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Is The Vancouver Real Estate Bubble Ready To Pop?

 9 min read / 

Those who have lived in Vancouver have probably heard about the housing situation in the city. One is amazed by the beauty of the Vancouver skyline and impressed by the amount of new construction sites around the downtown area and the surrounding neighbourhoods.

An Entrepreneurial Finance student was quoted as saying: “They build something new every year. They tear down some <old> building and rebuild it shinier but as functional as the old one.” The problem was not confined to UBC renovation programs but represented a habit and problem for all of Vancouver and its suburbs.

The Growing Bubble

Downtown, in the financial and commercial centre of the city, lie the most expensive areas in residential housing, due to a craze that arose in the last two-three decades. Due to the uprising prices of residential properties in the area, mostly shiny skyscrapers and luxurious mansions, many have decided to sell their own properties and buy larger ones in the – at the time – less glamorous suburb near the airport.

Now, the buyers are considering moving away from Richmond for the very same reason: increased costs of living, an upsurge in housing prices and the desire to cash-out from what could be, in the near future, the next residential housing bubble.

This reasoning is as logical as it can possibly be. Dr Kershaw, of the UBC School of Population & Public Health, and Mrs Minh, a researcher at Generation Squeeze, give their explanations on the alarming “Code Red” study concerning the looming and pressing issue of Canadian housing, with particular reference to Vancouver.

They estimated, for instance, that with CAD500,000 one could roughly afford to buy two homes in 1976, as compared to two bedrooms today, for the same amount of money. What might seem an author’s exaggeration in the eye of a naïve reader is the sad truth for young buyers (and a true fortune for older homeowners).

Salaries Vs House Prices

While housing prices have doubled in a few decades, the same cannot be stated for full-time wages, with the consequence of a shrinking purchasing power for young residents willing to settle down and take out a mortgage. Considering that in 1976 one would need five years to save for a 20% down payment on their first home purchase, it is now estimated that one would need 12 years of savings for the same amount in Canada, compared to Toronto at 15 years and Vancouver at 23 years.

Of all homes in the city of Vancouver, the authors estimate that only 3% are priced less than CAD250,000, while about 30% cost less than CAD500,000, double the cost of the average home in the mid-70s. Surprisingly, the single largest share of properties is priced above CAD813,000, namely luxury properties – outrageous considering the aforementioned diverging pattern of labour income and real estate face values.

The Domino Effect

The vast phenomenon of uncontrolled price increases does not only affect buyers purchasing their new home, but it has inherent effects on service providers within the area (hairdressers, groceries stores, wine bars, etc.) who must absorb higher leasing or renting property costs and subsequently need to raise their prices.

This effect is dangerously self-reproducing. Unfortunately, the situation does not look any better moving far away from the city centre to Metro Vancouver (Burnaby, Surrey, Coquitlam, etc.). Only 15% of the houses can be bought for less than CAD500,000 and have more than three rooms, putting young families through the wringer when dealing with the choice of where to settle down. There is only one town that allows for these two criteria to account for more than 50% of the houses: Maple Ridge, 45km (38 miles) outside of Vancouver.

Affordability pressures put at stake the wellbeing of lower-income classes and result in tangible socioeconomic distress. If one considers a worker was commuting from Richmond to Vancouver, one also needs to take into account the opportunity cost that he or she faces every day, along with fixed costs of transportation, that most probably are not covered by the employer. One can assume a typical worker earns an hourly wage of CAD15, and it takes one hour to reach the workplace. Considering two hours of transportation per day, five days a week, one month of holidays, one reaches a total amount of almost CAD7000 opportunity cost per year. When one does the maths for the maturity of a mortgage, and one will get how much it costs to decide to live in the suburbs rather than in the city. Even if one is forced to.

A Call For Help

The situation has been worsening at a high pace during the last few months, with Vancouver residents calling out the British Columbia and Federal Government for actions. Their requests seem to have finally found a place on the agenda of regulators and policymakers, who have recently released a set of actions that aim to mitigate the climbing prices.

Prices have been soaring until this summer. Have we reached the plateau?
Prices have been soaring until this summer. Have we reached the plateau?

Despite the fact that prices seem to have endured some cooling effect after the introduction of recent regulations, the scarce availability of properties on sale at the moment is still keeping the price high. How long, though? One cannot know if this equilibrium is sustainable and the house of cards might just fall at the first uncertainty.
Worst case scenario, homeowners will lose a consistent amount of their recently acquired property value and possibly default on their mortgages. The risk is all but unrealistic, given that Bank of Canada estimated that the share of borrowers with an LTI (loan-to-income) above 450% had increased considerably year-over-year.

The Eastern Factor

It is common knowledge that the majority of real estate investors are Chinese, who became the main promoters of investments in the city with relevant inflows of money from mainland China. Given the important economic and social role that the whole Asian community plays in Vancouver (the local China Town is the second largest in North America after San Francisco’s, for instance), it is no such wonder that there are tight business relationships between Canada and China. These relationships are of crucial importance not only for Vancouver but for Canada as a whole, they will get stronger in the future as negotiations with the EU regarding CETA come to a halt.

A thorough report by Macleans, however, suggests that in the past five years, the flow of money coming from Chinese investors has consistently increased, reaching toxic levels and risking the destruction the internal market for residential properties. Although this might not be the only explanation for the phenomena, it is a fact that existing tax loopholes and former immigration laws have permitted and fostered investments from outside Canada during the last decades, thus inflating prices to above-normal levels and ultimately frustrating middle-class residents, who are being priced out of the market.

Growing Foreign Interest

The formerly existing Immigrant Investor Program, which was created in 1986 and suspended in 2012, granted residency to foreign citizens willing to invest CAD800,000 in the country, a considerably low amount for wealthy foreigners willing to park money offshore at a low price. Interestingly, a similar program is still running in Québec with a higher threshold, meaning that after complying with the holding period and time of investments regulations, foreigners would still be able to obtain Canadian citizenship and continue to invest in other provinces as well.

Very few investors, in fact, seem to remain in the Eastern province, but prefer to move to closer-metropolis Toronto or settle down in Vancouver, given the proximity to the home country and stronger cultural resemblance. The common habit of buying and selling real estate after a quick appreciation has been reinforced by the downward trend the Canadian dollar has been lately experiencing against the Chinese currency, allowing foreign investors to offer ridiculously high prices for existing properties and invest high amounts of money for new construction sites.

CAD$ is trending down against YUAN, considering that the latter is fixed to the higher performing American $.
CAD$ is trending down against YUAN, considering that the latter is fixed to the higher performing American $.

The well-known habit of leaving entire buildings and properties empty for long periods throughout the year has worsened the situation also for home renters. Empty and under-utilised housing could represent a key source of supply and, as it is suggested in a Vancouver City Council report, it could help improve the dramatic low rental vacancy rate for the city (0,6% in 2015, with healthy rates ranging between 3 and 5%). The report’s findings suggest that around 5% of housing units in Vancouver were unoccupied for more than a year in 2014. As economic pressure on low-income earners intensifies, the introduction of a tax on unoccupied properties is under discussion, with the aim of stimulating the turnover of housing.

Vacancy Rate for Rental Properties in Vancouver
Vacancy Rate for Rental Properties in Vancouver

It is true, nonetheless, that the Vancouver (and Canadian) economy has largely benefitted from an increased demand in the housing-related sectors, from realtors and construction companies to interior designers, accounting for the largest share of the city’ and provincial GDP. From this point of view, the problem is now not what the influx of capital from mainland Chine has caused in the previous decades to reach this trembling equilibrium, but what will happen now that the Provincial and Federal government have suddenly decided to open their eyes. They are now reacting impulsively with a new tax designed precisely to discourage foreign home-owners.

How To Deflate The Bubble

The introduction of an additional 15% tax on property transfers on foreign entities (“foreign nationals, corporations, taxable trustees and transferees that are not Canadian citizens or permanent residents”, as the Property Transfer Tax Act defines), based on the fair market value of the asset, resulted in an upsurge of deal closings before the starting date of the measure. It is unclear yet how realtors will act in the next months.

Despite the fact that long-term results need to be seen, initial forecasts and data suggest that initial cracks in the system are beginning to emerge. Considering the historical solidity of the Canadian banking system, it will be crucial to carefully design the next steps to deflate the bubble. This should avoid worse consequences that could be brought either by an unexpected slowdown in Chinese economy (and fewer investments from wealthy foreigners) or in a diminished British Columbia attractiveness for outside investors.

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Americas

Venezuelan Digital Currency Backed by Oil

 2 min read / 

Venezuelan Digital Currency

The Story

Venezuela has announced plans to launch a digital currency, “the petro”, backed by the country’s oil and mineral reserves. The petro aims to help ease the country’s monetary crisis but sceptics claim the proposal has no credibility and will not help those in extreme need.

Why It’s Important


source: tradingeconomics.com

Hyperinflation has eroded the Venezuelan bolivia’s value by 97% this year, making imports incredibly expensive and causing many to abandon trust in the currency. The country’s oil reserves made up 95% of its exports in 2016, while oil and gas extraction accounted for 25% of GDP. Rich supplies of resources provide some initial credibility to the proposal, but President Maduro’s questionable track record when it comes to monetary policy is making many sceptical about the proposal. His currency controls and money printing have only added to the monetary crisis. Maduro has not announced when the digital currency would come into use or any details regarding how the country would create such a system.

Opposition leaders argue the country’s shortages of food and medication are far more pressing and that the digital currency will not address this. The digital currency may provide a more trusted medium of exchange, but it is unlikely to help those in excessive poverty.

Keep reading |  2 min read

Americas

The US Senate Approves the Republican Tax Bill

 2 min read / 

senate tax bill

During the early hours of Saturday morning, the Senate passed the Republicans’ landmark bill in what could become the USA’s first tax overhaul since 1986 and the first legislative success of the Trump presidency. Meanwhile, Democrats have denounced the bill as essentially a handout to the wealthy that will disproportionately squeeze other segments of society.

Mixed Feelings

There is also a strong feeling among many Democrats and Republicans that the bill was hastily drafted and improperly thought through. Democrat senator Chuck Schumer said:

“I have not seen a more regressive piece of legislation, so devoid of rational, so ill-suited for the condition of the country”.

For Trump, however, this is a victory and a step towards making good on some of the policy promises that formed his election manifesto. So far, the Trump presidency has been characterised by racial tensions, a failure to repeal Obamacare and no sign of the infamous border wall being built. Accordingly, the President made his feelings known on Twitter following the Senate’s approval of the tax bill.

The tax bill is not yet in the clear, however. It will now be amalgamated with legislation that has passed through the House of Representatives. This process will commence next week and it is likely that there will be further complaints from Democrat lawmakers.

Meanwhile, business groups, who will be the primary beneficiary of the tabled plan to reduce corporation tax from 35% to 20%, have welcomed the bill’s progress. Jamie Dimon, JPMorgan’s CEO, congratulated the Senate and said that the reforms would “boost [our] economy and benefit American workers.”

Uncertainty Ahead

It is yet unclear what impact the tax cuts will have on the USA’s national budget. Despite Trump’s promise to balance the nation’s books, a congressional watchdog has recently said that Trump’s tax plan will send the deficit soaring and only put slightly more cash in the wallets of millions of ordinary American families across the country.

Keep reading |  2 min read

Americas

How Trump Inadvertently Prompts Discussions of Unlikely Issues

 5 min read / 

trump discussion

In 1916, in a letter to David Lloyd George’s daughter, Winston Churchill admitted:

“I think a curse should rest on me – because I love this war. I know it’s smashing and shattering the lives of thousands every moment, and yet, I can’t help it, I enjoy every second of it”

Can Trump be considered the moral equivalent of World War One in terms of the mayhem he has wrought upon civilised notions of the way the world should be? Probably not, but the damage he has caused is nonetheless considerable. The juxtaposition of Trump with Churchill seems appropriate because, as the President dismantles so much of what has come to be normative behaviour in civilised society, he is inadvertently promoting a re-examination of the things that America holds dear – in the same way that the world has re-examined its opinion on war in the 100 years since Churchill made his aforementioned remark.

The fact that Trump was elected notwithstanding the revelations in the Access Hollywood tape has likely been responsible for women finally declaring enough to be enough. Would Harvey Weinstein, Kevin Spacey, Louis CK, Matt Lauer have been exposed in a Hillary Clinton administration? The fact that Trump’s tweets are ill-considered, often factually wrong and inflammatory, has promoted a sober discussion of how to deal appropriately with the issues of racism and immigration.

The fact that Trump is actively withdrawing from the theaters of international endeavor – trade, diplomacy and climate change – has led to a careful consideration of why those things might be important to Americans. The fact that Trump shamelessly panders to his base, regardless of collateral damage to broader public opinion, has resulted in a careful review of the stakes involved in tribal loyalty.

Sexual Assault and Tax Reform

Susan Collins, one of the senators for Maine, was asked at a recent Christian Science Monitor Breakfast whether, if Roy Moore were elected to fill the Alabama Senate seat vacated by Jeff Sessions, he should be unseated by the Senate. She stressed, firstly, that she protested his candidacy even before the allegations of sexual assault. She went on to say that the question of whether the Senate would have the right to unseat him if he were to be elected by the people of Alabama, accusations of sexual assault notwithstanding, was a very difficult one.

She is right. A trial in the court of public opinion has a different standard and different procedures from a trial in the justice system. An election is perhaps the most exacting kind of public opinion trial. An acquittal by the voters does not preclude future legal proceedings, but, while it is clear that NBC is within its rights to fire Matt Lauer, it is less clear that the US Senate or House of Representatives has the right to unseat Moore – if elected – or, respectively, John Conyers as Nancy Pelosi has urged.

Tax reform is currently top of mind in DC and, as this article is written, the Senate is close to passage of its bill. As it stands, neither Moore not Conyers will be voting for tax reform: Moore because the vote will likely pre-date his election; Conyers because he is a Democrat and votes for the bill that is presented to both Houses of Congress, after it has been to conference committee to sort out the differences between House and Senate versions, are expected to proceed along party lines.

Hypocrisy and Principle

Fitness to serve and uphold the values for which representatives are elected are both called into question by the context in which the current tax reform legislation is proceeding.

Mitch McConnell, Senate Majority leader made it clear in an interview in May 2017 that he believed any tax overhaul could not add to the growing budget deficit. Steve Mnuchin, Treasury Secretary, claimed the proposed tax reforms, which include a reduction in the corporate tax rate from 35% to 20% would pay for themselves.

The Joint Committee on Taxation was asked to conduct a macroeconomic analysis of the impact of the Senate Tax Cuts and Jobs Act bill – the so-called dynamic scoring report that would validate Mnuchin’s statements. The report revealed approximately $458bn of savings due to economic growth. That left a deficit increase over the next ten years of $1trn.

The report leaves the Republican party with the uncomfortable choice of passing a bill that contradicts its stated, fiscally prudent governing principle of not increasing the deficit or failing to pass tax reform, which, it is assumed, would have dire electoral consequences in 2018.In the court of public opinion as it stands in 2017, hypocrisy and lack of principle may prevail.

Conclusion

Churchill was a little ashamed of enjoying World War One. Should one be equally ashamed while watching the unravelling of the hypocrisies of the elite-world order? Perhaps, but there is a decent chance that, as public officials (Mike Flynn, for example) are convicted of lying in the service of their president and the unwinding of male privilege rolls through the power venues of Hollywood and Washington DC, hypocrisy and abandonment of principle may extract a price and the Republican Party may find that it has made a profound mistake.

Keep reading |  5 min read

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