Consequences of government meddling in the real estate market

By now everyone is aware of the hot real estate market in Vancouver and the fact that it is difficult for Canadians to purchase. But there is a lot more to the story.

40,000 people per year are coming into British Columbia from outside Canada and CMHC says 90% of them are settling in the Lower Mainland. A further 10,000 are coming to BC from across Canada – and it is estimated 10% of those are settling in the lower mainland.

On top of this, Justin Trudeau just announced a new program that will be bringing 1 million new immigrants into Canada over the next 3 years. Traditionally, 20% of new immigrants to Canada settle in BC (2001) as of 2016 that percentage was down to 14.6%. So if my math is correct, that is another 50,000 people into BC annually (45,000 into the Lower Mainland) – on top of the 40,000 (36,000 in the Lower mainland) we usually expect each year – and all of them are going to need a place to stay.

According to CMHC, housing starts in the Lower Mainland as of June 2017 were just over 39,000 housing units and 95% of them were already sold. Already we are 47,000 housing units short.

Compounding the problem of the obvious housing shortage in the coming years, Trudeau’s government has decided he is going to ‘cool off’ the price escalations by making it harder for Canadians to qualify for a mortgage – in effect reducing demand.

How do you cool off a market that is strictly supply and demand driven? If the supply is low and demand remains constant then prices will rise. If demand is high and supply is low (or constant) then prices will rise.  I surmise that Trudeau’s theory is if he can restrict demand then prices will fall. Hence the new mortgage ‘stress test’ rules. Yet that is only restricting demand from Canadians – read on.

Typically, in applying for a mortgage, Canadians have to show the last 3 years of income tax returns, a job letter, length of time on the job, recent pay stub and proof that their deposit has been in a bank for a minimum of 30 days. As of October 2016 buyers with less than 20% down have to show that they can pay for a mortgage at a rate that is 2% higher than the actual rate they sign up for – the so called ‘stress test’.  This is supposed to save us from ourselves i.e. getting over our heads in debt, despite the fact that all banks already have limits on debt/income ratios – no more than 42% total debt to gross income and no more than 32% mortgage / gross income.

Now, as of January 1, 2018 buyers with MORE than 20% down have to submit to this same stress test. This will affect those people on a fixed income, pension etc that sell their home in Vancouver, Burnaby and want to move further out and buy down with a big down payment and leave some money in their bank for a rainy day and manage a small mortgage.

Now here is the rub. Since at least 2016 banks have been giving foreign buyers mortgages without requiring any proof of income as long as they had 35% or more down payment. (50% minimum for some banks).

So the same banks that force Canadians to qualify based on their income, do not require foreign buyers to do the same!

A realtor friend of mine just relayed a recent incident to me where his buyer – having taken a sabbatical for the past year, last fall purchased a property worth $950,000. That client had $800,000 down and could not get approved for a $150,000 mortgage. They had to borrow the balance from a family member.

It would appear that purchasing Canadian real estate is becoming a pipe dream for many hard working tax paying , society supporting Canadians while non- Canadians can use our banking system to get treated better than the citizens that have supported those banks for a millennium. This also affords non-Canadian investors the opportunity to buy our real estate and flip it as a business.

For the past year I have been watching new listings come onto the market, and as I am curious, I look them up to see when they were last sold. It turns out a large number of these ‘new’ listings were purchased within the past year or 2 and are now re-entering the market at a price considerably higher than their purchase cost – most with no improvements at all. 

It does appear that this is a way that people with money make $100,000 -$300,000 + per year.

My Malaysian Chiropractor told me that for the past 30 years, Malaysia has had a foreign buyer policy that restricted foreign ownership to only those properties that cost much more than the average value of Malaysian real estate – at that time it had to be more than $1million.  That makes sense. Get rid of the 15% Foreign Buyers Tax (that isn’t working) and put a limit on price. Above $5 million? Higher?

What about the Rental Market?

If you have not heard, the rental market in the Lower Mainland is following the home buying market in that prospective tenants are in bidding wars against other prospective tenants because there are not enough rental properties available. Imagine saying to a landlord “I will give you $50, $100, $200 more in rent each month, just pick me instead of the others”.

Tip of the Iceberg? As I have mentioned, in the Lower Mainland there will be in the neighbourhood of 81,000 new people coming to BC each year to vie for the 39,000 new housing starts (note our vacancy rate is less than 1%). And please note that it is 39,000 housing units STARTED – some won’t be ready for up to 2 years from the start date.

On top of this extra demand add the number of young Canadians that are venturing from home for the first time and now add all those potential buyers who, because of the change in mortgage rules, find themselves forced into renting.

But didn’t the BC government in its new Condominium Act – January 1, 2010 – say that all new strata  buildings could no longer restrict rentals?  Yes, BUT I have read more than a few Strata Bylaws for buildings under 8 years of age and guess what? While they did not enact a Bylaw that restricted rentals to 1 unit, or 5% etc of the number of units in the complex, they are passing Bylaws – voted on by the majority of owners – that state that a new owner will not be allowed to rent that unit until the new owner has owned it for at least 12 months. Some say 36 months. So that, in effect takes those buildings out of the rental pool as investors are unlikely to buy an apartment when they have to sit on it for 1 to 3 years with no rental income.

As the philosopher Ludwig von Mises stated “Every government intervention in the marketplace creates unintended consequences, which leads to calls for further government intervention.”  Scary times ahead?