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Vancouver Bubble

June 30, 2019 - For years people who have lived in the area of Vancouver have known that a huge real estate bubble has been caused by foreign money laundering and speculation by multi millionaires. Anyone with a half-an-once of brains can see all the Vancouver real estate for sale signs are in Chinese. It is pretty hard to miss all the German and Italian super-cars on the road too.

The brain trust in Ottawa (and the former Liberal government in BC) lied on purpose to Canadians, claiming it was less than 4% of the market. Of course, we all knew offshore money was buying these properties through untraceable trusts and shell corporations that are officially listed as Canadian. It was all a huge ploy to avoid a recession and kept the tax dollars rolling, even if it meant we were setting ourselves up for a massive crash.

According to the South China Morning Post a new study finally tells the real story... of course the speculation was off-shore sourced money. A white paper by Josh Gordon, an assistant professor at Simon Fraser University’s school of public policy, found a near-perfect 96 percent (or 0.96) correlation between various metro Vancouver municipalities’ price-to-income ratios (a common measure of un-affordability), and the proportion of their detached houses in which at least one owner was a non-resident.

The study is very clear. The chart below shows Vancouver by district, affordability and by foreign ownership, topping out at 10%:

There is a joke where a guy wants to sell a hamster for $500,000. When asked if his plan worked he says; sure it did, he traded the $500,000 rodent for two $250,000 chickens.  This is somewhat how real estate in holding companies trades hands in China between those who know how the game is played. These off-shore paper billionaires trade blocks of properties back and forth among a circle of associates, setting ever higher valuations, and then borrowing more debt in Asia and Canada based on Canadian held "property assets".

Similar things are going on in New York with Russian Oligarch money and in Panama and Florida with South American drug cartel money.

Multi-millionaires sit quietly in China -- speculating, polluting and slave driving employees to create massive tax-free income, with bank loans guaranteed by the government. Then their families become Canadian residents paying almost zero tax, but enjoy the parks, roads, laws and security that the people of Canada built up from the hard work of generations. More than 60,000 millionaire migrants and family members have arrived in Vancouver since 2002. The vast majority of these people live fairly modest lifestyles, and are for the most part, escaping the brutality of the communist party. I have no problem with these new Canadians and I am pro immigration.  However, over 6,000 of them made their money very questionably, live in mansions, and party in style all over the world. They gobble up condos 50 at a time and use them as untraceable piggy banks.  In Canada these elite file very low income level tax returns, with occupations like "student",  because the money is earned off-shore and never disclosed. Yet they enjoy free healthcare and the Canadian education system as a right. It is this conspicuous 10% that need to be examined more closely.

You can see exactly how these funds are channeled in this video report below from Bloomberg and Transparency international: 

There are also a long list of greedy tricks being used by the Realtors, including client education on how to game the immigration process and even shill bidders who pretend to be buyers during home showings.

It is not just Asian immigrants and drug cartels, after 28 years of ever increasing prices, the "Vancouver mindset" is everywhere. The average Vancouver resident has not really had to work very hard, they just keep milking the equity appreciation in their home and speculate by buying more properties, that they then rent out and milk for more appreciation. Then they refinance and live off the appreciation. What could go wrong?

The nightmare problem is in Canada, the Federal government through CMHC backs the property markets and has a guarantee in place that future Canadian tax payers will be taxed to pay for perhaps for decades in a full scale crash.  In Canada, mortgages have been securitized for years. The Canadian-issued securitizations are called National Housing Act, Mortgage-Backed Securities and all that paper debt is protected by the tax payer. In 2008 the Harper Conservatives directed the CMHC to change the mortgage rules to effectively make the Canadian government the biggest sub-prime lender in the world.

The youth of Canada today faces impossible university admission because the foreign born students that fill these places use money and influence to secure the best schools and programs for themselves.  That same youth has no hope of home ownership as the bubble grows and a further whammy of ever higher property and income taxes. West coast cities from L.A. to Vancouver have become famous for their needle parks and crime ridden streets. 

It is also changing our cities lifestyle. Because money laundering leaves vast unoccupied condo towers in Toronto and Vancouver. Who wants to run a little cafe on the main floor under 30 stories of empty condos? For Canada's youth, even getting a low-level paper-hat job becomes impossible. Once thriving trendy areas of town like Vancouver's commercial drive, Toronto's Young Street or Edmonton's Whyte Avenue find they are in a hollowed out city that  people don't live in. Jobs are not worth having, at least compared to the sky high rents that $15 an hour can not pay. Huge parts of major Canadian cities that once held stores, restaurants, cafes and night clubs sit abandon.

Below is a tiny 1.4 million dollar apartment condo for sale in Vancouver. It has 2 bedrooms and is 1300 sq feet. Take out the staged furniture and the light fixture and it is little more than a run down box with worn carpet.  It is in an aging building and is not even downtown. It is the only listing currently in West Vancouver under $2 million. This is after prices are down over 15% from 2 years ago.

There has been some relief in prices this year, in part due to higher taxes and ownership rules. People still put on a brave face, waiting for the bubble to begin to again, but the heard smells fear, and is on the edge of panic, it would not take much for people to begin deleveraging. Prices remain stable because sellers refuse to believe the party is not just taking a rest.  Realtors still talk of a brief "gully" and "a buying opportunity".

Its not just in Canada, in the U.S. where they have a better handle on foreign investment statistics, the numbers now show a 36% drop in investment in U.S. housing from abroad. According to the U.S. National Association of Realtors. Foreigners bought 183,100 properties with a total value of about $77.9 billion, down from 266,800 properties valued at $121 billion a year earlier. That's a drop of 36% in just 12 months. However the majority of the $75 Billion in investments this year are from buyers from Canada and Europe, where as last year the source was mostly Asia. The New York Times also pointed out that Chinese investment in the U.S. overall dropped 90%.  

In fact the real change in the market is mostly due to a shift in policy from China clamping down on flight capital. In the autumn of 2017 Xi Jinping made a three hour speech about how housing should be for living not speculating. For those outside China that sounded like wishful thinking, but for those inside the communist party the message was more like, we might need to execute a few more corrupt officials. The message was very clearly heard in China. Amazingly almost to the day, for the first time in 28 years, prices began to recede in Vancouver. Also at the same time lower prices came to Seattle, California, Sydney, London and New York.

"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."
 - Winston Churchill

By the way, in case you think this is racist I suggest you read my position, please read What's Your Problem.

This article is part of a series:
Death of a Fruit Importer
The Vancouver Bubble
Casino 2017
Opium Den Revenge
Dark Money, Dirty Real Estate and a Naive Economist
The China Problem


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