Give it Up

So yesterday a moister in Van told us why he and his squeeze bought a condo. On cue the crustaceans and paleos in the steerage section trashed them. (And we wonder why they hate us…)

Because life moves on, there’ll always be people buying. To spawn. To nest. To scratch the societal itch for property. The job here is to ensure fewer of them blow up, that they understand the consequences of their actions.

BTW, here’s Derrick in Toronto, with a so-typical question:

What if buying a box in the sky in TO gets you lower monthly payments than renting one? The rental market is crazy too. Take your pick of getting gouged for a rental or a purchase. Scenario: rent:$2000/month. Condo, say $450,000. Downpayment: 300K, mortgage 150K. Monthly payments condo fee $450 + $750 amortized over 25 years +utils/insurance/hydro /taxes say $300?. Total $1500. Rent or buy?

The answer ain’t simple. What are D’s assets? His income? Corporate pension? Age and marital status? Job security? Can’t answer without knowing more – but sadly most people never do the calcs, figuring out where true financial security might lie for them. Real estate’s not a strategy, just part of one. Never forget that.

In this case, the kid neglects the value of a $300,000 downpayment. Invested for a 6% annualized return over five years, it would grow to about $400,000. In other words, the opportunity cost of the down is $1,500 a month – so the condo costs at least $3,000 to possess. Plus property taxes are understated, and destined to rise. In other words, there have to be reasons to buy, and saving money isn’t one of them. The only valid excuse for taking the plunge is enough capital appreciation over time to outweigh closing and sale costs plus the added burden of owning over renting. In this case, over five years, that would be about in excess of $100,000. And that’s a gamble.

Maybe it’s time more people accepted the fact owning in the 416 or downtown YVR is a really bad idea. If the economy slows, trade wars intensify, commodity prices fall or money costs rise (all distinctly possible in the next three years) then you poured money into an asset that could have been leased for far less, or drop further in value. Yesterday Pablo said he could live with that thought. Good thing.

This week a mortgage-rate site crunched numbers to determine who can actually afford homes. The results support the drivel published here: in Toronto and Vancouver, buyers are gamblers unless in the top income brackets. Smarter people are heading to other cities where they can have a nice urban existence, less traffic, cheaper real estate, more cash flow and enhanced financial security. How does that not make sense?

Here’s what RateSupermarket found: to buy in Toronto you should earn $160,000, putting you in the top 10% in terms of income. In poor Vancouver, it takes wages of $240,000 annually. That makes you a 1%er.

Income required to buy, city-by-city

Here’s the comparison:

• Vancouver: House price: $1,441,000. Household income needed: $240,000
• Toronto: House price: $873,100. Household income needed: $160,000
• Victoria: House price: $741,000. Household income needed: $140,000
• Hamilton: House price: $630,000. Household income needed: $120,000
• Kitchener-Waterloo: House price: $523,720. Household income needed: $110,000
• Calgary: House price: $467,600. Household income needed: $100,000.
• Ottawa-Gatineau: House price: $444,500. Household income needed: $90,000
• London: House price: $426,236. Household income needed: $90,000
• Montreal: House price: $375,000. Household income needed: $80,000
• Edmonton: House price: $372,100. Household income needed: $80,000
• Saskatoon: House price: $301,900. Household income needed: $70,000
• Regina: House price: $275,900. Household income needed: $70,000

But remember, as with Derrick, the buy-or-rent decision is not just based on income, nor the price of the real estate.  Will buying a house soak up all your cash flow and prevent you from having a liquid portfolio for the future? What are you going to live on when you’re 73 and as employable as an NDP finance critic? In life it’s the long game that matters. Play it that way.

Now, kudos to some Vancouver media. It’s a rare thing, but maybe this is a reflection of shifting public sentiment. Let’s hope.

An editorial in the Courier makes the GreaterFool argument: it wasn’t dudes from China, or bad people from Alberta, or shady money launderers who were primarily responsible for the price of houses inflating beyond control. The locals did that. Just the way locals in every market set the prices for that city. Therefore politicians who try to ‘fix’ it always fail, and in the course of doing so distort the market, making outcomes worse. Plus, people who strive to buy using extreme debt and duct tape are putting themselves at risk. Ironically, if you stop, the market will correct. It always does. Really.

First we were told it was foreign buyers who had driven up the cost of housing in British Columbia. Then it was real estate speculators who were responsible. Now the B.C. government and much of the public and media have turned the guns on near-phantom money launderers as the mystery bogeyman to blame for the unprecedented surge in Metro Vancouver housing prices from 2015 to 2017.

Despite all the hyperbole and headlines, it turned out that foreign home buying in Metro Vancouver peaked at less than 5 per cent of sales and has since fallen below 1 per cent.  The few remaining foreign homebuyers are still exposed to a 20 per cent tax on their purchase. The provincial government then further weaponized taxes and thundered after residential speculators who it said were forcing tenants into the streets and driving up residential prices across the province.

“The speculation tax focuses on people who are treating our housing market like a stock market,” said Finance MinisterCarole James. The government then required the majority of B.C. homeowners to fill out a lengthy form on any homes they owned. Failure to do so results in taxes of thousands of dollars, guilty or not. The forms revealed that just 1 per cent of owners could be defined as speculators and most of these are B.C. families who happen to own  a vacation home, often for generations.

The money launderers are an even more elusive target, primarily because it is not against the law in B.C., at least not yet, to pay cash for something. The recent government-ordered report on money laundering in B.C. real estate was vague to the point of nonsense. It could be worth $800 million. It could be $5 billion. Whatever, who knows? The report also stated that Manitoba and Saskatchewan have more money laundering in real estate  than B.C., which gives an idea of how much faith we should put in its findings. Now the provincial government has ordered an expensive Commission of Inquiry into Money Laundering in B.C., which won’t report back until May 2021.

What politicians miss is that there is no mystery bogeyman to blame for high home prices. B.C. residents buy and sell  more than 96 per cent of residential real estate; all the biggest property developers are B.C. born and built; and government delays and taxes have helped drive housing supply down and prices up. But it is easier, and more vote-friendly, to blame someone, anyone else.

Bingo.