foreign buyers who are simply seeking to take advantage of the Canadian real estate system, while parking or washing their funds.

These changes should apply to ANY foreign buyer of any nationality (US, Europe, Britain and Australia included).

UBC already does this with foreign students who are required to pay much higher annual tuition than local students –and no one is complaining!

Will this “fix” the real estate affordability problem?  Maybe not, but you have to start somewhere and you might as well start with the most obvious cause.

Are either of these measures likely to come to come to pass?  I would not hold my breath.

Generally, by the time the government gets around to doing anything of consequence “the proverbial horses are already out of the barn and the farm has been sold off to a foreign syndicate.” 

SHOCKING US JOBS REPORT AND TORONTO AND VANCOUVER HOUSING TOO HOT

First on the U.S. Jobs Front

The May employment report was released this morning in the US and it was shockingly weak–indeed, the weakest number in almost 6 years. Nonfarm payroll employment was up only 38,000, well below the market expectation of 160,000. Not only was May incredibly weak, but the March and April job gains were revised down sharply, by 59,000. This represents a dramatic slowdown from last year’s average monthly growth of 229,000.

Economists had expected the May job gain to be depressed by the Verizon strike and information and telecommunications jobs were down by 34,000, but employment declines were also posted in manufacturing, construction and mining.

The average workweek was unchanged for all workers and was up slight in manufacturing. A bright spot in the report was worker pay. Average hourly earnings rose by 0.2 per cent in May after a 0.4 percent gain in April that was a bit stronger than initially reported. Worker pay increased 2.5 percent over the 12 months ended in May.

In addition, 458,000 people left the workforce last month, taking the labour force participation rate down to 62.6 per cent. In consequence, the unemployment rate fell by 0.3 percentage points to 4.7 per cent, the lowest level since November 2007. The drop in the jobless rate is nothing to cheer about since it was caused by Americans leaving the labour force.

Dismal employment gains reduce the chances of a pronounced upturn in household spending and economic growth from the disappointing first quarter pace. This takes a Federal Reserve rate hike off the table for June. Job growth has slowed in concert with weaker corporate profits and a weak global economy.

The Canadian dollar rose in the wake of this report as the US dollar plunged. Clearly, the weakness in the US is not good news for Canada as 77 per cent of Canadian exports go to the US. The Bank of Canada is counting on the export sector to pick up the slack from the hammered oil sector.

Red-Hot Housing Continues in May in Toronto and Vancouver

The release of the May data from the Real Estate Boards in Vancouver and Toronto show a continued record surge in sales and house prices. Both markets and their surrounding regions have posted enormously frothy gains, which appear to be accelerating. How much of the activity is attributable to foreign buying is unknown, but there is evidence that capital inflows to housing markets from China have risen in the past year.

Housing affordability is plunging in both regions and there has been a rising number of voices calling for government action of some sort. Some have suggest an increase in the minimum downpayment, tightening credit conditions or a rise in the cost of CMHC mortgage insurance–all of which would hurt first-time home buyers the most, exacerbating affordability. As well, the idea of action to slow foreign buying–such as, for example, a luxury tax–has also been floated.

This is a very tricky issue. The strength in housing (in these two regions) has been a key underpinning to economic growth this cycle. As well, 70 per cent of Canadian households own their own homes and home equity is for most people the largest component of household wealth, so the government is leery about triggering a collapse in housing. Nonetheless, housing growth this strong does not usually end well.

In Vancouver, the Multiple Listing Service reported unprecedented growth in home sales and prices. Last month’s sales were 35.3 percent above the 10-year sales average for May and ranks as the highest sales total on record for that month. While demand is very hot, the total number of listings in Metro Vancouver has declined 37.3 per cent from a year ago, helping to explain some of the upward pressure on price. Home prices in Greater Vancouver are up a stunning 48.3 per cent in the past three years and the one-year change has been close to 30 per cent. The numbers are similar for the Lower Mainland as a whole. The price gains are even larger for single family detached homes as supply is very limited.

In Toronto, the story is much the same, although the activity and price increases are slightly less frenzied, which isn’t saying much as multiple offers and paid prices well over asking has become increasingly common. The Toronto Real Estate Board reported a new record month for May sales, up 10.6 per cent from a year ago as the number of new listings was down 6.4 per cent. The excess demand in the Greater Toronto Area (GTA) continues to push prices higher and, in some cases, to create panic buying.

The MLS Home Price Index was up 15 per cent year-over-year, with the surge even stronger for detached homes. Gains in the 905 area (the suburbs and exurbs of Toronto) outpaced those in the 416 area (Toronto proper), likely reflecting the supply and affordability issue. The average price of a detached home in the 416 area is now $1.3 million compared to $892,000 in 905. Condo prices are considerably cheaper at an average price of $443,000 in Toronto and $347,000 in the burbs–still beyond the reach of many first-time homebuyers. Even move-up buyers are choosing to renovate their existing homes because they cannot afford to pay the prices for larger properties. Downsizers have an incentive to wait, thinking that price increase will only continue.

This is certainly top-of-the-market thinking, but as we have seen, it can last for a considerable period. Most everyone is predicting a slowdown in the housing markets next year. We better hope so. A soft landing is what we all want as prices cannot go up forever, especially at this pace.