How to fix the Vancouver real estate bubble.
Here is a great video produced by Tyler Cowen. It is about the rise and fall of the Chinese economy:
Capital Flight from China! Where will this money flee to exactly?
Vancouver is turning into a Pacific Asian city. Statistics Canada data shows that over 17% of the approximately 2.5 million people living in the lower mainland are ethnic Chinese. This trend began in 1858 during the Fraser Canyon Gold Rush and continues today as China modernizes it's economy.
There are 1,404,609,9921 billion people in China, or roughly 42 Chinese people for every Canadian who doesn't have a Chinese ethnicity. A lot of my friends from mainland China talk about the allure of Vancouver to the people from their homeland. When I ask them if their friends have heard of Saskatoon Saskatchewan, they say, "No, and why would anyone live there anyway? Too cold.. it's empty".
I think it is safe to say, that the majority of people who would like to leave China for Canada would either like to live in the lower mainland or in a larger center like Toronto.
So, a better way of thinking about things would be to look at the ratio of the population of China and the population of the lower mainland and the greater-Toronto-area. This is about 166 Chinese people for every Canadian in the city's that are of interest to them.
Now, imagine standing in front of your dream house, the home you would like to raise your family in. Great! Oh wait, to your left, there are 83 people. Oh, and to your right there are another 83 people. You are all looking longingly at the same house. You look down the street, and in front of every house, their is a similar mob of prospective buyers. There just isn't enough room -- so, we will pack the front yard with people and the back yard with people too, and that should do it.
Ok, Ok, this is a ridiculous analysis. There are huge income disparities in China. So, I could talk to you about averages and ratios -- and it would all be hog wash. Let's instead talk about the 1-2 percent of people in China who are really really rich.
Say only 2 people in that group of 166 can actually leave China to compete with you to turn the house you want into a bank account.
That's still 2 people who aren't really in your economy, competing with you for a house. In Vancouver the median income of a household is $73,3902, which happens to be lower than that of Halifax. Yet, the average house price in Vancouver is $1.273 Million. The average price of a house in Halifax is $291,000.4
In 2015 the number of Vancouver houses available to purchase has gone down, relative to previous years.
We see that the number of houses available for sale is somewhere between 10 and 13 thousand this year.5 Well, that's not that many. Also the Canadian dollar has gone down 30 percent relative to the American dollar.
Oh, and did you hear? Money is free!
Interest rates have never been so low:
Let's take a look at the Vancouver housing prices over time:8
Wow, that blue line is starting to look a lot like Nortel stock!
There is a narrative much like mine that a lot of people believe in. I'm not a statistician and my data and sources are weak. My research consisted of a few google searches. This is not the gospel. However, I do believe a lot of people are thinking this way.
Chinese money wants to find safety in big expensive homes in the lower mainland. Americans have received a 30 percent discount on all of their Canadian purchases, so they can get in front of the Chinese buyers... why not get in on this Nortel thing too... it's looking so good!
The people in Vancouver can't really get in on this game, unless they have a home already and they are willing to sell it. If they think the line will continue to go up, they could leverage themselves and buy a bigger house. Why not buy two houses? Then sell at the top!
Or, they could downsize and take some profit from the global forces driving our little city's real estate value.
If they neither buy nor sell, they just have to pay the additional tax and remove the 14 or 15 real estate brochures from their mailbox everyday.
Who are the winners? Real Estate agents, they get a flat percentage of the value of each house sold. They just happen to be living in the lowermain land, good times are here for them for sure. Also, the people selling their homes and buying condos. Maybe the people who watched to see which homes were completely ignoring the summer city water bans. You know the houses with the perfect green lawns beside everyone else's dead grass. If you had gotten a Mandarin interpreter, you might have negotiated cheap rent for such a place.
So here is my fix:
If the city government were to place a progressive property tax67 on housing costs, then they could cash in on any real estate mania. It would be painful for the home owners, who just happened to win the real estate lottery... but if it where really painful, they could sell their homes and buy a cheaper place at a lower tax bracket. Then invest their profit windfall into index funds or something.9
The tax would discourage speculative buying and the driving of prices to the moon, by global capital flows. Each incremental increase in the house price would cost the buyer a lot more money in terms of lost future profit. It would also discourage the next speculative fool from buying the house at an even higher price. You could consider this as a tax on the people in another country, who want to use your city as a bank account.
On the city's side, their progressive tax-windfall could be put into a city contingency fund. This is not the kind of funding you would want your municipal government to get used to.
3602 people were born in China during the time it took me to write this blog entry.
Let's hope that this number is down because houses are being torn down so that condominiums and high rises can be built instead. This could cause a squeezing effect. As the number of the houses available drops (smaller number of possible bank accounts), the more and more valuable the remaining houses are. ↩
Linked to the median income of the Vancouver income, or, the median value of a typical Canadian city. ↩
This could be politically difficult -- but you can do it Gregor! ↩
If you think the idea is stupid, log in and comment. Then present your own idea. ↩