As the U.S. Energy Information Admin EIA.gov noted in their December 12, 2018 report:
"...concerns about the pace of global economic growth in coming months have led to related concerns about the pace of oil demand growth."
The Canadian Dollar continues to plunge. That means our import costs go up and our net trade has been negative 8 out of the last 11 prints; ie: we Canadians buy more than we sell which is ok if we have the income to service the debt, but as the Chinese economy slows and they buy less of our resources, our incomes as well as other countries incomes are going to diminish.
As Rick Ackerman reminded his clients on December 30, 2018:
A further, significant strengthening in the dollar will tell us when the Deflationary endgame for the global economy is gathering force. It will crush debtors, bankrupt creditors and lop at least four or five zeroes worth of funny money from the banking system’s quadrillion-dollar shell-game. I have written extensively on why hyperinflation is extremely unlikely to settle debts that have become vastly too large to repay. If you cannot understand why, let me pose this question: Do you actually believe the banksters will let you pay off your mortgage with a few hundred-thousand-dollar bills that you’ve peeled from your wallet? If you answered in the negative, you are implicitly a deflationist.
Since the start of ZIRP and NIRP it has been difficult to "be a deflationist" as we watched the global bubble of everything inflate; resource assets, equities, debt and of course real estate which Canadians with the help of foreign laundry services have pushed real estate prices into the top tiers of global pricing. In November 2018, I posted "Dirty Real Estate" which highlighted the "Vancouver Model" that has spread throughout Canada.
The C.D. Howe Institute study estimates of money laundering in Canada range from $5 billion to $100 billion. C.D. Howe Report, September 2018
e don't even know what the "value" of the crime is, but we know what the effect has been in terms of FOMO debt taken on by Canadians. Real estate prices have peaked in Canada and as they drop, the FOMO crowd has a tough choice to make: turn debt into equity quickly by selling the asset or stay in for the long haul and meet the amortization obligation. If it's the former, look for price drops to happen quickly as vendors compete for a diminishing supply of buyers; if it's the latter look for a slow Japanese style deflation and a return to savings as noted in my 2012 post "What Do You Do During a Housing Bust".
A return to savings will eventually allow the pendulum of capital investment to return to productive use. But asset deflation is in view now and we don't yet know it's future length of trend.
One asset class that retains value and even grows during a broad deflationary event is precious metals; and that canary in the coal mine is happening now. See my ongoing chart study of "real" gold and real estate.
And below, see Chris Kimble's
December 31, 2018 note to clients:
I have added in comparison on the chart, the rise in single family detached housing prices for Vancouver and Toronto as well as the increase in annual employment earnings all since 1999, the eve of the dot com tech crash.
The result is a six and a half fold increase in housing cost relative to employment earnings.
Some rental housing cost relief will occur with increases in minimum wages, but minimum wagers are not a source of buyers for detached houses in Canada's crazy towns.
If the real estate bulls are correct in their projection that house prices are not going to drop in any meaningful way because of dearth of land, string pulling by government or money laundering then society is going to have to deal with the prospect of guaranteed incomes to offset housing unaffordability and we will have to provide better access to services and housing closer to employment.
Clearly, capital likes to go where the return on investment is high especially in productive sectors like manufacturing where competition for buyers is cutthroat.
The chart above shows that Canadian manufacturing wages have jumped 21% in the last 7 years while in the U.S. they have gone up only 12% and in Mexico they have DROPPED 7% to US$2.10 per hour. (no typo - that's US$2.10/hr)
Canadian households have become highly indebted (168% debt to income) via government insured credit and animal spirit peer pressure. The IMF has been sounding the alarm bell at least since 2011 "Households, however, already have done enough borrowing, at least when it comes to real estate. Any further buildup of debt only risks a painful collapse." That's what they said 5 years ago.
Canadians are just $200 away from being overwhelmed by debt, new survey finds Financial Post September 28, 2016
And here we are now trading real estate to each other at prices far greater than most places on the planet and that has attracted global capital into Canada to buy our hovels (speculative consumption). It's kept the F.I.R.E. service sector fully employed but has done very little for long term productive investment because long term bond yields cannot compete with flipping real estate. In the last 43 months, Vancouver single family detached house prices have gone up 1.7% per month or 20.4% per annum for nearly four years!
The latest sales/inventory ratio suggests that the risk of sentiment change is occurring in Vancouver (not yet in Toronto); but our very high labour cost relative to our U.S. and Mexican trade channels is going to put pressure on the Bank of Canada and the Federal Government to let the CAD/USD continue dropping (Bloomberg May 2016) "Currency depreciations would help many of the U.S.'s G7 partners (Canada, France, Germany, Italy, Japan, UK, & EU) a lot while hurting the U.S. little, if at all. In other words, a G7 currency war would be fine as long as the U.S. remained a pacifist."
A lower CAD/USD will help Canadian exporters to some degree but not enough to compete directly with Mexico and other low labour cost and low-bar regulatory regimes (China, Vietnam, Indonesia etal). A lower CAD/USD will also put more inflationary pressure on import costs into Canada reducing disposable consumer income that will affect consumption of domestic services including the demand for credit while debt repayment schedules may have to have their amortization terms lengthened especially if earnings growth slows.
ITEM: BlackBerry Abandons Its Phone New York Times September 28, 2016 - In recent years, BlackBerry has cut thousands of jobs and closed several operating centers, including one in this city (Halifax), over the last three years. A company spokeswoman declined to discuss any future layoffs.
A lower CAD/USD will not be favourable to the foreign buyers of Canadian real estate who purchased in the last 7 years if their own currencies do not drop as much as the CAD. Will they continue to hold a wasting asset that produces a negative cash flow?
The hysterical mania of buying real estate in Canada will come to an end when we see listing inventories rise, perhaps in 1Q 2017 if a shift from greed to fear manifests.
And from CNBC, September 27, 2016:
"Vancouver in Canada has been identified by Swiss bank UBS as the global financial center with the riskiest housing bubble."
In the meantime, "The OECD warns that a low-growth trap has taken root, as poor growth expectations further depress trade investment, productivity and wages." Sept 21, 2016
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
2008-09 FINTRAC disclosed 197 cases out of 556 involving transactions through the MSB (Money Service Business) sector.
Businesses suspected of being involved in ML/TF (Money Laundering and Terrorist Financing):
Of the case disclosures involving the use of an MSB, FINTRAC identified and focused on 126 cases from 2008-2009, which were the most illustrative of how MSBs could be exploited for money laundering and terrorist financing purposes. Complete 2010 Fintrac Study
COOLING OFF THE BC REAL ESTATE MARKET
FROM THE TOP DOWN
June 10, 2016 at linkedin.com/pulse
Hat Tip to BenRabidoux @BenRabidoux
In our real estate law practice we have seen houses steadily rise over the past seven or eight years and jump drastically since January of this year.
For example, homes in Vancouver on Connaught Drive which were selling for $3-4,000,000 a few years ago are now on the block for $10-15,000,000 (a client of mine recently turned down an offer on her home in this area at $15.8M. The home was purchased for $6M!)
Correspondingly, homes which were $1-2,000,000 are now $4-5,000,000.
Even condominiums which were valued at a half a million dollars a last summer are now worth $800K to $1M.
Prices are rising so fast, one has to buy a property BEFORE putting one's own property up for sale, for fear of being priced out of the market!
Before the completion date occurred, another client of mine who bought a home in North Vancouver for $1.5M was offered $250,000 by the seller NOT to complete the purchase!
In my view, this lunacy is being fueled to a large extent by foreign money which is pouring into the Lower Mainland at an unprecedented rate and pulling the prices UPWARDS from the top end.
This inflow of money (Chinese principally, but there is also a lot of Iranian, Indian and American capital coming in, as there is still a very substantial discount on the Canadian dollar for those who deal in USD), is destabilizing the BC real estate market for everyone who lives and works here.
Tragically, the only people who can't seem to see this are the provincial and federal politicians and the many pundits who make a living commenting on things they t know nothing about (newspaper columnists, economists, business school profs and other so-called experts).
They remind me of the referees at a World Wrestling Entertainment match. Everyone in the stands is screaming that the bad guy has a concealed weapon and the only one in the building who can't see it is the referee!
However in the WWE the refs are paid to look clueless.
Our politicians are paid to govern in the interests of Canadian citizens, not foreign speculators -but looking at their behavior, one would never guess that.
While it is reported that foreign ownership may be as little as 3-5% of the housing stock that is more than enough to affect the entire market adversely -and it has done so in spades as few can now afford to own a house in Vancouver and even condominium ownership is becoming a stretch.
WHAT TO DO?
1. Make foreign buyers confirm the source of their funds
Right now any foreign buyers can wire any amount of money into their lawyers' or notaries' trust accounts from any bank in the world to buy a property in BC with no questions asked.
Realtors and mortgage brokers are required to fill in a bunch of useless FINTRAC forms and obtain client identification documents, but NO ONE is asking where the money came from in the first place!
I have heard many stories from realtors of bidding wars where a property is listed at a certain price and then a half a dozen or more offers come in steadily bidding up the price by fifty or one hundred thousand dollar increments and then the final offer comes in at a half a million dollars over everybody else's!
A lawyer in our office recently had the same experience in BC Supreme court on a foreclosure sale. The offer the court was asked to approve was $1.5M and a six or seven other buyers showed up at the hearing. As is the court's practice, everyone was advised of price of the original offer and given the opportunity to bid or re-bid in a sealed envelope. The Master opened the sealed bids at $1,55M, $1.65M, $1.725M, $1.9M and the WINNER was $3.1M!
It would appear that the winner wanted to pay AS MUCH AS POSSIBLE.
It has been our experience that much like locals, foreign buyers usually don't want to pay a penny more than is necessary to purchase a property here (much less an extra million dollars on a foreclosure purchase).
As most foreign buyers have local realtors who are well aware of the market prices, the only explanation which seems to make any sense is that some foreign purchasers are using the Canadian real estate system to launder their money.
Once a house is purchased in BC the seller has effectively washed it and it can be moved anywhere in the world easily by selling the property (as the seller then has the contract of sale and all the documents necessary from the lawyer's office to "prove" that his funds came from the legitimate sale of Canadian real estate). No foreign country will look past the most recent transaction to confirm the legitimacy of the funds.
In the criminal world, the fee to launder money can be 50% or more. In Canada, it seems to be NIL.
I believe that many foreign buyers when confronted with a requirement to show where their funds came front would balk and refuse to complete the purchase.
Stemming the flow of dirty money into Canadian real estate would terminate a number of high end purchases, which may push down some of the prices at the $10M - $15M range which would in turn push down the medium high end prices and so on.
2. Increase taxes significantly on those who purchase property in Canada but do not live here or pay taxes here.
It is commonplace for foreigner investors to park some of their money in Canada (as they do not trust their own governments). They typically put the title of a property into the names of their wives or children (it is always interesting to look at the occupation listed on the titles to high end real estate like "worker," "student" or "home maker"). The wife and kids live in the property as their principal residence and pay no taxes as they have no income.
The father, who is a non-resident, continues to make money in a foreign state at a much lower tax rate. Canada taxes income on the basis of RESIDENCY, so the father pays NO CANADIAN TAX. The family enjoys the benefits of the Canadian health care system, school system etc. while paying nothing other than property taxes.
The misguided view of the premier of this province is that the above situation constitutes FOREIGN INVESTMENT IN BC, to be encouraged at every step.
With all due respect, that is nonsense.
As the BC government is perpetually short of money for every worthwhile endeavor (hospitals, schools, pubic housing, seniors, homeless shelters, transit, mental health, child poverty -the list is endless), it would seem obvious that one source of revenue which would be virtually unopposed by BC taxpayers would be to increase Property Transfer Tax and municipal property taxes on foreign buyers who are simply taking advantage of the laxity of the current legal and regulatory framework in BC.
An appropriate rate would be perhaps 20% Property Transfer Tax and triple current property taxes for those who choose to evade paying Canadian income tax (or pay only a token amount for appearance purposes) or simply leave their BC homes vacant.
A sale of a residence so occupied (or unoccupied as the case may be) should also attract income tax on any increase in value (not capital gains tax).
A capital gains exemption for a principal residence should also be disallowed for such owners (these two changes would of course require an amendment to the Income Tax Act which is a federal statute).
These even for so-called "legitimate" off-shore funds would also dampen foreign demand for Canadian real estate, however to the extent that it does not, then at least there is SOME benefit flowing back to the Canadian tax system.
Are these measures discriminatory? Absolutely! They discriminate against foreign buyers who are simply seeking to take advantage of the Canadian real estate system, while parking or washing their funds.
These changes should apply to ANY foreign buyer of any nationality (US, Europe, Britain and Australia included).
UBC already does this with foreign students who are required to pay much higher annual tuition than local students -and no one is complaining!
Will this "fix" the real estate affordability problem? Maybe not, but you have to start somewhere and you might as well start with the most obvious cause.
Are either of these measures likely to come to come to pass? I would not hold my breath.
Generally, by the time the government gets around to doing anything of consequence "the proverbial horses are already out of the barn and the farm has been sold off to a foreign syndicate."
Better Call Saul Explains Money Laundering
History, Charts & Curated Readings
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense
Balance Of Trade
Rent Or Buy