Is Speculation Really The Problem Now?

Yesterday, Gregor Robertson called for a speculation tax to help bring down housing prices.

We definitely need taxation tools that discourage speculation on real estate,” a statement from Robertson says. “It’s clear that rampant speculation on real estate is driving up prices in Vancouver. Vancouver needs the B.C. Government to take action on creating a speculation tax and recognize that we need a fair and level playing field to make housing more affordable for residents in Vancouver, and throughout the province.”

However, later in the day the BC Liberals repeated their apparent desire to keep housing prices from falling.

The ministry of finance responded with a statement late Friday, saying that “governments need to be careful that any tax would have the desired effect, without undermining the equity that people may have built up in their homes.”

As pointed out in Mystery Solved?, price increases over the last five or six years are being driven by the high-end. This is not indicative of a speculative market since very few people have the means to flip multimillion dollar homes. Tsur Somerville of UBC’s Centre for Urban Economics agrees.

“Think back to 2006 when people would line up overnight to buy a pre-sale condo then flip it within 30 days. That’s the sort of thing one would be looking for as proof of rampant speculation. There is very little evidence that is happening in the market right now.”

Instead, recent price gains are most likely coming from a massive inflow of offshore wealth into the region. And unlike the condo flipping of several years ago, these recent high-end buyers are looking for a safe place to park their wealth for the long term. They don’t appear to be speculating.

The effect this flood of offshore wealth is having on the Vancouver real estate market is undeniable. The frustration of Vancouverites seems to be reaching a tipping point, and they are finally starting to demand action by their elected officials.

But since speculation doesn’t appear to be the driving force in recent price gains, why is Robertson proposing this speculation tax now? Could it be just a diversion to take the heat off foreign capital inflows? A way to appear proactive, without actually solving the affordability problem?

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How “World Class” Is Vancouver?

One of the favourite justifications for high housing prices in Vancouver is, “we’re cheap compared to other world-class cities like Paris, Tokyo, London, New York, etc.”. In fact, Housing Minister Rich Coleman (following up on his comments from last week) gave this response a few days ago when asked about foreign ownership in Vancouver.

“I believe that the market place adjusts. If you notice over the years, it has fluctuations up and fluctuations down. If you look at the mean cost of housing across British Columbia and you compare it to other major cities worldwide, the reason it is attractive internationally is because it’s actually pretty reasonable compared to other cities like London, Singapore, Tokyo”

But is Vancouver really comparable to those cities?

Population

How does Vancouver compare to those other cities when it comes to metropolitan area population?

  • Tokyo: 34,607,069
  • New York: 20,092,883
  • London: 13,879,757
  • Paris: 11,978,363
  • Western Canada: 10,394,228 (west of Ontario)
  • Pittsburgh: 2,356,285
  • Vancouver: 2,313,328
  • Portland: 2,226,009

When it comes to population, Vancouver is not even close to the usual comparison cities. In fact, Tokyo, New York, London and Paris all have higher populations than Western Canada. On the list of North American Metropolitan Areas, Vancouver ranks 35th — right between Pittsburgh and Portland.

World City Rankings

The Globalization and World Cities Research Network has a methodology for ranking world cities. In their most recent analysis, the top four cities were: London, New York, Hong Kong and Paris. Vancouver ranks more than 60 places lower, most comparable to: Caracas, Riyadh, Chennai and Manchester.

A.T. Kearney compiles a Global Cities Index (GCI), which “examines a comprehensive list of 84 cities on every continent, measuring how globally engaged they are across 26 metrics in five dimensions: business activity, human capital, information exchange, cultural experience, and political engagement”. The usual comparison cities are all at the top. Vancouver ranked 48th.
Global Cites Top 20

The 3 most visited museums in the world are in Paris, New York and London. The Vancouver art gallery didn’t make the top 100.

Of the four major cross-border North American sports leagues (MLB, NBA, NHL, MLS), Vancouver has 2 teams and 0 championships. New York has 8 teams and 41 championships. Vancouver briefly had an NBA franchise, but lost it to fellow world-class city Memphis, Tennessee.

New York has Broadway, London has the West End, Vancouver has Granville Street?

Reasonable Comparisons

Vancouver is simply not in the same league as the truly world-class cities with which it is often compared. Two much more comparable cities are Portland and Seattle (similar populations, weather, natural beauty, etc.). So, how do these three cities compare when it comes to median house prices?

  • Vancouver: $704,800 CAD
  • Seattle: $359,100 USD
  • Portland: $291,300 USD

Sure, Vancouver is cheaper than truly world-class cities. But compared to similar cities, it is extremely overpriced.

The Modern Chinese Laundry

According to Global Financial Integrity, about US$1.252 trillion in illicit financial outflows left Mainland China between 2003 and 2012. In 2012, the amount of money leaving China had increased to an astonishing quarter of a trillion US dollars!!

Illicit Outflows 2003-2012

How much of that money is making its way to Vancouver? According to China’s list of the top 100 international fugitives, 26 of them were most likely in Canada. And according to Ian Young’s analysis of immigration data, 80% of Chinese millionaire immigrants to Canada are planning to locate in BC — the vast majority of whom likely settle in the Greater Vancouver area.

Using these figures, we can estimate the amount of hot money flows that could end up here. If we assume 26% of these financial outflows are destined for Canada, and 80% of those individuals locate in the Vancouver area, there was a potential flow of almost US$52 billion into the Vancouver area in 2012 alone!

According to the REBGV, total sales volume for the Greater Vancouver region was $18.6 billion in 2012 — only about 36% of the potential hot money flow from China that year.

Of course, not all laundered money ends up in real estate. But if only a small fraction of it does, that is more than enough to have a dramatic effect on local housing prices.

 

5 Year Benchmark

Up until now, we’ve only looked at individual examples of properties selling for a loss. I’m sure many people question if these examples are cherry-picked exceptions, or whether these losses are common.

Today I thought we’d do something different and look at a hypothetical five year situation. What would be expected if someone bought a Vancouver condo five years ago and sold today?

The Real Estate Board of Greater Vancouver (REBGV) tracks the price of a “benchmark” condo. The benchmark is intended to measure the price change for comparable properties over time. Similar to the Teranet HPI, or the Case-Shiller Index in the US, it should provide a better estimate for a given property than the average or median price.

According to the REBGV website:

The HPI benchmarks represent the price of a typical property within each market. The HPI takes into consideration what averages and medians do not – items such as lot size, age, number of rooms, etc. These features become the composite of the ‘typical house’ in a given area.

Each month’s sales determine the current prices paid for bedrooms, bathrooms, fireplaces, etc. and apply those new values to the ‘typical’ house model.

Five years ago (July 2008) the benchmark condo price was $381,687. The latest figure is $368,300.

  • July 2008 Benchmark: $381,687
  • July 2013 Benchmark: $368,300
  • Property Transfer Tax: $6,634
  • Real Estate Commission: $16,391
  • Loss: ($36,411)

The typical condo purchased five years ago and sold today would lose $36,411 – or 9.54%.