Vancouver is a beautiful place and has had a great quality of life. Over the years the property prices have been increasing at a rapid pace. The average price of a detached home in Metro Vancouver increased 40% over last year and today is $1.83 million. Click here for the article
So what is wrong with this picture? Well, for starters, locals are not able to afford housing. Then you may ask so how are such high prices sustained? Well, this argument has been played out in many forms over the decade. There were articles questioning if houses were overvalued or in the bubble region. Then there were other media pieces justifying the price tag comparing the city to international standards and justifying the price. Some said that the scarcity of land in itself amounts to the high demand and high price tag.
There have also been allegations of hot foreign money pouring into Vancouver market. Surprisingly, it was reported that we do not have any data collection mechanism to properly identify if that is the case. Basically, it seemed no one was tracking foreign ownership of Canadian Real Estate. It usually takes a long time for authorities to take any action so at this point we still do not have a system in place to track foreign ownership. I do not recollect reading any where about when such a system will be in place
The speculation that foreign money is at play was prompted because the local income level does not support such high property prices. There are anecdotes of how grown children had to leave Vancouver because they could not afford housing to be close to their parents.
Despite the outcry, nothing much happened. Then we started hearing stories of empty homes. Later on the stories were about many expensive empty homes. The latest outcry is about a multi million-dollar home that was renovated for $300,000 recently and is now earmarked to be torn down to build a bigger mansion. This attracted a lot of protests in front of the house and was covered by media. Click here for the article.
As recently as November 2014, CMHC had declared that Vancouver housing market was safe and there were strong fundamentals to support the price levels. Click here for the article
Last week The Globe and Mail published an investigative reporting piece that revealed how insider trading in Vancouver Real Estate had led to the abuse of the assignment clause in the house purchase/sale agreement. This was followed by a press conference by the local MLA David Eby who handed over a dossier to the press and walked through the key points of allegation and called for an enquiry. The allegations were: Click here for the article
a) Reports that as part of the purchase/sale process, the Fintrack form was not properly filled up and as a result foreign medium risk home buyer was projected as domestic buyer by allegedly providing the address of the Brokerage as the address of the foreign buyer.
b) Reports of sellers getting upset after finding out that their house was sold multiple times before closing and netted a significantly higher closing price. This was allegedly done by selling the assignment multiple times during the closing period. It is further alleged that such multiple sales did not pay taxes and each of those sales allegedly attracted sales person fees.
c) If the above two allegations are proved correct then the sales person has not performed their fiduciary duty to their clients either because they did not disclose the final price at which the house was sold or the profits they made from such sales or because they did not act in the best interest of their foreign buyers because they did not get them the best purchase price for the property. It is a Real Estate Sales person’s fiduciary duty to act in the best interests of his clients and fully disclose any indirect or direct remuneration they make out of the transaction.
The provincial government has confirmed that there will be investigations and action will be taken as appropriate. This brings me to a not so distant memory of what happened in Spain. Of course the two are not exactly comparable but the bubble aspect is similar.
In 2008 there was a construction boom in Spain where all agencies were encouraging Real Estate ownership with attractive lending terms. International money flowed in and soon the market became very frothy. In 2014, matters came to a head and hit headlines. Click here to read.
The end result was that a generation of people in Spain lost all their savings and some parents who had their mortgages lost their own house. The banks held to the property and housing shortage became acute. Some elements broke into such bank held homes and rented it out for as low as 400 Euros a month or sold them for as low as 1000 Euros. The understanding was that the bank would take a couple of years to move the court to evict them.
Going back to my earlier blog post Revisiting Adam Smith , It seems to vindicate my theory that with the amount of first world outsourcing of work to developing nations, we are creating first world cities with huge income disparity and low paid work force while enabling newly minted millionaires from the developing world to park their wealth in our Real Estate because Canada offers good governance, political stability and very few controls as compared to their own country. This possibly explains why the income Vs. House prices in Vancouver is skewed.