Last week I spotted Ted the 40-year-old Vancouver man at Jonathan Rogers Park (West 8th & Manitoba St) who has been parking his $300 Craigslist shed on wheels in various Vancouver parks along with the rising number of homeless people. July 22, 2016 Metro News
"OSFI tells some banks to test for sharp drops in Vancouver, Toronto housing markets" July 26, 2016 CBC News
It must be my age, but when I see politicians trying to solve problems via blunt taxation, I move even closer towards being a grumpy old man - death and taxes - they suck, literally. Here are a few ideas while we wait for the July housing numbers to come out next month.
PART I - The Need for Tax Reform
In November 2011, I came across the idea of the APT, the ‘Automated Payment Transaction Tax’ which eliminates the need to file tax or information returns. A year later I posted links to the APT and since then I have continued to encourage media, politicians and potential influencers to at least look at the thesis.
To my dismay I have had insignificant response. I think this is because we have too much tax and are immersed in its complexity and we have not enough death of tired old ideas that should be retired with every generation.
The Automated Payment Transaction Tax
Implementation of this elegant and simple idea in Canada would allow Canadians to create an original, authentic social organization that would eventually be copied by other nations. Let's apply the power of the internet to get this Automated Payments Transaction Tax idea into the public square of discussion and then into application.
Canadians, write your Member of Parliament." Foreign readers take this idea back to your jurisdiction and spark the conversation there. Some country will be first in the implementation of the APT thesis.
In my opinion the APT or a variant of it will happen one day as sure as Uber, Airbnb and Torrents have arrived and driverless freeways will eventually emerge. It’s a peer to peer thing; it’s the internet, it’s inevitable. “Software is eating the world.” Marc Andreessen.
A micro tax on all financial transactions reduces the burden on all individuals and allows our governors to manage our spending requirements in a transparent progressive way. The APT thesis calculations were based on U.S. taxation revenues and expenditures from the late 1990’s. The potential tax base has increased significantly since then; think of the machine initiated equity, fixed income and commodity exchange transactions that go on day and night. Here is a snippet from the 41 Page PDF authored by Edgar L. Feige, Professor of Economic Emeritus, University of Wisconsin-Madison:
The APT tax rate from the original study publication in 2000 achieved the goals of replacing the present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive revenue neutral Automated Payment Transaction tax of only 0.15% on each side of the transaction for a total of 0.3% on any financial transaction.
PART II - The Need for Policy Reform
Clearly, a 15% provincial tax on Vancouver housing purchases by foreign buyers will simply move what little demand there is from this sector to other jurisdictions. Hot speculative money whether clean or dirty is transnational.
Look at Canada’s record of Federal Direct Investment; in full year 2015 there was a huge spike in FDI OUT such that for every $1 of FDI coming into Canada there is $1.31 going out to get a better return on Capital and Labour. In short, our Canadian investor class, like most other global players, looks for leverage and arbitrage opportunities outside of Canada. This is a trend that has been widening and unbroken since 1997 throughout the last five federal governments (4 Liberal, 1 Conservative).
Meanwhile after seven years of nitro-fueled Zero Interest Rate Policy, we have only increased our consumption habits and widened our debt load across both private and public sectors. While the private sector binges on low cost credit, our multi-level governance is shifting more to fiscal policy since monetary policy has not worked as promoted. Yes - CPI remains muted, No - we have no control over what consumers will do with easy credit especially since competing governmental departments encourage minimum equity positions when borrowing. After seven years, the Bank of Canada is still trying to figure it out:
With the next renewal (of the “Inflation Control Target”) approaching in 2016, the Bank is focusing its review and research in the following three areas:
We have a failed Canadian central bank policy of ZIRP and NIRP threats that ape the U.S. Fed policy as well mirroring many other central banks since the pit of gloom in March 2009. It’s been a race to the bottom, and here we are.
We have the outdated 20th Century wild west mortgage insurance liability of CMHC which was created in 1946 as an elaboration of previous housing incentives beginning in 1919 (Wikipedia).
We have an irresponsible overpriced exclusionary and predatory real estate industry that obfuscates, monopolizes and fails at basic fiduciary behaviour.
This combination of patchwork policy has failed to get capital investment into productive employment. Instead we have asset valuations that exceed the worst possible, measured globally, and we have settled for consumption and waste. Asset values may look good on a balance sheet in terms of credit worthiness, but the social contract does not serve our collective needs.
Nowhere is there public debate or care about tomorrow except in the tedium of blogs and anonymity. Governance has clearly failed and the media is busy chasing sirens and shootouts. It’s shameful. It’s time for reform and modernization using the tools we already have.
PART III - The Need for Land Entitlement Reform
“The social state is advantageous only when all have something and none too much.” A paraphrase of Jean-Jacques Rousseau from his Du Contrat Social ou Principes du Droit Politique of 1762.
The APT does not solve the problem of the current historic asset valuations in Canadian housing prices which are at crisis proportions and which cannot now be easily solved with ZIRP, NIRP or a revolving door of political ambitions.
Let’s consider the end to private fee simple land ownership and move all our land and territorial limits into the hands of all of us.
Here’s how I see it:
This simple idea would put an end to the endless inflation of the cost of land since the value of the land would be set by the central organizing body of the state which would assess the needs of the community of tenants and the responsibilities of all of us towards the wellbeing of our health and environment.
The improvements on the land would by definition be valued by their utility and composition of materials all of which are readily assigned value by an open marketplace and would be more prone to deflation than inflation because improvements have to be maintained to retain value.
Valuations would be rational, transparent and immediate. Affordability would be easily controlled. Tenancy agreements on the land would be available to both domestic and foreign users and when combined with the ‘Automated Payment Transaction Tax’ outlined in PART I above, all land lease revenue and all improvement transactions would trigger APT revenue to the state for reinvestment.
How economic inequality harms societies - Richard Wilkinson
We humans have accomplished a lot of ambitious and technically challenging projects and have expanded our knowledge base to a degree that suggests we should be able to transform our puny little financial problems in a politically impartial way free of ideology to the benefit of the greater good.
I don’t expect that this post will trigger any change during my remaining lifetime to the status quo of 20th century and older ideas that we remain wedded to, but I publish this because ideas precede action and I am not the only one thinking about this.
According to this December 2015 study by Azoulay, Fons-Rosen & Zivin “Does Science Advance One Funeral at a Time?”, Max Planck’s observation is indeed the way our knowledge base and idea implementation grows.
“A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it."
Real Time with Bill Maher
Chronically low interest rates since the Pit of Gloom in March 2009 have fueled a huge credit bubble in Canada. StatsCan as far as I can tell does not highlight luxury sales, but the Bank of America credit card division does as the chart shows. I have added to the mashup a sales chart of detached housing in West Vancouver, one of Canada's most expensive postal codes for real estate. Is the FEAR OF MISSING OUT shifting to the FEAR OF GETTING IN for hopeful West Van buyers?
Asian buyers won 28% of Christie’s offerings world-wide. but a big reason for the drop in the list of sales below was the disappearance of the heretofore relentless Chinese bid. (Year/Year Data)
Art Sales down 33%
Auction Sales down 37.5%
Private Broker Art sales down 10%
Contemporary Art sales down 45%
U.S. Art Sales down 50%
Europe Art Sales down 12%
Hong Kong Art Sales down 11%
Rival Sotheby's Art Sales down 22.6%
Tefaf Art Market Report: Global Art Sales down 7%
Asian Art Sales down 33%
Christie’s said only 29 artworks it sold during the first half achieved prices exceeding $6.5 million—compared with 47 the year before—with nothing selling for anywhere close to the $180 million that Pablo Picasso’s “Women of Algiers (Version O)” brought in 2015."
- JUL 2016 The late Alan Bond’s Perth mansion sells as the price of Australia’s most luxurious homes plunge
- JUL 2016 The Hamptons Housing Market Has Crashed: Luxury Home Sales Drop By Half As Prices Plunge
- JUL 2016 Dramatic Luxury Sales Drop, Fresh Data Shows
- JUN 2016 Luxury L.A. Home Prices Down First Quarter 2016 As Global Volatility Dampens Buyer Demand
- JUN 2016 Luxury retailer Neiman Marcus reports decline in both sales and profit
- MAY 2016 Hong Kong’s retail sales drop hardest in 17 years
- MAY 2016 Luxury condo boom in Lower Manhattan turns to glut, prices sag.
- MAY 2016 Luxury-Home Sales Fall in London, NYC With Rich Shifting Focus
- MAY 2016 Across the world, luxury-home sales get a reality check
- MAY 2016 The Premium Plunge: Sales of the Most Popular Luxury Cars in America Are Nosediving
- MAY 2016 At China’s Biggest Yacht Show, the Party Feel Fizzles
- MAY 2016 Business-Jet Sales Sink Most Since 2011
- MAY 2016 Luxury jeweller Tiffany posts steepest sales drop since financial crisis
- MAR 2016 Luxury watchmakers gloomy about 2016 sales
We're doing beyond well
said CEO of Vornado Realty Trust.
How to catch a whale; put a unicorn in front of them. Global money has not yet exhausted itself on trophy properties. The bets on asset price appreciation keep rolling in. Here are some snippets from the WSJ May 12, 2015
- 220 Central Park South secured $1.1 billion in sales ... in just six weeks on the market.
- At One57... sales have picked up substantially ... hope to sell out the tower by the end of the year.
- The well of buyers is deep ... at least for the best towers.
- Investors look for higher returns than they can get from bonds.
- Many apartments go unoccupied, used only as investments.
- Details on buyers are scant, since wealthy purchasers typically shield their names.
- Real-estate markets that lack transparency are prone to overbuilding.
- Very little information is actually getting into the market ... everyone’s just copying each other.
One57 sells for $100,000,000
and... how to adorn a Unicorn
- Only 16 percent of the 53,710 Vancouver homes sold in 2014 were priced over $1 million.
- The average sale price of all residential properties in 2014 for the bottom 80 percent of the Lower Mainland Vancouver market of 42,968 units, was $462,792.
- The average sale price of the bottom 80 percent of just the condo market was $327,486.
Record number of billionaires (now): 2325
Billionaires combined net worth: 7.3 trillion
New billionaires since 2013: 155
New billionaire growth since 2013: 7.1%
Billionaires in Europe: 775
Billionaires in U.S.: 609
Billionaires in Asia: 560
Billionaires in Middle East: 154
Billionaires in Latin American: 153
Billionaires in Africa: 40
Billionaires in Pacific: 34
Average time to become a billionaire: 45 years
Self-made billionaires: 55%
Inherited/Self-made billionaires: 26%
Inherited billionaires: 19%
Billionaires with university degree: 65%
Billionaires in private companies: 63%
Billionaires in public companies: 31%
Billionaires with over $50b: 4
Billionaires with $25-50b: 16
Billionaires with $10-25b: 88
Billionaires with $5-10b: 169
Billionaires with $2-5b: 732
Billionaires with $1-2b: 1316
Average billionaire cash holding: $600m
Philanthropic donations by a billionaire: more than $100m
Real estate held by a billionaire: less than $100m
Number of billionaires that are networked by a billionaire: 3
Number of billionaires by 2020: 3800+ "this might change eh?"
Data Source & Full Report
Real Estate Evaluation
Commute times say as much about the locations in which different employees choose to live as it does about the nature of the transport networks. In New York, where staff favour living more centrally, the average commute is just 19 minutes. By contrast, the more dispersed nature of Rio, Mumbai (3 times longer to commute than NY) and Shanghai means that people spend longer commuting, despite faster travel times on a per kilometre basis. Here, administration level staff live far from the centre, priced out of the best neighbourhoods and reflecting income inequality. (Source savills.com)
Overslept, so tired,
if late, get fired.
Why the pain?
Just go home,
do it again.
The Commuter’s Lament/A Close Shave by Norman Colp as public art in the tunnel connecting the NY Port Authority to the Times Square subway station.
Doctor Who "Gridlock" Scene 6
A ranking like this is important, said WealthInsight Analyst Oliver Williams, "...because wealthy individuals, more than any other group, will change their home and even their domicile based on factors of ready access to wealth managers and private banks as well as political stability and heritage. Owning a piece of history in a city such as London is an aspiration for many, particularly wealthy individuals from overseas..."
- Monaco (29.21%)
- Zurich (27.34%)
- Geneva (17.92%)
- New York (4.63%)
- Frankfurt (3.88%)
- London (3.39%)
- Oslo (2.90%)
- Singapore (2.80%)
- Amsterdam (2.63%)
- Florence (2.59%)
- Hong Kong (2.58%)
- Rome (2.54%)
- Dublin (2.40%)
- Doha (2.31%)
- Toronto (2.29%)
- Venice (2.25%)
- Brussels (2.11%)
- Houston (2.09%)
- San Francisco (2.07%)
- Paris (2.04%)
Grace Kelly & Prince Rainier Attend A Gala Show 1955?
In preparing for my recent BNN Interview (July 9th) the producers sent some queries in advance of the spot; one was "Is it time to rent or buy?". We never covered it on air but my response would have been:
It’s always a time to rent or buy unless you're Hikikomori.
One should look at the fundamentals of one’s present balance sheet and not rely on past performance or future speculation. If you are risk averse then buy or rent what you can pay for if the scenario of your household income were to suddenly drop. Contingencies are for the unexpected. Two income households may have a cushion, one income households have a greater risk.
I mashed up the chart above from Mercer via ZeroHedge which shows the high rent cities (petro-finance-centric) and I included Manhattan averages with or without doormen as well as the 3 hot Canadian markets of Vancouver, Calgary and Toronto.
The fundamentals don't support buying in Vancouver, Calgary and Toronto especially since interest rates are at a low (will they drop?) and rents and resale prices are at the highs (will they rise?).
There is little room for improvement on cash flow unless buying hot market real estate to rent out has some potential for improving the ability to increase the revenue. As I demonstrated in my case study last year of buying a Vancouver condo for investment, the risk of a negative return is only going to be alleviated by a 25% reduction in purchase price if comparison to a 10 year bond is rational. Also last year at the time of the study, inflation (CPI) was running at half of what it is today; a rising CPI erodes the bottom line.
Taxation & Invisibility
Nadeem Walayat has been calling for bull markets in the U.K. and U.S. housing for quite a few years pinning his argument to:
"...an exponential inflation mega-trend which is the primary consequences of perpetual money and debt printing monetization programmes that the government is engaged in, in an attempt to buy votes through high deficit spending, an inflation trend that asset prices are leveraged to and oscillate around..."
I think real estate prices are zooming in London for another reason: TAXATION. Martin Armstrong makes the observation that:
Unlike the USA, Britain does not tax worldwide income. The rich have flocked to London by the boat and plane load and this is driving property prices way up and you see more high end cars everywhere – many with Arab plates.
The French “rich” have left France and many moved to London. Yet this is still just a tiny fraction of the trend. Since you do not pay taxes just to live there on your earnings outside of Britain, they can live in London effectively tax free ON THAT FOREIGN income.
Behind a New York City deed, there may be a Delaware LLC, which may be managed by a shell company in the British Virgin Islands, which may be owned by a trust in the Isle of Man, which may have a bank account in Liechtenstein managed by the private banker in Geneva. The true owner behind the structure might be known only to the banker. “It will be in some file, but not necessarily a computer file,” says Markus Meinzer, a senior analyst at the nonprofit Tax Justice Network. “It could be a black book.” If an investor wants to sell the property, he doesn’t have to transfer the deed—an act that would create a public paper trail. He can just shift ownership of the holding company.
Old time realtors who worked through the flat market of the 1970's and the 1980's bust in Canada will remember offers made on over priced listings that included some cash, some financing and lots of jewelry, boats, cars and overvalued art. It's what happens when over leveraged investors realize that a declining asset price without an income stream would be better traded for over priced real estate.
The chart above shows the share price of Sotheby's Auction business since the later 1980's. Five peaks have been set and the last three since the 2008 blowout have been on a trend of lower highs. In the pit of gloom of 2009, the BDI share price hit the 2003 and 1988 lows.
The chart captions on the 5 peaks refer to the 2011 New York Magazine article by Marc Spiegler; "Five Theories On Why the Art Market Can't Crash and why it will anyway." In brief Marc underlines the bull argument for investment in art:
1) The Expanded Art World
"...the global market is up to twenty times as large as it was in 1990."
2) The Art World’s Gone Global
"...the next big collectors will emerge from Russia and China, yes, but also India and various Arab emirates."
3) Art Is the New Asset Class
"...it’s a trillion-dollar asset class that in many ways works a hell of a lot like real estate."
4) Diversification As a Safety Valve
"...there’s a constant process of mini-corrections, as some genres rise while others fall.)
5) The Japanese
"...there’s plenty of other clueless money in the market... the hedge-fund guys are the new Japanese."
The chart above shows Sotheby (BID) and its anagram BDI (The Baltic Dry Index) heading south as the Shanghai Composite Index (SSEC) collapses into 2006 and 2001 lows.
The reversal is underway even as headlines trumpet new highs on selected pieces of art.
"Christie's racks up $745m in one night (a record) and the bubble keeps inflating: This week's mega-auctions are once again reaching obscenely high prices, with a Barnett Newman selling for $84.2m and a Bacon triptych close to that. Why is there no sign of a crash?" Jason Farago, May 14, 2014 TheGuardian.com
Jason answers his own question with:
1) There is only one art world now,
2) Enough people believe the hype,
3) You've got to put your money somewhere,
4) Art isn't part of the real economy,
I think he means "Hedge Fund guys are the new Japanese."
An observation from February 2014 on the Vancouver Gallery scene by artist Win Seaton:
Many of these properties (Art Galleries along Granville St) have been purchased by offshore owners and as a result the average gallery space on the street is more than $10,000 a month. This increase combined with the decline in art sales makes it is easy to see why the migration (of Galleries) away from the area. Of course a few of the major galleries remain run by the same owners, like Heffel Fine Art Auction House – the key word here being ‘auction’. Along with ownership changes of these properties, the market has changed to reflect the demands of offshore buyers with deep pockets.
The auction is replacing the gallery as an expedient method to monetize art. As Win points out "Rental fees for Canadian art is a tax deductible business expense and the purchase of Canadian art can be a depreciable asset."
Clips from the movie "Exit Through The Gift Shop"
A 16,000 sf unfinished penthouse shell gets "snapped up" by an "eastern" European at One Hyde Park in London for £140 million with finishing costs expected in the range of £175 million and a "stamp duty" possibly as high as £21 million. All four penthouses in the development are now spoken for.
Source: The Daily Mail. More Whale Watching Here.
"Mystico & Janet - Flats Built by Hypnosis"
Monty Python 1972
History, Charts & Curated Readings
Balance Of Trade
Rent Or Buy