Vancouver house prices are falling(qz.com)
qz.com
Vancouver house prices are falling
https://qz.com/903194/vancouver-house-prices-are-falling-as-it-gets-its-real-estate-bubble-under-control/
252 comments
In addition, the article fails to mention the Empty Home tax implemented by the city. Homes that sit empty (for speculation or other reasons) are taxed 1% per year. This was done to increase the vacancy rate and encourage owners to put all this property sitting idle back onto the market. AND: Collected Empty Home Tax will be reinvested into affordable housing initiatives.
Overall I think these ideas are super interesting and may be good in the long run. But I'm also curious about what the unintended consequences will end up being.
I would imagine that one unintended consequence is that very few homes (read: zero) actually sit empty for a whole year. In fact, I would imagine there's a local property manager right now offering to rent your house out with "very light use" for exactly 31 days every 6 months while offering "maintenance services."
I think the idea is that it cannot be empty more than six month out of twelve, not that ot cannot be empty more than six months in a row.
Check out this proposal for a surtax which more targets the issue from a different direction, with a more simple implementation than foreign buyer or vacancy taxes.
> One example is the Immigrant Investor program, where those wishing to immigrate would make an interest-free loan to government of $400,000 in exchange for landed immigrant status. UBC geographer David Ley has shown that investor immigrants in the Vancouver region represent nearly 10 per cent of the Vancouver region’s population. That population paid, on average, $1,400 in income tax 10 years after immigrating. This is less than refugees. > … > A property surtax is an elegant and legally safer way to reduce foreign capital flows into Canada’s cities than the new foreign buyer’s tax. A one per cent surtax would work like this: if you own a $1 million house, you will receive a surtax bill for $10,000. If you have already paid equivalent income tax, are on a disability pension, or if you are a retiree on CPP, the tax is a full deduction—you’ve already paid, thanks.
http://www.macleans.ca/economy/economicanalysis/a-roadmap-fo...
> One example is the Immigrant Investor program, where those wishing to immigrate would make an interest-free loan to government of $400,000 in exchange for landed immigrant status. UBC geographer David Ley has shown that investor immigrants in the Vancouver region represent nearly 10 per cent of the Vancouver region’s population. That population paid, on average, $1,400 in income tax 10 years after immigrating. This is less than refugees. > … > A property surtax is an elegant and legally safer way to reduce foreign capital flows into Canada’s cities than the new foreign buyer’s tax. A one per cent surtax would work like this: if you own a $1 million house, you will receive a surtax bill for $10,000. If you have already paid equivalent income tax, are on a disability pension, or if you are a retiree on CPP, the tax is a full deduction—you’ve already paid, thanks.
http://www.macleans.ca/economy/economicanalysis/a-roadmap-fo...
> That population paid, on average, $1,400 in income tax 10 years after immigrating.
How's that possible - do they all become non-resident after receiving their passports?
How's that possible - do they all become non-resident after receiving their passports?
They don't report their global income. There's a term in the Chinese investor immigrant community: "astronaut dads". Kids get Canadian citizenship and a good education, dad might keep working in asia, or may have made enough. During the 5 year immigration process (and also after receiving citizenship) people are supposed to report worldwide income, but the Canadian government has very limited resources and capability to investigate.
The interest-free loan of $400,000 to the Canadian government was also a weak test for 'investors'. The Canadian banks would front the money on behalf of the immigrant, if they prepay the interest on the loan. I was told by a banker that this was at a pretty high rate of around $120,000. This amounted to paying $120k to a bank in exchange for a clean citizenship path. Lots of people benefited from this system (banks, property owners, developers) so it went on for a long time. Ottawa ended the program in 2013, but one of the problems is that Québec hasn't--they control their own immigration policy to an extent. So it became common for investor immigrants to apply to Québec but then move to Vancouver.[1] In theory, immigrants that bring a lot of wealth with them sounds great, but I was also shocked by the stat showing that they paid less taxes than refugees after 10 years.
[1] Quick reference:
http://www.news1130.com/2015/04/01/investor-immigrants-using...
> “Quebec gets the benefits from that loan, which lasts for five years. It’s a very lucrative program as far as Quebec is concerned but the downside is that the people don’t actually end up living there. There’s plenty of data that shows 90 per cent of those arrivals actually end up living elsewhere. I think it’s fair to estimate that a large majority end up living in Vancouver.”
TL;DR People who try to launder money and escape capital controls in China have a high overlap with people who cheat on their taxes in Canada.
The interest-free loan of $400,000 to the Canadian government was also a weak test for 'investors'. The Canadian banks would front the money on behalf of the immigrant, if they prepay the interest on the loan. I was told by a banker that this was at a pretty high rate of around $120,000. This amounted to paying $120k to a bank in exchange for a clean citizenship path. Lots of people benefited from this system (banks, property owners, developers) so it went on for a long time. Ottawa ended the program in 2013, but one of the problems is that Québec hasn't--they control their own immigration policy to an extent. So it became common for investor immigrants to apply to Québec but then move to Vancouver.[1] In theory, immigrants that bring a lot of wealth with them sounds great, but I was also shocked by the stat showing that they paid less taxes than refugees after 10 years.
[1] Quick reference:
http://www.news1130.com/2015/04/01/investor-immigrants-using...
> “Quebec gets the benefits from that loan, which lasts for five years. It’s a very lucrative program as far as Quebec is concerned but the downside is that the people don’t actually end up living there. There’s plenty of data that shows 90 per cent of those arrivals actually end up living elsewhere. I think it’s fair to estimate that a large majority end up living in Vancouver.”
TL;DR People who try to launder money and escape capital controls in China have a high overlap with people who cheat on their taxes in Canada.
Capital gains tax in Canada is ludicrously low, also the richer you are the more tax loopholes you can afford to find out about.
Keep in mind if you get capital gains you pay tax twice to both governments. You make it sound like it is a huge deal but factor in the increased accounting costs and in most cases the advantage isn't that great at all.
I wouldn't say it's ludicrously low - it's still half of income tax, which itself can be pretty high for people who make a lot.
Until I see actual statistics about empty houses, I consider this policy as a useful empty gesture. It's an opportunity for politicians to pretend that they are doing something about housing prices, while avoiding actually doing anything, and hence avoiding the unintended consequences.
If I did the math right, there are 50 empty dwellings in England for every person sleeping on the streets. https://www.theguardian.com/uk-news/2017/jan/27/squatters-op...
The article looks at one empty building in London, but how many dwellings are in decent areas versus shitholes / the middle of nowhere? I doubt that all of them are Russian oligarch money havens.
We can play similar games in the US with abandoned houses - there are probably enough abandoned homes in Gary, Indiana to house the entire US' homeless population. Said homes, unfortunately, happen to be in Gary.
I don't know enough about England towns and cities to make a judgment, but it looks like The Guardian got their data from here: https://www.gov.uk/government/statistical-data-sets/live-tab...
We can play similar games in the US with abandoned houses - there are probably enough abandoned homes in Gary, Indiana to house the entire US' homeless population. Said homes, unfortunately, happen to be in Gary.
I don't know enough about England towns and cities to make a judgment, but it looks like The Guardian got their data from here: https://www.gov.uk/government/statistical-data-sets/live-tab...
There have been a number of studies using a variety of methodologies.
http://www.theglobeandmail.com/news/british-columbia/vancouv...
http://www.theglobeandmail.com/news/british-columbia/vancouv...
I agree the ideas are interesting, but I wonder how easy it is to detect that the house is empty (and who has the burden of proof). Unless there are some pretty draconian / invasive inspections I wonder if the law has any teeth. Not a criticism of the root comment, just curious.
Looking at the power consumption should be enough in most cases unless they generate their own electricity which should also be easy to figure out... from my home I can wirelessly read the power meters of about 30 of my neighbors (updated every 1 to 5 minutes) using a cheap rtl-sdr and a raspberry-pi (I probably could do better if I placed the antenna outside of my house or if I optimized the antenna for the frequency)
Stop dancing on the head of a pin!
Land value tax. No income tax. People who add no value get nothing.
Land value tax. No income tax. People who add no value get nothing.
Or a land value surtax which you don't have to pay if you are already paying income taxes or retired.
http://www.macleans.ca/economy/economicanalysis/a-roadmap-fo...
http://www.macleans.ca/economy/economicanalysis/a-roadmap-fo...
Then I can avoid the tax by using a timer device to switch the lights on and off
You can also shoplift and almost certainly get away with it.
Most people won't go through the trouble though.
Most people won't go through the trouble though.
You probably should use a somewhat random timer and include some heating and cooling too...but yeah it probably could be tricked fairly easily.
Care to speculate? Besides, if there are unintended consequences, the laws can be changed...
Tax laws are hard to change. Prop 13 sure had unintended consequences...
Hrm . . . I guess I'm struggling to think of a good reason to keep a house empty for a year. Presumably there is a remodeling exception . . .
The only thing I can really think of is that it might force people to divest in a very down market where it is difficult to find renters, but it doesn't seem like a huge tragedy for people who have at least two dwellings to be forced to sell one of them or else eat losses.
The only thing I can really think of is that it might force people to divest in a very down market where it is difficult to find renters, but it doesn't seem like a huge tragedy for people who have at least two dwellings to be forced to sell one of them or else eat losses.
Leaving the property empty can be worthwhile if you make more from the capital-gains than you would from {rental income, minus repairing problems caused by the tenants, minus maintenance, minus property management fees, minus income tax}.
Don't you make the same gains on the property regardless of if its rented or not? You might not need the money from renting it but its still going to be more money above the gains from appreciation...
You can't time the market and sell the house if there's a tenant living in it. (I'm guessing that's the thought process)
Yes but the whole point is that that's only "worthwhile" for you, and it contributes to fucking everyone else in the housing market over.
I assume you mean decrease the vacancy rate.
No they mean increase. Rents are high and it is causing problems for retail workers who have to commute 2h to get to work because of living costs in the city.
If you tax vacancy then you're discouraging vacancy which would encourage non-vacancy (decreasing vacancies). The Empty Home (Vacancy) tax is to encourage owners to either sell their vacant property (which would increase supply and lower prices) or lower rents on their vacant properties to find tenants and fill their home. The goal is to decrease vacant (empty) homes and lower housing costs for people that desire to live there.
I think by "vacancies" they mean "vacant homes on the market", versus "vacant homes the owner is sitting on." A tax would encourage vacant homes to be put on the market.
How do they enforce it?
One of the proposals was to look at energy use. Which is sorta absurd for "green" Vancouver to encourage cheats to waste energy on things to make the empty home look active. Not sure if that is what actually got implemented though.
Wildly insufficient. As a local, I'd vote that foreigners shouldn't be allowed to buy property here at all - not residential, not speculative, not vacation homes, nothing. 1% tax is slightly better than nothing, I guess.
> As a local, I'd vote that foreigners shouldn't be allowed to buy property here at all
Define "local" and "foreigner". Does local mean you grew up in vancouver, or moved there a while ago, or your family spent three generations there already?
In addition, define foreigner. Anywhere else in British Columbia considered "foreign"? What about from Ottowa?
If you mean that you want to punish behaviour, such as buying houses and properties you don't live in or use, that's one thing. Discrimination based on locality sounds an awful lot like Jim Crow laws.
Define "local" and "foreigner". Does local mean you grew up in vancouver, or moved there a while ago, or your family spent three generations there already?
In addition, define foreigner. Anywhere else in British Columbia considered "foreign"? What about from Ottowa?
If you mean that you want to punish behaviour, such as buying houses and properties you don't live in or use, that's one thing. Discrimination based on locality sounds an awful lot like Jim Crow laws.
I think he means foreigner as in a non-permanent resident.
It isn't unheard of. In SE Asia (the Phillipines for example), all properties must have 50%+ occupancy by permanent residents.
It isn't unheard of. In SE Asia (the Phillipines for example), all properties must have 50%+ occupancy by permanent residents.
> In SE Asia (the Phillipines for example), all properties must have 50%+ occupancy by permanent residents.
I think that's an overly wide generalization. For instance, in Thailand, I don't think you're allowed to own land or houses, just a condo. In Laos, you can't own land at all.
The situation is much the same in much of Latin America.
I think that's an overly wide generalization. For instance, in Thailand, I don't think you're allowed to own land or houses, just a condo. In Laos, you can't own land at all.
The situation is much the same in much of Latin America.
Not exactly rich countries.
Let's face it, capital coming into the country to buy property is a Good Thing from an economic perspective. You "just" have to make sure this capital rewards low-income people as much as property owners. This tax is one way to do that, which I think is very good.
Let's face it, capital coming into the country to buy property is a Good Thing from an economic perspective. You "just" have to make sure this capital rewards low-income people as much as property owners. This tax is one way to do that, which I think is very good.
Switzerland also has strict restrictions on foreigners and non residents buying properties.
I think asking someone to live in a home they own 6 months a year in the same city as their property(ies) satisfies 'fairness'. It's important to allow people to live their lives, but over speculation hurts many people to a much larger extent.
You had me right up to Jim Crow laws. That is a bit hyperbolic and an inappropriate comparison, IMO.
"Foreign real estate investor" in Vancouver is a thinly veiled euphemism for "Chinese and Russian money."
When you're passing a law that disproportionately affects certain ethnic groups, that particular comparison is apt.
When you're passing a law that disproportionately affects certain ethnic groups, that particular comparison is apt.
Most of the Russian and Chinese money is being laundered out of their respective countries.
Your ethnicity isn't being discrimated against, just your country's economics circumstances. No reason to bring the SJWing into an economic argument.
Your ethnicity isn't being discrimated against, just your country's economics circumstances. No reason to bring the SJWing into an economic argument.
>Your ethnicity isn't being discrimated against, just your country's economics circumstances.
Restricting people, no matter their ethnicities, based on their country's circumstances is generally frowned upon. Especially when it only affects citizens of a few countries. "Well, this law only applies to <action> Too bad only people from these countries perform these <actions>"
Besides, your claim that the money is being laundered is highly speculative and unproven. That's the definition of painting with a wide brush - because most money is suspect, you cut off access to all of it?
Restricting people, no matter their ethnicities, based on their country's circumstances is generally frowned upon. Especially when it only affects citizens of a few countries. "Well, this law only applies to <action> Too bad only people from these countries perform these <actions>"
Besides, your claim that the money is being laundered is highly speculative and unproven. That's the definition of painting with a wide brush - because most money is suspect, you cut off access to all of it?
Both local governments and popular opinion in those regions differ from your opinion, although you are still entitled to that opinion.
Local residents and voters have the right to keep others out if their laws allow for it. Outsiders/non-citizens don't get a vote.
Local residents and voters have the right to keep others out if their laws allow for it. Outsiders/non-citizens don't get a vote.
Wut?
This is fundamentally a monetary and trade policy issue.
Are you claiming that, for example, tarriffs on Chinese dumped imports are also equivalent to racially targeted laws?
This is fundamentally a monetary and trade policy issue.
Are you claiming that, for example, tarriffs on Chinese dumped imports are also equivalent to racially targeted laws?
Likewise
Canada didn't have Jim Crow laws, wrong country.
http://startouch.thestar.com/screens/003e50ae-8fe5-4e1f-be7e...
Your simplistic views of history do not explain reality. Just because they weren't called Jim Crow laws doesn't mean that similar laws didn't exist.
Your simplistic views of history do not explain reality. Just because they weren't called Jim Crow laws doesn't mean that similar laws didn't exist.
I didn't say similar things didn't exist in Canada, I said "Jim Crow" didn't exist in Canada because that was the subject of the comment I was replying to. Thanks for the scolding though.
Local (in my case) means born in Vancouver and raised in bc. Foreigner means not a Canadian citizen. I don't think anyone who isn't a Canadian citizen should be allowed to buy Canadian property.
You still have not given reasons why you think that people who aren't Canadian citizens should be allowed to buy Canadian property, or that the fact that you're a "local" by some definition of the word gives you some sort of special insight or moral authority on the matter.
Only 15% of purchases were made by foreigners. 85% were made by Canadians. How about places in Alberta when the oil business was booming? Prices were driven up by Canadians, not foreigners. Everyone wants to solely blame foreigners when there were other issues like geography, low-interest mortgages, Vancouver being the only major city on the Canadian west coast, etc. What about foreigners coming here to work and plant roots?
As a local, you probably are more interested in keeping your networth, at least that's what most people want. I am not sure if they would necessarily want their home prices go down.
[deleted]
Or for that matter occupy any property. Because if they rent, that drives rental prices up, which means it's more profitable to buy for renting out, which drives prices up. I think the best solution would be to not let any of those pesky foreigners with their evil money into the country at all. Surely the prices will go down then. May be the economy too, but worth it, no?
What you want is a land value tax that would punish speculation, foreign and home grown. Bonus: it encourages building more housing, unlike standard property taxes.
So you want Vancouver to be a Prince Edward Island!
This Bloomberg article explains what has been happening here: https://www.bloomberg.com/features/2016-vancouver-real-estat...
Vancouver is located at the most western point of the Fraser Valley which is locked in by a mountain range to the North and the US border to the south. I live in Chilliwack, BC at east end of the Valley. I bought my home out here in the "cheap" part of the FV in 2015 for $375,000 and two years later it's assessed at $570,000.
The joke here is "they pay you in mountains and rivers". Wages are nowhere close enough for the average family to live here, so many are having to leave. But because Canada has some pretty epic winters in most of the country, and Vancouver has the mildest weather and climate (read: it rains a lot here) many baby boomer Canadians move here to avoid the winters the rest of the country endures 3 - 4 months out of the year.
If you're a US citizen thinking about leaving the US and are considering moving to Vancouver, do your research first. Talk to other Vancouverites and check your assumptions before committing to buy property. I'd recommend renting here for a couple of years to see if it's for you, and also because the market will hopefully correct and you'll get a better price on a home.
Vancouver is located at the most western point of the Fraser Valley which is locked in by a mountain range to the North and the US border to the south. I live in Chilliwack, BC at east end of the Valley. I bought my home out here in the "cheap" part of the FV in 2015 for $375,000 and two years later it's assessed at $570,000.
The joke here is "they pay you in mountains and rivers". Wages are nowhere close enough for the average family to live here, so many are having to leave. But because Canada has some pretty epic winters in most of the country, and Vancouver has the mildest weather and climate (read: it rains a lot here) many baby boomer Canadians move here to avoid the winters the rest of the country endures 3 - 4 months out of the year.
If you're a US citizen thinking about leaving the US and are considering moving to Vancouver, do your research first. Talk to other Vancouverites and check your assumptions before committing to buy property. I'd recommend renting here for a couple of years to see if it's for you, and also because the market will hopefully correct and you'll get a better price on a home.
I'm not sure I'm getting this right - they got 3.7% drop after 250% raise in 10 years and they consider the problem being fixed and everybody should come and look how cool they are? Something is missing here. OK, let's say they manage to get the local market get lethargic - nobody sells because prices are too low and selling means realizing huge losses, nobody buys because there's nothing to buy. How this is "bringing it under control"? It's like shooting your computer and saying "here, I debugged it! It's no longer crashing!" It's no longer working either...
You do know that over 10 years that is an annualised 9.6%, a 3.7% drop in a year is a big deal. What do you want, anarchy?
[deleted]
I want to understand what is the great achievement this article is touting.
The actual key figure is that sales dropped 39.5% from last year. Housing prices tend to be inelastic downwards, because nobody wants to sell in a sinking market, but if the trend continues, there will be enough people who have to sell that prices will plummet as well.
It might be under control. I don't think your shooting computer analogy is quite right - the equivalent would be making selling houses illegal.
This is like your computer was constantly restarting, so you unplugged the weird printer. Now it hasn't restarted...yet.
No one in Vancouver is thinking anything is solved.
This is like your computer was constantly restarting, so you unplugged the weird printer. Now it hasn't restarted...yet.
No one in Vancouver is thinking anything is solved.
Except pretty much everyone has a mortgage to get their property. Even the Chinese house buyers, well, most of them.
So house prices drop, so the backstop for the loans doesn't work anymore. Interest rates are rising, so monthly payments are going up.
Let's just say "I hope rents are rising too". Otherwise ...
So house prices drop, so the backstop for the loans doesn't work anymore. Interest rates are rising, so monthly payments are going up.
Let's just say "I hope rents are rising too". Otherwise ...
>nobody sells because prices are too low and selling means realizing huge losses
This is only looking at housing as investment/speculation. Downside is that people also sell if life forces them to. Like if they need to move because of personal or professional reason.
If the price continues to trend downward, realizing a loss isn't as bad as losing more, or more likely unable to deploy capital in better investments. While there are mortgages, my assumption is that foreign money is mostly all cash buyers.
This is only looking at housing as investment/speculation. Downside is that people also sell if life forces them to. Like if they need to move because of personal or professional reason.
If the price continues to trend downward, realizing a loss isn't as bad as losing more, or more likely unable to deploy capital in better investments. While there are mortgages, my assumption is that foreign money is mostly all cash buyers.
You're interpreting the quartz.com authors opinion, not that of the municipal or provincial government.
from 1984, chapter 5:
It appeared that there had even been demonstrations to thank Big Brother for raising the chocolate ration to twenty grammes a week. And only yesterday, he reflected, it had been announced that the ration was to be reduced to twenty grammes a week. Was it possible that they could swallow that, after only twenty-four hours? Yes, they swallowed it. .. the other table swallowed it fanatically, passionately, with a furious desire to track down, denounce, and vaporize anyone who should suggest that last week the ration had been thirty grammes. Syme, too-in some more complex way, involving doublethink, Syme swallowed it. Was he, then, alone in the possession of a memory? .. http://www.george-orwell.org/1984/4.html
It appeared that there had even been demonstrations to thank Big Brother for raising the chocolate ration to twenty grammes a week. And only yesterday, he reflected, it had been announced that the ration was to be reduced to twenty grammes a week. Was it possible that they could swallow that, after only twenty-four hours? Yes, they swallowed it. .. the other table swallowed it fanatically, passionately, with a furious desire to track down, denounce, and vaporize anyone who should suggest that last week the ration had been thirty grammes. Syme, too-in some more complex way, involving doublethink, Syme swallowed it. Was he, then, alone in the possession of a memory? .. http://www.george-orwell.org/1984/4.html
Imagine the Canadians who bought in the last 6 months. They probably purchased thinking it was a great investment and if they didn't buy now they'd never be able to afford a home in Vancouver.
And the shocking thing is just how big the losses can be when homes cost >$1M. If you buy a $200K home and the market drops 10%, it's a $20K loss of your down payment. A lot of money, but something manageable for most people.
If you bought a $1.5M home and the price dropped 10%, that's a $150K hit to your pocket book. And 10% is a small drop in an overheated market like Vancouver. It wouldn't surprise me to see a drop closer to 20-30%. That's a $300K to $450K loss for those home owners.
And the shocking thing is just how big the losses can be when homes cost >$1M. If you buy a $200K home and the market drops 10%, it's a $20K loss of your down payment. A lot of money, but something manageable for most people.
If you bought a $1.5M home and the price dropped 10%, that's a $150K hit to your pocket book. And 10% is a small drop in an overheated market like Vancouver. It wouldn't surprise me to see a drop closer to 20-30%. That's a $300K to $450K loss for those home owners.
Granted, short-term losses are undeniable.
But long-term, ordinary Canadians living in these properties stand to make out alright (indeed - assuming this is not a long-term depression in prices). They get their utility out of the property (if city rents are 2-3K/mo for a 2 bedroom, that's 480K over 20 years in "cost of renting the space" which they don't end up incurring).
I cannot speak for Vancouver, but scenarios in the US where cities saw non-trivial % declines had those % returned in-kind within a decade. So we're seeing short-term losses, it will impact folks selling today or tomorrow, but not in 10 years (as I've caveat-ed along the way: probably).
But long-term, ordinary Canadians living in these properties stand to make out alright (indeed - assuming this is not a long-term depression in prices). They get their utility out of the property (if city rents are 2-3K/mo for a 2 bedroom, that's 480K over 20 years in "cost of renting the space" which they don't end up incurring).
I cannot speak for Vancouver, but scenarios in the US where cities saw non-trivial % declines had those % returned in-kind within a decade. So we're seeing short-term losses, it will impact folks selling today or tomorrow, but not in 10 years (as I've caveat-ed along the way: probably).
They get utility, but they still have to pay the mortgage based on the old price. They'd get the utility anyway, without the price drop, so utility-wise the situation is neutral. But money-wise, it is a huge loss, which can make it very hard also to move - if you paid 20% down and the price dropped 20%, now if you sell the house, you only have enough money to pay the bank, and maybe a little equity you've accumulated on the way, which may be barely enough to pay closing costs, agent's fees, etc. But now you still need a house, and you need 20% down to pay again, but you no longer have any cash, or have very little of it, way not enough to pay 20% even of the new, lower price. You have only two choices here: give up the idea of owning a home for next 10 years or so, or hold out on selling until the prices go up again. I don't see a big win here.
That's ok because houses everywhere has dropped 20%. And if you still can't afford to move even if your dream home has taken a price hit at least you still have somewhere to stay.
The great part about a severe correction in home prices is that.. Well I think generally speaking... Luxury homes have a higher beta than non-luxury homes, i.e. Luxury homes correct harder than non luxury homes. If you're staying in a 1m home hoping to leg into a 2.5m home, it sometimes happen that a correction drops your home value by 150k and the target 2.5m home by 650k or more. So the hurdle to change home just got cheaper by half a mil... Which is a good thing!
The scenarios you mentioned are the risks of overleveraging and that applies to everything. Few people leverage their retirement portfolios. If your home value is 90% of your retirement, why take that risk? Would you gear 90% of your retirement portfolio 4-5x and put it in a single asset?
The great part about a severe correction in home prices is that.. Well I think generally speaking... Luxury homes have a higher beta than non-luxury homes, i.e. Luxury homes correct harder than non luxury homes. If you're staying in a 1m home hoping to leg into a 2.5m home, it sometimes happen that a correction drops your home value by 150k and the target 2.5m home by 650k or more. So the hurdle to change home just got cheaper by half a mil... Which is a good thing!
The scenarios you mentioned are the risks of overleveraging and that applies to everything. Few people leverage their retirement portfolios. If your home value is 90% of your retirement, why take that risk? Would you gear 90% of your retirement portfolio 4-5x and put it in a single asset?
I don't think you calculations are entirely right. Let's consider home of price X. Most people would have to pay 20% down (you can get a loan for that too, but that would be overleveraging so let's ignore it). Let's say prices go down 10%. You lose 0.1X of your down payment, or half of it. Let's say you have to sell and move to another place, where you want to buy a similar house, now costing 0.9X. You need to put up 0.18X downpayment for this. However, after the sale you only have 0.1X (ignoring the sale costs, which can easily cost you another 0.05X-0.06X and making situation even worse). So you're now have to come up with 0.08X cash, and fast, otherwise you don't have a place to live in. Most people don't have this much free cash just laying around - it'd be in tens of thousands of dollars. If you are moving into more expensive home, the situation would be even worse.
[deleted]
That is true, but unfortunately not everyone can decide when they move. Losing a job, having a family member get sick, etc can force a sale and realization of loses.
But overall, housing prices do increase over time relatively inline with inflation. So even if Vancouver takes a huge hit in the short-term, over the long haul it will keep going up.
One interesting thing I noticed is that some housing markets don't really go down that much, they just stop growing. I can remember the home my parents owned in Toronto. They sold it for $325K in 1990. In 2005 I looked up the price and it was about the same. Adjusted for inflation, the it was a price decrease.
But overall, housing prices do increase over time relatively inline with inflation. So even if Vancouver takes a huge hit in the short-term, over the long haul it will keep going up.
One interesting thing I noticed is that some housing markets don't really go down that much, they just stop growing. I can remember the home my parents owned in Toronto. They sold it for $325K in 1990. In 2005 I looked up the price and it was about the same. Adjusted for inflation, the it was a price decrease.
> One interesting thing I noticed is that some housing markets don't really go down that much, they just stop growing. I can remember the home my parents owned in Toronto. They sold it for $325K in 1990. In 2005 I looked up the price and it was about the same. Adjusted for inflation, the it was a price decrease.
This isn't actually what happened in Toronto, to be clear. There was a huge housing boom (especially condos) in Toronto in the late 80s, followed by a bust. >100% gain in real housing prices between 1985-1989, then a 40% drop between 1989-1996. What you saw was a housing collapse which took until the 2000s to recover, not a flatlining.
This isn't actually what happened in Toronto, to be clear. There was a huge housing boom (especially condos) in Toronto in the late 80s, followed by a bust. >100% gain in real housing prices between 1985-1989, then a 40% drop between 1989-1996. What you saw was a housing collapse which took until the 2000s to recover, not a flatlining.
Along the course of those 20 years will be 20 years' worth of property tax, home insurance, and maintenance that renters will largely not incur on top of rent (it is arguably built into the rent, of course).
The owner is not "saving" $480K, but a sum quite a bit smaller than that, likely around 20-40%.
The owner is not "saving" $480K, but a sum quite a bit smaller than that, likely around 20-40%.
The situation is actually even worse than this.
In Canada, they don't have fixed 30-year mortgages like in the US. They have 25-year mortgages with 5 year terms. They need to refinance within 5 years. If they take a 20-30% hit in the house costs, they will absolutely be unable to renew their mortgage, unless they come up with the cash to make up the difference in appraised value.
This will lead to a lot of forced selling or foreclosures which will only pull the house prices down further, and cause more forced selling.
In Canada, they don't have fixed 30-year mortgages like in the US. They have 25-year mortgages with 5 year terms. They need to refinance within 5 years. If they take a 20-30% hit in the house costs, they will absolutely be unable to renew their mortgage, unless they come up with the cash to make up the difference in appraised value.
This will lead to a lot of forced selling or foreclosures which will only pull the house prices down further, and cause more forced selling.
That is extremely bad deal if you have to essentially re-apply for the mortgage every 5 years. I then wonder why nobody offers much better fixed 30yr there? Regulations?
30 year fixed mortgages are offered almost exclusively in the USA. They would not exist here if not for the massive government subsidies in the form of backing & tax breaks.
That's correct. The 30 year mortgage wouldn't exist if it's weren't for the gov't coming in and backing them.
Before the Great Depression, mortgages were completely private – homeowners would generally string refinances one after another, and mortgage terms were less than 5 years. It wasn’t until 1934 that the Federal Housing Administration stepped in with an insurance program on mortgages, an amortization plan, and terms of 15-20 years (much like today, many mortgages are insured based on standardized programs – say, 30 years, fixed interest, 80% loan to value).
[1]https://dqydj.com/history-30-year-mortgage-private-mortgage-...
Before the Great Depression, mortgages were completely private – homeowners would generally string refinances one after another, and mortgage terms were less than 5 years. It wasn’t until 1934 that the Federal Housing Administration stepped in with an insurance program on mortgages, an amortization plan, and terms of 15-20 years (much like today, many mortgages are insured based on standardized programs – say, 30 years, fixed interest, 80% loan to value).
[1]https://dqydj.com/history-30-year-mortgage-private-mortgage-...
Maybe we aren't talking about the same thing, but most mortgages in Australia are 30 year, variable rate with a honeymoon period but no reapplication required throughout the loan.
My understanding is that is pretty similar to the US, but it sounds different to Canada.
We don't have the same tax breaks as in the US though.
My understanding is that is pretty similar to the US, but it sounds different to Canada.
We don't have the same tax breaks as in the US though.
In the US, you can get a 30 year fixed mortgage. Basically you set your interest rate when you take our the loan and it's doesn't change for 30 years.
It's really quite amazing if you think about it.
I know a guy who refinanced a few years back at 2.89%. That's insane as it's barely above inflation. He's basically borrowing money for free.
If inflation goes up to 5-7% over the coming years, his rate will stay at 2.89%, drastically decreasing the cost to pay it back.
It's really quite amazing if you think about it.
I know a guy who refinanced a few years back at 2.89%. That's insane as it's barely above inflation. He's basically borrowing money for free.
If inflation goes up to 5-7% over the coming years, his rate will stay at 2.89%, drastically decreasing the cost to pay it back.
If your 30-year mortgage is at 5% and you refinance it at 25 years at 3%, who pays the loss the bank takes due to the new, lower interest rate?
The bank. If interest rates go up a few points in the coming years, and it would be hard for them not to, banks are going to be sitting on a ton of mortgages that are not profitable.
That said, most loan originators sell the mortgage off. Many of those go to quasi governmental corporations that most people believe the US tax payers will bail out if necessary.
That said, most loan originators sell the mortgage off. Many of those go to quasi governmental corporations that most people believe the US tax payers will bail out if necessary.
Ok, so in effect it's these quasi governmental corporations that assume the risk of rates going up (which would make it very lucrative to refinance), and that's where the subsidy lies.
We have fixed-rate mortgages in Norway too, but the interest rate loss or gain is realized when you refinance. Meaning that if you refinance to a lower rate, you'll have to pay the loss taken by the bank, and if you refinance to a higher rate, the bank pays you the loss you take. If you pay off the loan faster than scheduled, the same rules apply. So the risk is taken entirely by the borrower.
We have fixed-rate mortgages in Norway too, but the interest rate loss or gain is realized when you refinance. Meaning that if you refinance to a lower rate, you'll have to pay the loss taken by the bank, and if you refinance to a higher rate, the bank pays you the loss you take. If you pay off the loan faster than scheduled, the same rules apply. So the risk is taken entirely by the borrower.
The banks mitigate the loss from early payment by heavily front-loading the interest - i.e. first years huge part of what you're paying is interest, and very little goes to equity (at least in default fixed payment scheme, you can pre-pay the principal if you want, but on top of the default fixed payments). The longer is the life of the loan, the more goes to equity and the less to interest. So if you close off the mortgage early, you've already paid a lot of interest that bank would have gotten. Of course, not all of it, but the bank also gets the money back earlier, so I don't think they lose too much.
A "refinance" means someone (which may be your original bank or someone else) lends you the balance to pay off your old loan, and you pay the new loan.
There's not really a loss, since the terms of your old loan allowed the early repayment.
There's not really a loss, since the terms of your old loan allowed the early repayment.
The bank doesn't "lose" in that they are fully paid up to the date of the refinance.
The bank loses in that they are upside down on the spread. They have a mortgage which is paying a low interest rate but they have to borrow at a high one.
The mortgage is essentially a 30 year option, in those terms it becomes obvious why 30 year fixed mortgages wouldn't exist in an unsubsidized market.
The mortgage is essentially a 30 year option, in those terms it becomes obvious why 30 year fixed mortgages wouldn't exist in an unsubsidized market.
You have to take into account all time periods from the time the interest rate charges started (beginning of loan) through to the time when the bank's loan is terminated.
They may have (potentially) had a few month's worth of being underwater but they were able to borrow at a lower rate also.
Further, there are several %age points of spread between what banks pay to borrow and what the mortgage rate is, further cushioning them. See the CIDOR here: http://www.tradingeconomics.com/canada/interbank-rate ... now compare with the mortgage rates a bank will charge.
EDIT: CIDOR under 1% but ratehub.ca says the best 5-year fixed rate you can get is... 2.42% .
They may have (potentially) had a few month's worth of being underwater but they were able to borrow at a lower rate also.
Further, there are several %age points of spread between what banks pay to borrow and what the mortgage rate is, further cushioning them. See the CIDOR here: http://www.tradingeconomics.com/canada/interbank-rate ... now compare with the mortgage rates a bank will charge.
EDIT: CIDOR under 1% but ratehub.ca says the best 5-year fixed rate you can get is... 2.42% .
That's what low rates are designed to do: make the credit cycle work faster, right?
Understood, and makes sense. But even variable rate mortgages in US do not require maintaining equity threshold, do they? Maybe also consequence of govt guarantee. Though I wonder what Canadian central bank would do if it finds itself in the same situation of mass mortgage defaults/underwater mortgages as happened in US - I suspect they would also opt for one or another form of bailout, thus implementing implied, if not explicit, guarantee.
Tax breaks of course is another thing that massively influences US mortgages. I probably would never take my current mortgage if not the interest tax break.
Tax breaks of course is another thing that massively influences US mortgages. I probably would never take my current mortgage if not the interest tax break.
what rates of those fixed mortgages do these subsidies provide on average?
To me, massive government subsidies is more like in France where you can have a 0% interest 25 year mortgage if your household income is low enough.
Or the special account which gives a 2.6% fixed interest after having saved some money in a special savings account.
To me, massive government subsidies is more like in France where you can have a 0% interest 25 year mortgage if your household income is low enough.
Or the special account which gives a 2.6% fixed interest after having saved some money in a special savings account.
Freddie & Fannie own ~45% of the mortgages in the US. Ginnie has another 15.
In addition VA loans & FHA loan security is applied to something like 45% of loans. I've seen estimates that suggest the US taxpayer backs or owns 60% of loans in the residential market.
In addition VA loans & FHA loan security is applied to something like 45% of loans. I've seen estimates that suggest the US taxpayer backs or owns 60% of loans in the residential market.
What are 25-year mortgages with 5 year terms?
Do you mean the interest rate is fixed for only five years? If so, people will not need to refinance as long as interest rates stay low.
Do you mean the interest rate is fixed for only five years? If so, people will not need to refinance as long as interest rates stay low.
It means the mortgage is based on a 25 year repayment schedule, but the money is only lent for 5 years at a time. After the 5 years are up, you need to pay back all the remaining principle. That's usually done by taking out a new 5 year mortgage.
Wow, that's utterly terrifying.
It's how it's been done in Canada for the last century. Normally interest rates don't change that drastically and if they do go up it's due to inflation which is usually reflected in a salary increase.
What would be really terrifying would be another period of stagflation (no growth, high inflation). You could see your salary stay the same, but your mortgage payments increase by 20-40% when you refinance.
What would be really terrifying would be another period of stagflation (no growth, high inflation). You could see your salary stay the same, but your mortgage payments increase by 20-40% when you refinance.
Can they deny an existing homeowner a mortgage? In the US, getting a mortgage is often a convoluted process that takes weeks of effort to put together and can fall apart at any time.
Yes, it is possible, but more often the homeowner switches lenders themselves, since they are now able to negotiate for a better rate from a competitor.
The truly terrifying thing is that the banks have been adding clauses to the mortgages that on renewal if the market value drops below the outstanding balance, the homeowner is required to pay the difference in order to renew.
This is scary because they will not have paid off much in the first 5 years, but the house price can certainly drop a lot in 5 years in a down market, and there would be very little hope for finding a new lender willing to offer a new mortgage for more than the market value of the house.
Getting a mortgage in Canada is (in my experience) a very weird process for an agreement over such a large sum, but typically can happen within a week.
The truly terrifying thing is that the banks have been adding clauses to the mortgages that on renewal if the market value drops below the outstanding balance, the homeowner is required to pay the difference in order to renew.
This is scary because they will not have paid off much in the first 5 years, but the house price can certainly drop a lot in 5 years in a down market, and there would be very little hope for finding a new lender willing to offer a new mortgage for more than the market value of the house.
Getting a mortgage in Canada is (in my experience) a very weird process for an agreement over such a large sum, but typically can happen within a week.
Wow, that's basically a 5-year loan. I'm surprised that Canadian home buyers accept such risk. I wonder why the mortgage market in Australia and UK is so different to Canada.
I think it means amortized over 25 years, balance due and payable in 5, meaning you make payments like it was a 25 year mortgage, but after 5 have to pay it off (often, as GP points out, by refinancing.)
the interest rate is fixed for 3-5 years usually, yes
even if interest rates are flat (or go down, even) you can still be forced into foreclosure if your equity in the home drops below an acceptable threshold
even if interest rates are flat (or go down, even) you can still be forced into foreclosure if your equity in the home drops below an acceptable threshold
>> They probably purchased thinking it was a great investment
You would think by now people would have learnt their lesson and stopped thinking of housing as a 'great investment'.
You would think by now people would have learnt their lesson and stopped thinking of housing as a 'great investment'.
I have no way of substantiating this, but it seems to me that there has been a shift in mindset, at least where I live, from the investment being that you slowly pay it off and eventually own your home, to speculation that the housing market will go up.
A coworker was particularly happy that his apartment had appreciated a lot in value since he bought it. Now, what he doesn't take into account is that the rest of the market has appreciated just as much. It isn't that his apartment has magically become more valuable, it's the entire market that has moved. The only way to realise that profit (without renting) would be to move somewhere where apartments are less expensive for the same standard, which he is not going to do.
A coworker was particularly happy that his apartment had appreciated a lot in value since he bought it. Now, what he doesn't take into account is that the rest of the market has appreciated just as much. It isn't that his apartment has magically become more valuable, it's the entire market that has moved. The only way to realise that profit (without renting) would be to move somewhere where apartments are less expensive for the same standard, which he is not going to do.
This. In Spain, where the housing bubble bust is still widely felt, economic and finance newspapers are starting to report (or pitch, I'm not really sure) that "Spaniards are starting to invest in housing again".
We don't learn.
We don't learn.
I think the reasons people like property are:
- They think they understand it. Everyone lives in a property, right? And they have an opinion about which parts of their town are nice.
- Access to leverage. There's not a lot of things you can buy where the bank gives you 60-95% of the money you need, depending on the country and your situation. Other places where you can get this kind of leverage tend to have a bad rep, such as spread betting.
- They think they understand it. Everyone lives in a property, right? And they have an opinion about which parts of their town are nice.
- Access to leverage. There's not a lot of things you can buy where the bank gives you 60-95% of the money you need, depending on the country and your situation. Other places where you can get this kind of leverage tend to have a bad rep, such as spread betting.
For most people your house is one of your largest investments .
It's an investment in the sense that you have to spend a lot of money/get a huge loan upfront.
But many people also see it as a way to make money. Unlike basically everything else we buy for living, people think that the only direction the value of their house can go is up.
If you look at it like your car (it costs money, but maybe you'll get some money back), then you can't be disappointed. In the worst case, it's no different from paying rent.
Plus, unlike penny stocks, you can live in the house.
The obvious protip here: don't buy a second house unless you can afford losing money on it.
But many people also see it as a way to make money. Unlike basically everything else we buy for living, people think that the only direction the value of their house can go is up.
If you look at it like your car (it costs money, but maybe you'll get some money back), then you can't be disappointed. In the worst case, it's no different from paying rent.
Plus, unlike penny stocks, you can live in the house.
The obvious protip here: don't buy a second house unless you can afford losing money on it.
Once you factor in mortgage interest payments, taxes, maintenance, inflation, real estate commissions, your time, and the time it sits vacant while you try to sell it, it's usually a lousy investment.
Much better off investing in the S&P 500.
Much better off investing in the S&P 500.
You can't live in S&P 500 ;)
Also, when you factor this in - the landlord also knows how to factor those in. So rental prices won't be far behind. There are a lot of factors in renting vs. owning, but it's not clear-cut either side - you need to always look to specific local prices.
Also, when you factor this in - the landlord also knows how to factor those in. So rental prices won't be far behind. There are a lot of factors in renting vs. owning, but it's not clear-cut either side - you need to always look to specific local prices.
> You can't live in S&P 500
Getting a place to live is quite different from getting one as an investment.
> the landlord also knows how to factor those in
Rents are determined by supply & demand. They are not determined by whatever the landlord pleases to charge any more than whatever the renter pleases to pay.
Getting a place to live is quite different from getting one as an investment.
> the landlord also knows how to factor those in
Rents are determined by supply & demand. They are not determined by whatever the landlord pleases to charge any more than whatever the renter pleases to pay.
> Getting a place to live is quite different from getting one as an investment.
Not really. You need a place to live anyway, so why not get one that can also would appreciate in value? Alternatively, getting one that would depreciate can be financially ruinous. So investment consideration is always there, even if they might not be always the primary one.
> Rents are determined by supply & demand.
That's a platitude. But you are thinking of "supply and demand" to narrowly - nobody would purchase a rental property that brings in less money than it takes out, whatever demand is around. There's a price floor for rental price, and that's how much it costs to the owner to get and maintain the property. Short-term, the price can drop below it since selling house takes time, and the market may be not good. Long-term, nobody would keep such asset. People don't do it for fun, they do it for money. If selling is more profitable, they'd do that.
Not really. You need a place to live anyway, so why not get one that can also would appreciate in value? Alternatively, getting one that would depreciate can be financially ruinous. So investment consideration is always there, even if they might not be always the primary one.
> Rents are determined by supply & demand.
That's a platitude. But you are thinking of "supply and demand" to narrowly - nobody would purchase a rental property that brings in less money than it takes out, whatever demand is around. There's a price floor for rental price, and that's how much it costs to the owner to get and maintain the property. Short-term, the price can drop below it since selling house takes time, and the market may be not good. Long-term, nobody would keep such asset. People don't do it for fun, they do it for money. If selling is more profitable, they'd do that.
You can always tell if a market is insane if rent/sale ratio becomes too low.
There are many markets where renting makes perfect financial sense.
There are many markets where renting makes perfect financial sense.
Home price appreciation depends on location, so it's hard to generalize. Also unlike stock investments, a mortgage gives you massive leverage.
The massive leverage is precisely why I would never buy a house on a mortgage. With the 10x+ leverage most mortgages give you these days, it's absolutely terrifying how quickly you can accumulate losses of multiple times your principal. Definitely not what I'm looking for in a long term investment.
Not saying it's risk free, but smart real estate investments can crush stock market returns precisely due to that massive leverage
Yes absolutely. Everybody has a different appetite for risk. If you understand the risks involved and can tolerate the downside potential, a 10x+ leveraged mortgage has the potential to be one of the most lucrative investments opportunities available, due to the massive leverage it offers at dirt cheap interest rates.
What I'm fearful about is that the large majority of mortgage buyers don't see it as a 10x leveraged investment, nor do they understand how badly the amplified price fluctuations of a 10x leveraged investment could hit them if there was even a tiny dip in the price of their homes, let alone another housing crisis like 2007.
What I'm fearful about is that the large majority of mortgage buyers don't see it as a 10x leveraged investment, nor do they understand how badly the amplified price fluctuations of a 10x leveraged investment could hit them if there was even a tiny dip in the price of their homes, let alone another housing crisis like 2007.
Largest, sure, but not most effective. A house is for most people primarily a purchase they intend to use (live in), with the added benefit that over the long term is likely one of their few material possessions that will appreciate instead of depreciate.
Granted, even if the 1.5M house falls by 30% this year, over decades it is likely it will still come out ahead, adjusted for inflation, compared to say, a savings account. But chances are, on average, it won't beat an index fund.
Granted, even if the 1.5M house falls by 30% this year, over decades it is likely it will still come out ahead, adjusted for inflation, compared to say, a savings account. But chances are, on average, it won't beat an index fund.
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>> You would think by now people would have learnt their lesson and stopped thinking of housing as a 'great investment'.
Especially at a price of $1.5 million!!
Especially at a price of $1.5 million!!
I'm completely unfamiliar with the Canadian real estate market, but where I live your ability to get a loan depends on your income and ability to pay the loan.
Given that, why does it matter if someone in Canada had a $200K home and the market dropped 30%, v.s. someone who had a $2M home and the market dropped 30%? Surely their earnings were priced into the loan?
Or is the Canadian real estate/loan market so insane that nobody asks you if you can plausibly pay for the loan you're taking?
Given that, why does it matter if someone in Canada had a $200K home and the market dropped 30%, v.s. someone who had a $2M home and the market dropped 30%? Surely their earnings were priced into the loan?
Or is the Canadian real estate/loan market so insane that nobody asks you if you can plausibly pay for the loan you're taking?
Generally, you are correct. However, you need to take into account someone's down payment.
If you're making $300K per year and you buy a $1M house, then yes, a loss of $100K-$200K is probably manageable. However, a lot of people don't make that much money. What they did is scrap together a down payment, sometimes borrowing from Mom or Dad. They get a mortgage payment they can just afford on a salary of $100K.
The other thing that happens is that some people will get a 2nd loan to cover the down payment requirement. There are regulations against it, but it does happen.
If you're making $300K per year and you buy a $1M house, then yes, a loss of $100K-$200K is probably manageable. However, a lot of people don't make that much money. What they did is scrap together a down payment, sometimes borrowing from Mom or Dad. They get a mortgage payment they can just afford on a salary of $100K.
The other thing that happens is that some people will get a 2nd loan to cover the down payment requirement. There are regulations against it, but it does happen.
You are going to be hard pressed in the US to get a loan for more than 4x annual salary with 20% down. Unless you are borrowing 500k for a down on a 1 million dollar house.
Guidelines for confirming mortgages allow a 38% household DTI ratio. So a $1M home with $800000 loan comes out to around $5000 (3.875% ARM), putting minimum income at $160k. So 5x salary with 20% down.
The government-backed mortgages are capped below $1M though, aren't they? I thought jumbo loans were portfolio loans, so government criteria didn't apply.
One of the problems is that Canadian banks will make loans to foreigners with no credit history if there's a decent down payment. The banks typically demain that Canadian borrowers get a federally insured mortgage, which involves checking your income and credit history.
So it's actually easier for foreigners to speculate on real estate in Canada.
One of the problems is that if a foreign owner ends up underwater after a correction they can easily just walk away.
So it's actually easier for foreigners to speculate on real estate in Canada.
One of the problems is that if a foreign owner ends up underwater after a correction they can easily just walk away.
AFAIK the problem often is that the home is collateral for the loan, and when prices fall the bank demands more collateral to match the loan (even if you could still pay your monthly payments). If you can't pony up, the bank may take over and sell with the current (lower) price. You're left with no home and still have to pay the part of the loan that remains due to price difference.
Disclaimer: not sure this is how US/Canadian mortgages actually work, but this screwed lots of people in a certain financial crisis I know of.
Disclaimer: not sure this is how US/Canadian mortgages actually work, but this screwed lots of people in a certain financial crisis I know of.
I can confirm that Canadians banks do this, but I'm not sure if it happens all the time.
One of the biggest differences between Canada and the US is 30 year terms for mortgages. They are standard in the US and allow you to lock in a fixed rate for pretty much the rest of your life.
In Canada, they still do 30 year amortization, but loans are typically 5 year. You can get 1 year sub-prime loans with very low rates or 10 year fixed with higher rates. The 5 year is the most common.
What this means is that you don't get to enjoy a fixed rate over your lifetime. Get a mortgage for 4%? Great, it might be 7% 5 years from now. In other words your monthly payment could increase substantially.
Since you need to reapply for a mortgage in Canada, the banks will reassess the value and make sure you have enough collateral. I have heard of people refinancing after a downturn and the bank asks for another $5K to $20K to make sure you have the minimum 20% equity.
One of the biggest differences between Canada and the US is 30 year terms for mortgages. They are standard in the US and allow you to lock in a fixed rate for pretty much the rest of your life.
In Canada, they still do 30 year amortization, but loans are typically 5 year. You can get 1 year sub-prime loans with very low rates or 10 year fixed with higher rates. The 5 year is the most common.
What this means is that you don't get to enjoy a fixed rate over your lifetime. Get a mortgage for 4%? Great, it might be 7% 5 years from now. In other words your monthly payment could increase substantially.
Since you need to reapply for a mortgage in Canada, the banks will reassess the value and make sure you have enough collateral. I have heard of people refinancing after a downturn and the bank asks for another $5K to $20K to make sure you have the minimum 20% equity.
This is exactly the same problem as the UK housing market.
Mortgage loans typically have 2-10 year periods of discount or fixed rate (with the lowest interest rates normally found on the 2 year plans), then they revert back to the 'standard variable rate' which is significantly more expensive, and subject to change at very short notice. To keep a low interest rate you have to reapply for your mortgage every few years to get a new deal, and with reapplication comes the requirement to have a certain percentage of equity to loan.
Mortgage loans typically have 2-10 year periods of discount or fixed rate (with the lowest interest rates normally found on the 2 year plans), then they revert back to the 'standard variable rate' which is significantly more expensive, and subject to change at very short notice. To keep a low interest rate you have to reapply for your mortgage every few years to get a new deal, and with reapplication comes the requirement to have a certain percentage of equity to loan.
Lending is pretty lax, just like it's been in spots all over the planet for over a decade.
Six months ago people knew this was coming. If they bought at that time they were just ignoring the writing on the wall because they wanted to play real estate casino. No sympathy for sad house flippers, sorry!
They can live in it. How is this an investment? They are adding no value so should get a cut of that: nothing.
It's fascinating how effective the foreign ownership tax has been. It's only 15%, but it essentially halted the Vancouver property bubble in its tracks, and is now deflating it.
I'll admit to being one of those who thought Vancouver's real estate prices were due to an unwillingness to build. I was wrong. It was always just Chinese money fleeing uncertainty and trying to find a safe place to land.
I'll admit to being one of those who thought Vancouver's real estate prices were due to an unwillingness to build. I was wrong. It was always just Chinese money fleeing uncertainty and trying to find a safe place to land.
Every place's situation is different.
In vancouver with $60k/yr average incomes and a decent enough willingness to build, it's housing-as-bank foreign money. You see it even more with rent & housing price ratios being out of wack.
In the bay area with strong anti-building NIMBYs, prop 13 , a tech boom and some foreign housing-as-bank money leads to it's high prices. You see it in how housing prices and rent is pretty even in many cases. The places in the bay area that don't have fairly even rent/buy ratios are the ones who probably have money being imported.
A friend of mine pointed out how there seems to be about a $2 million limit in housing liquidity in palo alto now since there was a law passed that required that sources of cash have to be disclosed for housing that is over $2 million. You can often see housing liquidity bands too in the '1 tech worker salary' & '2 tech worker salary' limits, mortgage lender down payment behavior and what not.
In vancouver with $60k/yr average incomes and a decent enough willingness to build, it's housing-as-bank foreign money. You see it even more with rent & housing price ratios being out of wack.
In the bay area with strong anti-building NIMBYs, prop 13 , a tech boom and some foreign housing-as-bank money leads to it's high prices. You see it in how housing prices and rent is pretty even in many cases. The places in the bay area that don't have fairly even rent/buy ratios are the ones who probably have money being imported.
A friend of mine pointed out how there seems to be about a $2 million limit in housing liquidity in palo alto now since there was a law passed that required that sources of cash have to be disclosed for housing that is over $2 million. You can often see housing liquidity bands too in the '1 tech worker salary' & '2 tech worker salary' limits, mortgage lender down payment behavior and what not.
This isn't a warranted conclusion. The market was showing signs of slowing down before the tax was implemented. Post ergo propter hoc.
The more likely cause of the rise and then decline in Vancouver prices is the incredible levels of debt home buyers are taking on, due to low interest rates.
This is a testable hypothesis. Toronto is currently where Vancouver was pretax: rising prices, but decline in inventory and overall sales volume. If Toronto declines in 6-12 months without a tax, then the tax likely wasn't the major cause of the Vancouver decline.
The more likely cause of the rise and then decline in Vancouver prices is the incredible levels of debt home buyers are taking on, due to low interest rates.
This is a testable hypothesis. Toronto is currently where Vancouver was pretax: rising prices, but decline in inventory and overall sales volume. If Toronto declines in 6-12 months without a tax, then the tax likely wasn't the major cause of the Vancouver decline.
There has never been an unwillingness to build and that narrative remains baffling to me. The city has been steadily building condo towers for decades and continues to do so. Look at a photo of Vancouver from 1990 and now and the difference is startling.
I stopped by two City of Vancouver public consultations today and both were about rezoning areas to expand housing. One was about upzoning Chinatown to include more housing and the other concerned the design of the new North East False Creek neighbourhood that will exist after the viaducts come down. Tons of housing will be created when that land currently used for an incomplete highway is freed up.
I stopped by two City of Vancouver public consultations today and both were about rezoning areas to expand housing. One was about upzoning Chinatown to include more housing and the other concerned the design of the new North East False Creek neighbourhood that will exist after the viaducts come down. Tons of housing will be created when that land currently used for an incomplete highway is freed up.
Can't be too quick to attribute the "halt" as there have also been changes in currency control policies in China that came into effect in the new year. There likely are a few different contributing factors.
The article addresses this. Actions taken by china affect all cities but only Vancouver in recovering from bubble pricing. Other Canadian cities continue to suffer rising prices. Therefore we may conclude that the cause is specific to Vancouver.
> Chinese money fleeing uncertainty
More like fleeing Chinese taxes and laundering money.
More like fleeing Chinese taxes and laundering money.
Both. The Chinese economy is not dong as well as the gov says it is, places to park money to avoid deprecation and inflation are quite limited domestically.
There is also some laundering going on, as well as some fat cats setting up their life outside of china so they can escape to somewhere when Xi's anti corruption campaign catches up with them.
There is also some laundering going on, as well as some fat cats setting up their life outside of china so they can escape to somewhere when Xi's anti corruption campaign catches up with them.
Are there no "legitimately" rich people in China? I've been given the impression that the laws and economy are structured such that one cannot become wealthy without taking what "should" have gone to the government/people, but I find this all very confusing. Obviously there are very visible rich Chinese folks. Or is it more comparable to rich Americans with Panama accounts, which there is nothing necessarily wrong with, but we all know that a good chunk of them are probably dodging taxes?
There definitely are! But they aren't the ones who have to really worry about getting their assets (and eventually asses) out of China.
There are plenty of people who have built their empires via guanxi, bribery, and lots of untaxed grey money. Those are the ones that are a bit more worried about the government turning against them (because there is plenty of ammunition).
There are plenty of people who have built their empires via guanxi, bribery, and lots of untaxed grey money. Those are the ones that are a bit more worried about the government turning against them (because there is plenty of ammunition).
A willingness to build would lower the price of real estate. It depends on how great that contributing cause is.
There's never been an unwillingness to build in Vancouver. There've been constant condo developments for 20 years, and the only thing stopping more from starting is lack of labour. Friends in construction have been saying for a decade that there's more work and overtime than they can possibly glut themselves with. They're literally building as fast as they can.
It's the geopolitical reverse of global search for yield.
Necroposting here, but that's an extremely interesting comparison. Would you be able to elaborate?
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But has anything been solved? Can locals afford and are able to buy houses - especially first time buyers?
First step with any trauma is to stop the bleeding. Therapy and recovery come later and take a long time.
IMO, the timing also coincides with Chinese government's several actions of tightening regulations for foreign exchanges/purchases. So it may be a combination of multiple factors (not sure which one is more significant)
See https://www.ft.com/content/87d8a7e8-cfe8-11e6-b06b-680c49b4b...
See https://www.ft.com/content/87d8a7e8-cfe8-11e6-b06b-680c49b4b...
From the original article:
"It’s working (pdf), according to Bank of Montreal analysts. They show how prices have been falling in Vancouver but are still appreciating steeply in Toronto and Victoria, which don’t have a similar tax."
If your point were correct, you'd also see declining prices in Toronto/Victoria, no?
Here's the PDF: http://economics.bmocapitalmarkets.com/economics/amcharts/GD...
"It’s working (pdf), according to Bank of Montreal analysts. They show how prices have been falling in Vancouver but are still appreciating steeply in Toronto and Victoria, which don’t have a similar tax."
If your point were correct, you'd also see declining prices in Toronto/Victoria, no?
Here's the PDF: http://economics.bmocapitalmarkets.com/economics/amcharts/GD...
The foreign tax appears to be more significant due to other cities without the tax not seeing prices drop.
You have to remember that Vancouver was the hottest housing market in Canada. Toronto is #2, but prices there are maybe 60-80% of those in Vancouver. And Toronto is a massive city with a ton of high paying jobs. Vancouver not so much.
As I stated in another reply, I have no doubt the foreigner tax had an impact. But even without it, the Vancouver market was poised for a downturn.
As I stated in another reply, I have no doubt the foreigner tax had an impact. But even without it, the Vancouver market was poised for a downturn.
We're seeing signs of slowdown in house price increases here in Toronto as well this year. Many houses around our area are selling below asking price (which is historically uncommon)
Perhaps, as some other persons commented on the thread, the housing price at Vancouver was pushed high by oversea money? The other cities were not like this?
I wonder if this would also affect the Australian real estate market. I certainly hope so. The situation is getting to unsustainable levels. Now all we need is is a similar empty house tax law and we're all set.
Yes I think it's the main trigger.
Vancouver is in a major house price bubble and the correction is going to be huge.
I don't know where these guys got their stats but an average-priced detached home throughout Greater Vancouver costs $1,470,265.
http://www.huffingtonpost.ca/2016/09/02/vancouver-detached-h...
http://www.huffingtonpost.ca/2016/09/02/vancouver-detached-h...
I expect prices to drop up to 15% and then to recover. Such trends to happen when prices are elastic, profits are high, and a new tax is enforced.
I'm more interested in the effects of the new monetary rules/enforcement that China has imposed on its citizens. Still, I remain steadfastly skeptical that the sky will fall.
I'm more interested in the effects of the new monetary rules/enforcement that China has imposed on its citizens. Still, I remain steadfastly skeptical that the sky will fall.
New rules were not technically imposed, just a tougher enforcement of older rules. Anyways, the next moves by he Chinese gov should happen post CNY, they've already ratcheted up interest rates a bit in a surprise move, they'll probably make other moves in the next couple of weeks after people start coming back to work.
Christy Clark, the premier of BC, is considering getting rid of the 15% foreign buyers tax already and has proposed or implemented initiatives to bolster the RE market again. She and the mayor of Vancouver are said to have great ties to the RE industry. She needs to address the problem (elections are coming up) but doesn't want to anger her biggest donors (elections are coming up). One of the things she just did is implement interest free loans for 5 years for new home owners
The BC Liberal goverment has been in power too long, but people really like to play Real Estate Casino so the legacy lives on for now.
I wonder if anybody has built a system to correlate Chinese policy actions with economic effects elsewhere. I rudely became aware of just how much Chinese capital controls mattered in cryptocurrencies when BTC took that mini-dive. I'm sure there's some bank out there that's run the numbers -- it's fascinating how many variables might hang on what is essentially a black box.
> I rudely became aware of just how much Chinese capital controls mattered in cryptocurrencies when BTC took that mini-dive.
except they don't, really.
http://imgur.com/a/KDwtE
except they don't, really.
http://imgur.com/a/KDwtE
> So how did Vancouver tame its roaring housing market?
Tamed? The article makes it sound like over a decade of faster-than-inflation price appreciation has been wiped clean with a one year decline of 3.7% and cooling sales.
The real estate market moves in very long cycles due in part to the difficulty of trading in an out of it. Believe what you want, but I suspect now is not the time to dive into the Vancouver real estate market.
Also, no mention of China and the strong desire of many citizens to move their money out of the country and into offshore assets like Vancouver real estate:
http://www.huffingtonpost.ca/stephen-punwasi/chinese-buyers-...
Tamed? The article makes it sound like over a decade of faster-than-inflation price appreciation has been wiped clean with a one year decline of 3.7% and cooling sales.
The real estate market moves in very long cycles due in part to the difficulty of trading in an out of it. Believe what you want, but I suspect now is not the time to dive into the Vancouver real estate market.
Also, no mention of China and the strong desire of many citizens to move their money out of the country and into offshore assets like Vancouver real estate:
http://www.huffingtonpost.ca/stephen-punwasi/chinese-buyers-...
Local municipalities could easily take more protectionist measures like this to preserve basic needs of local citizens. It seems very reasonable and feasible to tax money coming from outside of the municipality so that housing prices (or food prices, etc) don't inflate faster than the growth of the local economy.
I'm thinking of dynamics where geographical wealth mismatches could affect prices. A couple examples I've been exposed to:
The counter-side to this is that the wealthiest property owners (local and foreign) benefit from the free inflow of capital. These people may be more influential constituents to municipality leaders than people who would be negatively affected by rising housing prices.
I'm thinking of dynamics where geographical wealth mismatches could affect prices. A couple examples I've been exposed to:
- Chinese investment in Bay Area residences
- Transient Bay Area tech workers renting in Mission / SOMA
- Residences being turned into vacation rentals in SF
- Houston oil money buying residences in Colorado communities
- NYC, LA, SF money flowing into Austin, both travel and investment
- Vacation spending and mainland investment increasing the cost of residences in Hawaii
The counter-side to this is that the wealthiest property owners (local and foreign) benefit from the free inflow of capital. These people may be more influential constituents to municipality leaders than people who would be negatively affected by rising housing prices.
In what way are Bay Area tech workers "transient"?
Locals raise housing prices to punish us for our transience.
We burn out after a few years of realizing that home ownership is perpetually off the table and raising kids here will be nearly impossible.
We give in the locals' demands that we move out, and locals double down on working to punish us for our transience.
We burn out after a few years of realizing that home ownership is perpetually off the table and raising kids here will be nearly impossible.
We give in the locals' demands that we move out, and locals double down on working to punish us for our transience.
Everything is transient. ("If something cannot go on forever, it'll eventually have to stop.")
But I'm pretty sure that's not what GP was referring too ;)
But I'm pretty sure that's not what GP was referring too ;)
Indeed. I would like to know how a tech worker is more transient than a banker, bus driver, welder, poet, lawyer, etc.
Part of it is incentives to do so by the demand side. Why is chinese wealth fleeing from china? Because they don't feel stable & safe to do so in china. NYC & SF money is more likely to flow into austin because of the relatively recent price spikes in their local areas and so on. These expensive place export their own problems in a sense.
This makes a lot of sense to me. I would like to see this implemented elsewhere.
I live in the Bay Area, and I'm trying to buy a house with my fiancé and we are really struggling to find anything affordable. I'm a software developer and she is a school teacher.
I live in the Bay Area, and I'm trying to buy a house with my fiancé and we are really struggling to find anything affordable. I'm a software developer and she is a school teacher.
The Bay is more driven from internal consumption than Vancouver, though. Vancouver had the problem of foreign owners buying up a significant percent and leaving those homes empty. A tax on foreign owners won't have anything close to the same effect in SF: SF's prices are driven by salaries and wealthy residents much more than Vancouver's was.
This. The bay is much more driven by google and Facebook millionaires while Vancouver's bubble is/was almost completely driven by Chinese speculation. LA is probably more exposed to a pop in Chinese speculation than the Bay Area is.
The Bay is driven by vast numbers of Google and Facebook millionaire hopefuls, who are willing to pay 60% and more of their salaries for single rooms in dilipidated apartments shared with strangers, and to endure uncomfortable hour-plus commutes, in pursuit of their dreams.
High competitiveness among the few thousand who actually got rich would not fall on the middle and working class so heavily.
A huge number of people willing to pay most of their upper-middle-class salaries for a standard of living we would call poverty in any other region, on the other hand, makes even poverty-style living too expensive for the Bay Area's actual poor.
High competitiveness among the few thousand who actually got rich would not fall on the middle and working class so heavily.
A huge number of people willing to pay most of their upper-middle-class salaries for a standard of living we would call poverty in any other region, on the other hand, makes even poverty-style living too expensive for the Bay Area's actual poor.
Agreed. How many people have been made millionaires through tech companies? 10,000? 20,000? Even 50,000?
There are 7 million people who live in the greater Bay area and they live in ~2.5M owner-occupied housing units. I can't see tech millionaires making that much of a an impact on housing prices. Sure, they could push prices up by 10-20%, but SF housing prices have pretty much doubled since the great recession.
I think it's the "now or never" mentality of home buyers. they think that prices will only ever go up, so if they don't buy now (even if it means overextending themselves) they'll never have a home. I'm sure a lot of people thought the same thing before the housing crash of 2007.
There are 7 million people who live in the greater Bay area and they live in ~2.5M owner-occupied housing units. I can't see tech millionaires making that much of a an impact on housing prices. Sure, they could push prices up by 10-20%, but SF housing prices have pretty much doubled since the great recession.
I think it's the "now or never" mentality of home buyers. they think that prices will only ever go up, so if they don't buy now (even if it means overextending themselves) they'll never have a home. I'm sure a lot of people thought the same thing before the housing crash of 2007.
Prices are set on the margins.
Sales volume in the bay area are low for a variety of reasons (Prop 13, not enough new construction).
It doesn't take many people with high salaries when there is low inventory to push prices up.
If many more houses were for sale, the prices would plummet due to lack of buyers able to pay the current prices.
Sales volume in the bay area are low for a variety of reasons (Prop 13, not enough new construction).
It doesn't take many people with high salaries when there is low inventory to push prices up.
If many more houses were for sale, the prices would plummet due to lack of buyers able to pay the current prices.
Millionaire doesn't just buy themselves a house. They also buy houses for their children! One of my colleagues at work just bought a house for her daughter, all cash, in Piedmont where every house costs more than a million bucks. She's a mid-level software developer, nothing remarkable or extraordinary but she has that kind of money.
As someone who once was outbid by an all-cash offer on a house in Piedmont I had to sort of grit my teeth over that one.
As someone who once was outbid by an all-cash offer on a house in Piedmont I had to sort of grit my teeth over that one.
No Google engineer is paying sixty percent of their salary for a rented room of any quality in the Bay Area. I don't know whether you're vastly overestimating the cost of a room, or underestimating Googler salaries, but one way or another, you've got it twisted.
By "Google/Facebook millionaire hopeful" I'm referring to founders/early employees that are trying to build a company with Google or Facebook's level of financial success and get rich on equity.
Google pays enough to get your own apartment on less than 50%, sure, but I don't think Google is making people millionaires anymore, except the slow way (401k savings).
Google pays enough to get your own apartment on less than 50%, sure, but I don't think Google is making people millionaires anymore, except the slow way (401k savings).
Facebook/Google made lots of people millionaire with their share grants. I'm not talking about the IPO from 10 years ago, but the regular stock grants they give on top of salaries.
Over a few years, the big company compensation package is over 1 million. (It helps that the valuation has been rising steadily forever).
Over a few years, the big company compensation package is over 1 million. (It helps that the valuation has been rising steadily forever).
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If you are talking about rents, sure: more demand, same supply = higher rents.
If you are talking about sale prices, then those hopefuls hardly influence that market. Instead, it is the people coming in with money that can afford to bid up houses that you have to worry about.
If you are talking about sale prices, then those hopefuls hardly influence that market. Instead, it is the people coming in with money that can afford to bid up houses that you have to worry about.
I don't think the rental and ownership markets are that segregated. If buying a house costs less than the expected value of renting it out for a while, a smart investor would buy that house and make it a rental.
There's a huge amount of demand to live here. The price level has to rise until only the number of people who can fit in the housing stock are coming in. We could have no inward migration, but I don't think we could have a large number of people without money moving in - how would we decide who gets a home and who doesn't, if not by raising prices?
There's a huge amount of demand to live here. The price level has to rise until only the number of people who can fit in the housing stock are coming in. We could have no inward migration, but I don't think we could have a large number of people without money moving in - how would we decide who gets a home and who doesn't, if not by raising prices?
To become a landlord, you have to have either the capital or credit. Playing landlord even in the Bay area is risky.
Vancouver, even though rents are crunched also, is not so affected much by internal movements. The distortions are much more at the sales level and then, speculators leaving bought property empty because they intend to flip sooner rather than later, or just don't want to rent it out for money that isn't very comparable to the purchase price.
Vancouver is basically the mainland Chinese real estate market: very expensive to buy a house, but still cheap (relatively) to rent. The Bay Area is not.
Vancouver, even though rents are crunched also, is not so affected much by internal movements. The distortions are much more at the sales level and then, speculators leaving bought property empty because they intend to flip sooner rather than later, or just don't want to rent it out for money that isn't very comparable to the purchase price.
Vancouver is basically the mainland Chinese real estate market: very expensive to buy a house, but still cheap (relatively) to rent. The Bay Area is not.
People often downgrade their housing type before they start paying more for housing if they can. Ex: Live with room mates, live in a studio vs a 1 or 2 bedroom with their partner, etc.
Precisely. The downgraded housing options that tech workers accept, i.e. roommates, tiny studios, bad neighborhoods, poor maintenance, long commutes, etc. are hallmarks of poverty in the rest of the country.
In Milwaukee, a 20th percentile household still has a car and a commute below 30 minutes [0].
Here, even six-figure professionals can't afford such things, so life is nearly impossible for the genuinely poor.
[0] https://datausa.io/profile/geo/milwaukee-wi/#housing
In Milwaukee, a 20th percentile household still has a car and a commute below 30 minutes [0].
Here, even six-figure professionals can't afford such things, so life is nearly impossible for the genuinely poor.
[0] https://datausa.io/profile/geo/milwaukee-wi/#housing
These claims have very little in common with the facts on the ground. A Google engineer can afford a condo five miles away in Sunnyvale ($700k), or a house ($1M) if they have a partner earning decent money too. These prices are absurd, and untenable for regular people who don't work in tech, but let us be realistic. Those are the prices because there are people paying them.
>A Google engineer can afford a condo five miles away in Sunnyvale ($700k)
If we're using the 2-2.5x income definition of "afford" that stands in the rest of the country, no. Total compensation across software engineers at Google looks to be about $160k [0]; a Googler can afford about $400k.
Not a lot of $400k condos around here.
To get to $700k, you'd need a married pair of Googlers (not an easy thing to do in this overwhelmingly male industry), the equity from a paid-off house somewhere else in (more likely), or the willingness (and lenders' willingness) to spend a much higher multiple of your income (seems to be what's happening).
[0] https://www.glassdoor.com/Salary/Google-Software-Engineer-Sa...
If we're using the 2-2.5x income definition of "afford" that stands in the rest of the country, no. Total compensation across software engineers at Google looks to be about $160k [0]; a Googler can afford about $400k.
Not a lot of $400k condos around here.
To get to $700k, you'd need a married pair of Googlers (not an easy thing to do in this overwhelmingly male industry), the equity from a paid-off house somewhere else in (more likely), or the willingness (and lenders' willingness) to spend a much higher multiple of your income (seems to be what's happening).
[0] https://www.glassdoor.com/Salary/Google-Software-Engineer-Sa...
I'm not sure the average Google software engineer according to Glassdoor is representative enough of Google software engineers who would be buying housing that it's valid basis to make assertions about housing affordability.
It's extraordinarily unaffordable in the Bay Area and none of my friends there (at Google, Facebook, or elsewhere) would say it's easy, but I don't think $400k is the right number to pick even if you're conservative about affordability.
Google has been hiring extremely heavily over the last 4-5 years, and their HQ gets tons of early 20s fresh university hires. So I'd expect that $160k number (which I see as $166k?) to be skewed down a bit. Anyway, fresh early 20s university hires aren't likely to have the savings, stability of personal situation, or desire to buy property.
You're probably looking at more established engineers as buyers, and they'll have been able to save longer and advance in their careers, and $160k + the standard 20% down payment is probably on the low side for that.
Glassdoor's numbers don't change much when you bump up the experience, and I'm afraid I don't have sources other than my fairly extensive social network at large Bay Area tech companies, but I can pretty confidently say 3-6 years out of school that yearly total comp number will be $200k+ and if you're saving properly without 6 figures of debt you'll have upper 5/lower 6 figures saved to put down on a place.
$700k is still a stretch, so I think your point still stands, but I don't think you need to be a dual-income Google/Facebook/etc. software engineer household to afford it.
It's extraordinarily unaffordable in the Bay Area and none of my friends there (at Google, Facebook, or elsewhere) would say it's easy, but I don't think $400k is the right number to pick even if you're conservative about affordability.
Google has been hiring extremely heavily over the last 4-5 years, and their HQ gets tons of early 20s fresh university hires. So I'd expect that $160k number (which I see as $166k?) to be skewed down a bit. Anyway, fresh early 20s university hires aren't likely to have the savings, stability of personal situation, or desire to buy property.
You're probably looking at more established engineers as buyers, and they'll have been able to save longer and advance in their careers, and $160k + the standard 20% down payment is probably on the low side for that.
Glassdoor's numbers don't change much when you bump up the experience, and I'm afraid I don't have sources other than my fairly extensive social network at large Bay Area tech companies, but I can pretty confidently say 3-6 years out of school that yearly total comp number will be $200k+ and if you're saving properly without 6 figures of debt you'll have upper 5/lower 6 figures saved to put down on a place.
$700k is still a stretch, so I think your point still stands, but I don't think you need to be a dual-income Google/Facebook/etc. software engineer household to afford it.
I wouldn't say "completely driven". The Quartz article even talks about low interest rates and too many first time buyers getting into the market. 15% of purchases were made by foreigners, 85% by Canadians. If you wanted to live on the west coast of Canada, Vancouver is about the only choice.
If everyone and their grandmother is a (multi)millionaire, even a $200k salary looks like a pittance in comparison. The area is only so big, meaning property prices explode. For the average earner, the Bay Area is a victim of its own success.
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How comparable do people think their market is to the Bay Area? Would we expect to see something similar if Trump did something similar (not out of the realm of possibility at this point if it would give him a victory)? Or are the job markets and situation with Prop 13 too different such there would still be more demand than supply?
Vancouver's market isn't really comparable to the Bay Area. They have actually been building quite a lot of new housing, and have been for some years. Vancouver's real estate boom was mostly caused by foreign buyers (Chinese) using it as an investment vehicle and a place to park their money. This is a reason why Vancouver is among the top 2 or 3 most unaffordable cities, because the median wage (~60k CAD) there doesn't support owning a family home, which could easily be over a million CAD.
I doubt a foreign buyer tax would have much of an effect on the Bay Area, since much of it is driven by internal demand and high salaries. On the other hand, places like Sydney, Auckland, etc. have similar problems with foreign buyers and could probably benefit.
I doubt a foreign buyer tax would have much of an effect on the Bay Area, since much of it is driven by internal demand and high salaries. On the other hand, places like Sydney, Auckland, etc. have similar problems with foreign buyers and could probably benefit.
Vancouver's real estate boom was mostly caused by foreign buyers (Chinese) using it as an investment vehicle and a place to park their money.
Although foreign buyers do have an impact on the Vancouver housing market, I think people really overestimate the effect it has.
After lots of discussion about hoards of Chinese buyers, the BC gov't started tracking purchases. It peaked at 13% just before the tax (and most of that was concentrated it the top of the price range).[1] Also, that definition of foreigner is just someone without Canadian citizen or permanent residency. If you live and work in Canada and are on a work visa, then you would still count as a foreigner (which I don't think is fair).
That means only 1 out of 8 homes were bought by a foreigner and 7 out of 8 were purchases by resident Canadians.
What people seem to ignore is the absolutely shocking way that Canadians are overextending themselves when it comes to real estate. It's a "now or never" mentality and mortgage products like the ones that brought down the US economy are becoming more and more common in Canada.
The foreigner tax is likely the straw that broke the camel's back when it came to the Vancouver real estate market. Even without the tax the market was about to turn.
[1]http://www.theglobeandmail.com/real-estate/vancouver/foreign...
Although foreign buyers do have an impact on the Vancouver housing market, I think people really overestimate the effect it has.
After lots of discussion about hoards of Chinese buyers, the BC gov't started tracking purchases. It peaked at 13% just before the tax (and most of that was concentrated it the top of the price range).[1] Also, that definition of foreigner is just someone without Canadian citizen or permanent residency. If you live and work in Canada and are on a work visa, then you would still count as a foreigner (which I don't think is fair).
That means only 1 out of 8 homes were bought by a foreigner and 7 out of 8 were purchases by resident Canadians.
What people seem to ignore is the absolutely shocking way that Canadians are overextending themselves when it comes to real estate. It's a "now or never" mentality and mortgage products like the ones that brought down the US economy are becoming more and more common in Canada.
The foreigner tax is likely the straw that broke the camel's back when it came to the Vancouver real estate market. Even without the tax the market was about to turn.
[1]http://www.theglobeandmail.com/real-estate/vancouver/foreign...
> After lots of discussion about hoards of Chinese buyers, the BC gov't started tracking purchases. It peaked at 13% just before the tax (and most of that was concentrated it the top of the price range).[1] Also, that definition of foreigner is just someone without Canadian citizen or permanent residency.
You can still purchase permanent residence status with cold hard cash in Quebec. A lot of Canadian "citizens" / "permanent residents" are nothing of the kind, they are citizens of convenience. The passport and house is for getting out of Dodge when the sht hits the fan.
Similarly, a lot of multi-million dollar houses are owned by Chinese students.
I'd feel very comfortable betting the truly* foreign percentages is far, far higher than the government is telling us. It took high levels of public outrage before the government finally released a subset of the statistics, if they were really now interested in telling the truth, they'd publish all the metadata available for citizens to examine.
You can still purchase permanent residence status with cold hard cash in Quebec. A lot of Canadian "citizens" / "permanent residents" are nothing of the kind, they are citizens of convenience. The passport and house is for getting out of Dodge when the sht hits the fan.
Similarly, a lot of multi-million dollar houses are owned by Chinese students.
I'd feel very comfortable betting the truly* foreign percentages is far, far higher than the government is telling us. It took high levels of public outrage before the government finally released a subset of the statistics, if they were really now interested in telling the truth, they'd publish all the metadata available for citizens to examine.
Admittedly I'm not an expert in this, but isn't demand for housing relatively inelastic? I have no idea whether 13% foreign buyers is considered high for a city, but it seems conceivable that it could fuel a large boom in real estate. Especially if a lot of these units aren't even being lived in.
I have a hard time believing that Vancouver real estate prices have been driven by 'organic' demand. It's a beautiful city, for sure, but the economy isn't exactly stellar. Canadians are probably overextending themselves, but I doubt the average young Canadian with 60k income can quality for a 1 million dollar mortgage.
I have a hard time believing that Vancouver real estate prices have been driven by 'organic' demand. It's a beautiful city, for sure, but the economy isn't exactly stellar. Canadians are probably overextending themselves, but I doubt the average young Canadian with 60k income can quality for a 1 million dollar mortgage.
"That means only 1 out of 8 homes were bought by a foreigner and 7 out of 8 were purchases by resident Canadians."
1 out of 8 is more than is necessary to create a massive bubble, and is the driving factor - along with low interest rtes.
In a housing market - nobody knows for sure which direction it's going to go.
So how do they price? They price on 'similar properties'. So when 'the similar house down the street' sells for '5% above asking' that sends a 'validating pricing signal' to other buyers of homes in the neighbourhood.
It's not so much that it's 'foreign buyers' - if they were normal buyers it wouldn't have much on an effect - it's that they are generally 'price insensitive'. They need to get their money out of China and into something and they generally com e in and buy above asking, and out-bid everyone or whatever.
In a 'normal situation' a house may not sell for some time, it gets buyers skittish, and they wait, and maybe give low-ball offers. Sellers may be weary and then sell it.
But all it takes is for a few 'over asking bids' to come into an area and it props ALL of the homes up in price. Local buyers feel confident taking out their massive loans because 'that's what the house is worth, i.e. it's an investment'.
Without some upward driver on prices, they'll collapse to a different level - and guess what that level is? The level that people earning the local Houshold income feel comfortable buying at :) given all the variables.
Especially when the word 'bubble' is floating around, it means the only way local buyers will buy is if there is the 'up signal'. So - no 'foreign inelastic buyers' -> 'no up signal' -> depreciation.
As for: "What people seem to ignore is the absolutely shocking way that Canadians are overextending themselves when it comes to real estate"
This is rational behaviour. If the market is going up-up-up - and you're a family in Van - you either buy a home now while you can barely afford it - or be left out of the housing market forever, and rent - and within a few years, rents will be too much - and you have to leave Vancouver!
So the effect of 'price inelastic foreign buyers' is forcing otherwise normal people into a serious economic quandry - the system is forcing them to gamble their entire life of 'net worth' in a crazy crapshoot - when people just want a place to live.
Globalization is having a crazy effect on real estate - and outside of maybe a few 'globalist' cities like London and NYC - I believe that every nation should have a 15% tax on foreign buyers - so that local citizens are given a kind of advantage - or rather just a 'protection' from foreign blips of money coming and ruining them all. The local banks will pay a price as well. A serious Vancouver housing crash could kill a bank, in which case taxpayers have to come in and bail it out.
When the entire world is interconnected, the bad decisions of one government can send shockwaves through the world. That's why 'some kinds of walls' are good. Think 'economic firewall'.
1 out of 8 is more than is necessary to create a massive bubble, and is the driving factor - along with low interest rtes.
In a housing market - nobody knows for sure which direction it's going to go.
So how do they price? They price on 'similar properties'. So when 'the similar house down the street' sells for '5% above asking' that sends a 'validating pricing signal' to other buyers of homes in the neighbourhood.
It's not so much that it's 'foreign buyers' - if they were normal buyers it wouldn't have much on an effect - it's that they are generally 'price insensitive'. They need to get their money out of China and into something and they generally com e in and buy above asking, and out-bid everyone or whatever.
In a 'normal situation' a house may not sell for some time, it gets buyers skittish, and they wait, and maybe give low-ball offers. Sellers may be weary and then sell it.
But all it takes is for a few 'over asking bids' to come into an area and it props ALL of the homes up in price. Local buyers feel confident taking out their massive loans because 'that's what the house is worth, i.e. it's an investment'.
Without some upward driver on prices, they'll collapse to a different level - and guess what that level is? The level that people earning the local Houshold income feel comfortable buying at :) given all the variables.
Especially when the word 'bubble' is floating around, it means the only way local buyers will buy is if there is the 'up signal'. So - no 'foreign inelastic buyers' -> 'no up signal' -> depreciation.
As for: "What people seem to ignore is the absolutely shocking way that Canadians are overextending themselves when it comes to real estate"
This is rational behaviour. If the market is going up-up-up - and you're a family in Van - you either buy a home now while you can barely afford it - or be left out of the housing market forever, and rent - and within a few years, rents will be too much - and you have to leave Vancouver!
So the effect of 'price inelastic foreign buyers' is forcing otherwise normal people into a serious economic quandry - the system is forcing them to gamble their entire life of 'net worth' in a crazy crapshoot - when people just want a place to live.
Globalization is having a crazy effect on real estate - and outside of maybe a few 'globalist' cities like London and NYC - I believe that every nation should have a 15% tax on foreign buyers - so that local citizens are given a kind of advantage - or rather just a 'protection' from foreign blips of money coming and ruining them all. The local banks will pay a price as well. A serious Vancouver housing crash could kill a bank, in which case taxpayers have to come in and bail it out.
When the entire world is interconnected, the bad decisions of one government can send shockwaves through the world. That's why 'some kinds of walls' are good. Think 'economic firewall'.
[deleted]
I call b#)(sh!t
http://creastats.crea.ca/natl/index.html
Wishful thinking. Wealthy asians are still buying up everything.
Wishful thinking. Wealthy asians are still buying up everything.
Wrong. The majority of purchasers are Canadian.
Condo prices in Vancouver, however, are on the upswing.
If by "upswing" you mean -5% for Vancouver west side over 6 months, then yes
http://www.rebgv.org/sites/default/files/1.%20REBGV%20Stats%...
http://www.rebgv.org/sites/default/files/1.%20REBGV%20Stats%...
My source would be my friend who is looking for a condo right now and their experience has been that everything is being snapped off the market in days for above asking.
Source please?
https://betterdwelling.com/city/vancouver/vancouver-condo-pr...
Seems they've dipped a touch since the summer, but that's part of the usual summer-is-buying-season cycle as far as I understand.
Seems they've dipped a touch since the summer, but that's part of the usual summer-is-buying-season cycle as far as I understand.
how much are the property taxes in vancouver? I know in San Francisco its around 1.15%. A 1M condo pays, 15k in property taxes a year. So vancouver just increased this 15k by 2.25k and made it 17.25k? This seems negligible.. A 20% increase in business class plane tickets from China would have a bigger effect than this..
You misunderstand. This is a 15% premium on the entire purchase price. So for a $2M home the tax would be $300k [1].
[1] http://www.theglobeandmail.com/news/british-columbia/bc-to-t...
[1] http://www.theglobeandmail.com/news/british-columbia/bc-to-t...
I'm surprised that this has a material effect. I can't imagine that someone who is willing to buy a $2M home not to live but to park money from overseas is somehow not willing to pay $2.3M.
I suspect it's a sign that they're a lot more leveraged than one might expect. These people are not paying cash as long as money is near-free. They'd be total fools to pay 100% of 1 house instead of 20% on 5 houses. So consider a conventional mortgage that typically requires 20% down and you get it back when you sell, plus a profit. With these rules, they now have to pay 20%+15% to hold it, and they lose the latter portion to the government, plus significantly higher tax annually.
I'd guess they're good enough at this game that they're even more leveraged than the 20% conventional downpayment requirement and probably using the (bubble inflated) equity to print new money out of thin air and get another property.
I have no idea what's actually going on but this is how I've seen people speculate on real estate in other markets and seems like the obvious thing to do. I would even guess that there are ways of borrowing against money that is still in China, which subverts their restrictions on moving money.
I also predict that this hiccup will be invisible within 6 months, for two reasons.
1. Nobody goes shopping for houses in December and January because it's cold and there is Christmas/Lunar New Year etc, especially with the storms this year.
2. These restrictions are going to have loopholes and a market this big has an implicit bounty on finding them. They'll figure out how to get Canadians to hold the title to dodge the 15% foreign tax and they'll sign rental agreements with their lawyers kids/pets and say it's officialy rented or whatever else they need to do.
I'd guess they're good enough at this game that they're even more leveraged than the 20% conventional downpayment requirement and probably using the (bubble inflated) equity to print new money out of thin air and get another property.
I have no idea what's actually going on but this is how I've seen people speculate on real estate in other markets and seems like the obvious thing to do. I would even guess that there are ways of borrowing against money that is still in China, which subverts their restrictions on moving money.
I also predict that this hiccup will be invisible within 6 months, for two reasons.
1. Nobody goes shopping for houses in December and January because it's cold and there is Christmas/Lunar New Year etc, especially with the storms this year.
2. These restrictions are going to have loopholes and a market this big has an implicit bounty on finding them. They'll figure out how to get Canadians to hold the title to dodge the 15% foreign tax and they'll sign rental agreements with their lawyers kids/pets and say it's officialy rented or whatever else they need to do.
It's not that they are all 'not living there'.
They might live there, or have a family member/student live there, or their wife/kids while they stay in China.
These people might be a little 'price inelastic' but also 'not stupid'. A 15% advantage for local buyers gives some leverage.
It could also just be a little skittishness - 'what will the tax be next year'? Or 'will this cause other buyers to be skittish because if that happens, prices will drop, so I'll hold off'.
15% will definitely pull out a chunk of buyers - that pull out might be enough to make those buying 'at any price' not enough to keep the bubble up.
Finally - Toronto saw a big increase after Van put in the law. The money just may have switched gears into TO.
They might live there, or have a family member/student live there, or their wife/kids while they stay in China.
These people might be a little 'price inelastic' but also 'not stupid'. A 15% advantage for local buyers gives some leverage.
It could also just be a little skittishness - 'what will the tax be next year'? Or 'will this cause other buyers to be skittish because if that happens, prices will drop, so I'll hold off'.
15% will definitely pull out a chunk of buyers - that pull out might be enough to make those buying 'at any price' not enough to keep the bubble up.
Finally - Toronto saw a big increase after Van put in the law. The money just may have switched gears into TO.
Consider this: if you were trying to park your money somewhere safe, like a bank, and they said that in order to make a deposit you had to pay a 15% non-refundable fee, wouldn't you look elsewhere, especially if it was a $2M deposit?
The problem wasn't just parking, it was also the constant short-term flipping. Basically Chinese were speculating between themselves with a good chunk of GVA real estate, and that's what was driving the bubble.
If investors are buying with the intent to flip properties for a profit in the future then the tax significantly limits that profit. It'd make more sense to buy in other markets without such a tax.
If the intent is to just park money then a 15% cost to do so might or might not make sense.
If the intent is to just park money then a 15% cost to do so might or might not make sense.
I think that would be true if all potential locations had the tax. As they are just parking their money, the exact city they buy into doesn't matter too much to them outside of the economics.
[deleted]
The Vancouver housing market is one of many. If all it takes to avoid the tax is to buy a place in Toronto or Seattle, then why not?
People can afford to spend X on a house per year. After expenses the rest caverns a loan at some interest rate. So roughly 2.25K per year / ~0.05 = 45k lower property values. Or 4.5% drop on a 1 million dollar house which is a significant move. Over six months you would gain some vale from inflation making a 3.7% in line with expectations.
However, this assumes people mostly buy property to live on. You get a stronger impact on investment property which is why people are predicting 15% or so.
However, this assumes people mostly buy property to live on. You get a stronger impact on investment property which is why people are predicting 15% or so.
If I knew a trusted local, could they buy the property for me and then give me a leasehold without incurring the tax?
You most likely don't even have to do that, just lie, the likelihood of being audited is very low, and if you did get busted, it would likely be a couple thousand dollar fine (we can only speculate, as they magically never catch anyone).
http://www.theglobeandmail.com/news/politics/cra-launches-re...
"“Management has known of this issue for at least three years but did not want to pursue the real-estate flips because most of the auditees were Chinese in descent. They were scared of being racist … I can confirm this fact, based on meetings held,” the auditor said."
Of course, this is all being rectified as we speak, the government assures us. ;)
http://www.theglobeandmail.com/news/politics/cra-launches-re...
"“Management has known of this issue for at least three years but did not want to pursue the real-estate flips because most of the auditees were Chinese in descent. They were scared of being racist … I can confirm this fact, based on meetings held,” the auditor said."
Of course, this is all being rectified as we speak, the government assures us. ;)
Sure. You might be able to get out of the tax just by living in the house. The law is just meant to be for people who are buying property as an investment with no intention of living in the city.
Incorrect. You need to be a Canadian citizen, or a Permanent Resident, or have a valid work visa to avoid the tax.
Those are trivial to buy in most countries by "investing" in a business. Probably even a business that buys and sells property.
You can buy PR in Quebec, the predominantly French speaking province that has a parallel government as they threaten to seperate every so often when they don't get what they want.
Ah, I see. That makes sense. The vacancy provision is good, even if it does require valid residency to apply (going by https://news.ycombinator.com/item?id=13569671)
I have to chuckle at the thought of Trump introducing such a tax on foreign house buyers. Imagine the outrage!
It all depends what do you mean by "foreign". If you mean people that doesn't lives there and buys from abroad that is more reasonable. It will be an outrage if he just banned Muslims (whenever they live in the states or not), for example. The first is a measure to stop speculation and help people to get a home. The second is just a xenophobic populist measure that solves nothing.
Well sure, that would pretty annoying, this sort of thing shouldn't even be the federal government's job, let alone the President's. Note that this was done by the government of BC, not Justin Trudeau. Which makes a lot more sense.
No, if the laws concerning ownership are based on citizenship, then it should be done at the governmental level that manages citizenship, i.e. federal.
A 'national 15% tax' would have been much better.
Buyers from Van have shifted to Toronto. Which kind of defats the point - one city passing on their disease to another.
Globalization is having some crazy effects on the entire world, and we need some new laws.
A 15% tax on all foreign buyers on all homes in the world would be appropriate - these are not 'stocks' or other assets - these are the homes that people live in, and they are forced to gamble with their entire savings and future savings due to shifting economic tides that they don't have the capital base to deal with.
When shifting economic tides disrupt markets - the big winners are those who have enough capital to withstand the storm - they come in and pick up the pieces. Much like farmers during the great depression forced to sell their land cheap to big banks.
A 'national 15% tax' would have been much better.
Buyers from Van have shifted to Toronto. Which kind of defats the point - one city passing on their disease to another.
Globalization is having some crazy effects on the entire world, and we need some new laws.
A 15% tax on all foreign buyers on all homes in the world would be appropriate - these are not 'stocks' or other assets - these are the homes that people live in, and they are forced to gamble with their entire savings and future savings due to shifting economic tides that they don't have the capital base to deal with.
When shifting economic tides disrupt markets - the big winners are those who have enough capital to withstand the storm - they come in and pick up the pieces. Much like farmers during the great depression forced to sell their land cheap to big banks.
Residency, not citizenship. Huge difference.
Both residency and citizenship are controlled at the Federal level. (Except Quebec :).
Also, I agree that there should be a difference, and that should be reflected in the tax as well.
Non local residents 15% tax, resident, non citizens 5% tax, citizens 0% tax. For every regime.
Also, I agree that there should be a difference, and that should be reflected in the tax as well.
Non local residents 15% tax, resident, non citizens 5% tax, citizens 0% tax. For every regime.
This would deter a lot of high skilled immigrants coming into Canada. Waiting 6 years to buy a house is crazy. They'd move elsewhere. If you have a permanent residency, it should not incur a tax.
As someone from Vancouver: ...hahahahahaha oh wait you were serious. Let me laugh even louder.
House price inflation hasn't gone down in the slightest, especially not if you consider the greater vancouver area, which is where everyone's been driven off to, and consequently has become a metric that has to be considered when talking about "Vancouver" house prices. Those people are now also getting driven out of the GVA because the price increase over the last five years despite being "neighbouring city" was in the order of ~4%, ~4%, ~4%, ~4%, and then suddenly thanks to Vancouver proper, 30+%
House price inflation hasn't gone down in the slightest, especially not if you consider the greater vancouver area, which is where everyone's been driven off to, and consequently has become a metric that has to be considered when talking about "Vancouver" house prices. Those people are now also getting driven out of the GVA because the price increase over the last five years despite being "neighbouring city" was in the order of ~4%, ~4%, ~4%, ~4%, and then suddenly thanks to Vancouver proper, 30+%
The tech industry is highly cyclical. There's been a crash in 1999, and there's been another one in 2007 (along with the rest of the economy). There's no reason why it can't happen again. I'm sure that Bay Area housing prices are a good proxy for the state of the industry. If you're a techie and you don't have a way to stick it out through the next downturn, don't buy a house here.
There was no tech crash in 2007.