The short sellers are coming: “a money-laundering-induced market.”
By Angela Johnson, Vancouver, Canada:
The Canadian province of British Columbia may have gotten what it asked for in instituting the now notorious 15% transfer tax on home purchases involving foreign investors.
Benchmark prices of Vancouver still exhibit astounding year-over-year increases, with apartment prices up 27% and detached house prices up 38%, now at C$$1,578,300. But overall sales plunged to 3,226 homes, down 27% from the record in June and down 19% from a year ago.
“This is the first time since January 2016 that home sales in the region have registered below 4,000 in a month,” admits the Real Estate Board of Greater Vancouver. While apartment sales dropped “only” 7% year-over-year, sales of detached homes plummeted 31%!
And it’s spreading beyond Vancouver. For example, housing-refugees make their way to the Fraser Valley, which borders Metro Vancouver. The formerly bucolic and more affordable Langley Township is now highly developed and getting more so:
Prices have soared in the Fraser Valley. In July, the benchmark price of an apartment jumped 25% year-over-year (to C$240,000), according to the Fraser Valley Real Estate Board. The benchmark price of a townhouse soared 34% (to C$408,200). And the benchmark price of a single-family detached home skyrocketed a breath-taking 42% to C$881,400. These price increases put even Vancouver to shame.
But in the Fraser Valley too, sales in July (1,962 units) hit the wall: down 31% from June, and down 10% year-over-year.
So let’s talk more about that 15% tax on non-Canadian buyers of real estate, the result of an early-July emergency session of British Columbia’s provincial government.
Coming to the fore are stories of realtors and sellers alike finding ways of getting around the tax: Could the realtor Carolyn Chen be related to the seller Eddie Chen, who increased the list price by 15% about 2 weeks ago?
“The seller will compensate the qualified buyer with the additional 15% transfer tax,” the ad below says. “Qualified” in this case means non-Canadian; the original description spelled it out more blatantly: “Foreign National buyers get 15% off listing price!”
It’s easy to understand the foreign buyer’s penchant for properties in Metro Vancouver, like Richmond. Among the attractions: it’s only a plane ride away from pollution, and a command of English is not necessary:
So the 15% tax becomes merely the price of doing business or maintaining capital in an ever-devaluing currency. It certainly doesn’t put profit out of reach if 30%+ increases continue… Though we know past performance is no guarantee of future results, the Vancouver housing market time and again has defied the bears prophesying the coming bust.
The provincial government of British Columbia (BC) seems to be acting in consideration of locals with this tax – after all, next year is election year. But is it a case of ‘too little, too late’?
Not if the first indications of plunging sales (as in July above) are any sign, or early anecdotes of millions of dollars in deals falling through. But critics claim that shell companies and residency laws can be used to easily circumvent the tax.
The list of Vancouver RE doomsayers grows longer week by week: from the Economist and the IMF (January 2015) to the Bank of Canada (June 2016), to the Office of the Superintendent of Financial Institutions just last week. The latter (a regulatory watchdog) said it would require the smaller banks to stress-test their mortgage portfolios to ensure they could withstand a drop in home prices of 50% in Vancouver. This followed their earlier warning about record levels of household debt.
Then there is the Canada Mortgage and Housing Corporation (CMHC – akin to Fannie Mae and Freddie Mac in the US), which just raised Vancouver’s risk rating to high. Based on factors such as overvaluation, and price acceleration decoupling from historic trends, there is “strong evidence of problematic conditions,” said CMHC’s chief economist Bob Dugan.
The ripple effects have also been identified by the CMHC, as retirees downsize and desperate house-hungry sign on the dotted line, giving in to the FOMO (fear of missing out). In bubble-speak, that translates to “Buy now or be priced out forever!
Who else is taking more than a casual look at BC’s real estate phenomena? Legendary billion dollar hedge fund manager Mark Cohodes, now retired from his career as a successful Wall Street short seller.
“I think it’s a money laundering-induced market,” said Cohodes in his scathing indictment of the status quo. “Where the local politicians, or the BC Liberals, are kept or in cahoots with the real estate brokers, developers, lawyers, that angle. And they have sought Chinese money to keep the market propped up and it won’t last,” he said.
“China has capital controls on, and Vancouver has become the money laundering mecca of either the world or North America and something is going to change and change drastically.”
Note: in BC we call it HAM – hot Asian money. As for his dire prediction, we’re still waiting for our barista (modern equivalent of the shoeshine boy) to give us some house flipping tips before short selling anything.
Meanwhile, we await the September release of Canada Revenue Agency’s numbers from its ‘lifestyle audits’. A sensitive government document recently leaked that 50 additional income tax auditors are currently scrutinizing “individuals living in high-value areas in British Columbia who are reporting minimal income not supporting their lifestyle; individuals purchasing high-end homes with minimal income being reported [and] individuals who are not reporting all of their worldwide income.” Stay tuned. By Angela Johnson, Vancouver, Canada.
In the US, a different approach to the same problem is underway. Manhattan and Miami already get mauled. Now expanding to San Francisco, Silicon Valley, Southern California, even Texas! Read… US Government Mucks up Money-Laundering in Real Estate, Puts Luxury Housing Bubbles at Risk
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The longer and bigger an asset bubble expands, the more damage it causes when it collapses, as these always do.
Vancouver (and other “hot” real estate markets) may be forced to employ even more draconian measures to contain their growing real estate bubble, however there appears to be no way this can now be done without very considerable social and financial cost, as this is now a damage control rather than a damage prevention measure.
One possible measure is to implement a steeply progressive/confiscatory tax on real estate transaction profits above the rate of inflation, with allowance for improvements/rehabilitation of existing units.
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“”” So the 15% tax becomes merely the price of doing business…”””
A. It is a nice chunk of change if they collect it, and can be utilized to buy or create or subsidize low income housing for the locals.
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B. In NYC and elsewhere they were getting around it by having an LLC own the property, and then you sell the LLC you do not sell the property, the LLC can change hands many times and no one knows the owner.
That is why the Change in NYC it is long overdue.
It has long been known as a money laundering scheme.
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Indeed! This has long been known, although not under that name.
Marx apparently was correct in his identification of two types of value, “use” and “exchange” in Das Kapital, written shortly after the US Civil War, and implicitly the significant scioeconomic/cultural destabilizing effects conflation of the two types of value causes. Such conflation is promoted because “real estate” has both types of value, but the proportions change over time because of both idiosyncratic and exogenous factors, many of which are subjective/perceptual.
From this perspective, the challenge to the political leadership is to reduce the exchange value of “real estate,” while maintaining the use value, to produce a more stable proportion.
One possible palliative measure, while certainly not a panacea, is the imposition of a significant progressive tax or fee on vacant residential and commercial units, with the rate of the tax/fee, as a percentage of the assessed valuation, steeply increasing the longer the unit remains operationally unoccupied/unused, even if it is leased. The same effect can be achieved by imposing very high real estate taxes with significant rebates for occupied units, which may be more politically palatable.
George McDuffee ,
Conventional tools won’t do it .
You need to think outside the box like the authorities do not want you to do .
Basically the burden of taxation needs to be shifted from labor and enterprise to the natural monopoly of land .
The economic rent of the land needs to accrue to society rather than landlords/mortgage lenders/freeholders .
Look up “Land Value Tax” aka “Location Value Tax” aka LVT .
The best time to introduce LVT would be after a crash as it would be low but as land values rise it introduces a negative feedback .
LVT should appeal to capitalists and socialists but will not appeal to the rentier/crony capitalist class .
A good suggestion, but IMNSHO too limited in that land/location value is being significantly reduced by the huge improvements in communications [internet] and logistics [containerization] among many other factors, however this should have the positive effect of “encouraging” the dispersion of enterprises into less congested areas, providing local employment opportunities reducing out migration.
At one time land was indeed a major component/factor of many peoples wealth, however it was still possible to be “land poor,” i. e. owning so much unprofitable or encumbered land as to lack funds to develop the land or pay the charges due on it.
Piketty in _Capital in the 21st Century_ , among many others, suggests an extension of the LVT by levying a wealth tax on total net assets no matter where physically located or domiciled, which seems reasonable in that the fraction that “land” represents in the total wealth continues to decline as the “value” of abstract financial instruments and intellectual property soars. Because a house and vehicle represent the majority of “wealth” for many people, and these are already heavily taxed, a high wealth levy threshold/exclusion of 10 to 20 times median family income should eliminate double taxation.
The best approach is to let it pop. At the bottom limit purchases for SFH to live in resident buyers. Seize empty homes with absent owners. Houses are shelter let us end the speculation in shelter.
2008 on steroids… header our way.
And the central banks will have no ammo left this time around with interest rates at zero and trillions flooding the world trying to prevent another 2008
What we have here is 1929 all over again but this time the collapse is not being allowed to happen…
Therefore when it does come it will be exponentially worse than the great depression – whatever that means
“What we have here is 1929 all over again but this time the collapse is not being allowed to happen…
Therefore when it does come it will be exponentially worse than the great depression – whatever that means”
Maybe, maybe not. But keep peddling…
Herb Stein – what cannot continue – will stop.
@Thomas Malthus
“Herb Stein – what cannot continue – will stop.”
That only matters if the below– your opinion– is true. Many would disagree.
“What we have here is 1929 all over again but this time the collapse is not being allowed to happen…
RE: “What we have here is 1929 all over again but this time the collapse is not being allowed to happen…
—–
There are two possible, possibly overlapping, ways 1929 can be prevented, namely:
(1) Increasing amounts of financial repression and market manipulation of the entire socioeconomy can be employed. This is the Diocletian model which worked for 1,000 years in the Empire of the East (Constantinople) until its demise by the Turks. This results in a substantially static socioeconomy/culture with little upward mobility or technological progress and depends on an authoritarian government to stamp out “black markets” and the underground economy.
(2) The behaviors/attitudes and actions of the financial community can be tightly controlled and monitored, the highly dangerous financial instruments such as CDOs and derivatives !GRADUALLY! “unwound,” and “banking” (depository and investment), prop trading houses, insurance companies, contract futures merchants, exchanges, the new financial entities such as mutual, money-market, and hedge funds, and the quasi/shadow banking systems isolated from each other. This is the Glass-Steagall “New Deal” model, which has been largely abandoned, despite 50 years of reasonable “success.” This model is subject to continual political pressure and evasion.
This time … is not different…. (worth reading the book This Time is Different… which comes to the same conclusion)
The only way out of this is a massive reset of the system — a situation that would be far worse than the Great Depression because of the globalized world we live in.
The High Priests of finance understand the implications of this — that is why they are doing everything in their power to delay the inevitable.
They know that all hell is going to break lose once their policies start to push on a string.
There is no way out of this.
Do you seriously think that what is going on can continue?
I assume you are aware that that the only reason the stock markets have not collapsed is that the central banks are making cash available to failing corporations which is being used to buy back stocks and drive up share prices?
I assume you are aware that we have 6 quarters of declining earnings?
Do you really think this situation can go on forever?
Do you really think it can be fixed — I trust you are aware that interest rates are at record lows around the world — trillions of stimulus is surging through the global economy — with more being poured on every month…
And yet — declining earnings… stagnating growth.
There is no turn around — there can be no turn around. And the central banks are running out of ideas….
What’s coming is going to make 2008 look like a child’s birthday party….
Where did you buy the rose coloured glasses? They seem to be very powerful!
Let me analyse it for non-residents.
– This is pre-election smokescreen by the present right wing government.
– The 15% tax is the maximum to get away with without harming realtors and builders on whose support the government depends. At the same time, it is enough to grab the headlines, and assure the sheeple something is being done.
– The leftist opposition has only itself to defeat, and they will: they should be out there screaming to double the offer.
– Predators are always smarter than the prey.
– Criminals/scam artists are always a step ahead of the law.
Umm, d’Cynic, apparently you are unaware of the retroactive nature of the tax. Billions in deals are collapsing due to foreigners choosing to forgo their deposit over paying the tax. Do your homework, this is blowing up big time.
it makes sense that the retroactive nature kills some pending deals but that says very little.
The sharks need some time to get around the new policy measures; it would’t surprise me if in a few months – when lawyers and realtors have fool-proof tricks to circumvent the new rules – foreign sales start rising again. Or maybe there will suddenly be an influx of very wealthy ‘domestic’ buyers?
I have never seen an example of a country or state where the government has willingly pinched a RE bubble. NEVER. This will also prove to be just for public consumption. They always provide loopholes for the very rich, and usually safety nets for the bottom of the market as well. Nobody bleeds except the taxpayers.
Right-wing Liberals?
Yes, ‘right wing’ Liberals. BCer here. When the last right wing coalition collapsed Gordon Campbell and business backers hyjacked the Provincial Liberal Party, used a scandal to oust (another Campbell…no relation) and then used the party to regain the province after one failed election attempt. Think, Trojan Horse and a long view. It has paid off very handsomely for Campbell and ‘Friends’.
Why? Do you think the Dems are liberal? Same thing….. but more blatant.
Let ‘er blow. I am looking forward to the news stories about the whining.
“I bought our starter home thinking that….. (cut to picture of a shack then swing back to hand wringing fool),…that this would be a good move for our family. But now? Well, we paid only 1.9 million and thought we had a real deal, but now it is only worth 1/2 of what we paid for it”. (zoom out and show tearful wife clutching husband’s right arm arm). “Somebody lied. Our realator lied, our Govt. lied. Somebody should help us out. After all, we pay our taxes. I think it is Gregor Robertson’s fault with his bike lanes”, (Vancouver Mayor hated by the right). “WE need a govt that looks out for the people.”
Cut.
Everyone is right wing to the BC far left, even the NDP, which itself is too far left for the mainstream.
It is fortunate that the basic infrastructure of this country was built a generation or two ago- because the railways, dams, pipelines etc. etc. that supply people with computers and internet so they can comment could not make it past all the objections.
Did I mention that those $500 computers would have cost a million thirty years ago?
80% Drop in Sales: Vancouver Bubble Bursts Spectacularly
https://www.youtube.com/watch?v=beh16OyKT8A
This was well planned. All they need do now is, blame this on global warming.
Can we borrow that pin for our own housing bubble here in OZ?
if it works they can start exporting pins, for the dozens of housing bubbles around the world…
But I’m not holding my breath. The Dutch housing bubble has been building for 30 years, experts called an end to it several times and every time – after a minor decline in value and serious decline in sales numbers – it goes even higher thanks to ever more desperate government measures. RE seems to be the ultimate bubble in the West, the cat with nine lives.
And to be sure, most of the desperate measures that are used in the Netherlands haven’t even been floated in most of the other RE bubble markets. Given how government, banks and a voter majority depend on ever appreciating RE, I would be surprised if they don’t throw everything including the kitchen sink at it.
Isn’t globalization great!! Where the Corporation get rich and destroy the environment, economy and steal our resources….where countries go broke….where citizens work for slave wages with no benefits or compete with imported cheap labour (TFW)…where citizens can’t afford to live in their own communities. Money talks and BS walks. Follow the money!!!!
Hot money will gravitate to Toronto, or even Calgary (which is a bargain right now). Silver-lining.
spreading the wealth (-effect)
every state, city and citizen is entitled to their own bubble!
;-(
Calgary is about to become much more of a bargain. The office tower bit is a cherry on top of the crash. Because it takes 2-4 years from commitment before a tower can hit the market, there are millions of square feet coming on to a market with a real vacancy rate closing in on 50%.
Do the Chinese buyers ever sell, or trade up in Vancouver? Or are they all sitting on the properties?
They’re assets, insurance.
The reason I asked was that it looks like a political strategy not just money laundering. Having seen large scale money laundering in NYC and Miami, it doesn’t like to draw public attention to itself.
The Chinese money is blatant and easy for the Chinese govt to follow, if they wanted to. In the west, we think of everything in economic terms but a communist country thinks politically. If you look at the bubble politically, it looks like an invasion by economic means. Buying out two cities, over time, on the border of the US gives them more cover than mobilizing a division.
Canada is like Britain and Australia. With the collapse of commodities there is nothing else going for either country other than RE. The wealth effect that RE provides keeps politicians and parties in power. I still think the 15% will make little difference given the size of the money laudering taking place in Vancouver. With any luck Canada take a que from the UK and NEXIT, then they might have a chance to bring back manufacturing jobs to the country.
Both the UK and Canada have economies far more diversified than Australia. At times car production in Ontario has exceeded that in Michigan. The UK is a considerable car exporter ( although as in Canada, most are branch plants. but the work happens there)
The last Aus, car outfit, Ford is leaving.
Interestingly, this BC law might expose the Federal government to huge liabilities under NAFTA and other treaties that govern foreign national rights in Canada. I don’t know anything about these, but a number of newspaper articles have raised the possibility.
what happened to newport rhode island is instructive, but not definitive. styles and fashions change.
I see two home sellers in my area with houses originally listed for $6 back in September. Price has been reduced three times on both of them and zero buyers. One complaind almost no one even comes to look at it. Selling a house really sucks fo those non-flipper, non-realtor people; namely, your average person. “I felt a disturbance in the force, as if a million almond trees cried out in thirst and were suddenly silenced. We must go to central California”.