A billion Canadian dollars are being laundered in BC a year

British Columbia’s money laundering is an emergency. The public deserves an inquiry.

The entire thing is an emergency. Recently, a federal case — known as the E-Pirate investigation — related to money laundering in British Columbia resulted in stayed charges when the RCMP botched the case by exposing the identity of an informant. The investigation reads like something out of a crime novel. As investigative journalist Sam Cooper, perhaps the top journalist on this file, summarized it, “The E-Pirate investigation found loan sharks allegedly connected to drug-traffickers in China used legal and illegal Metro Vancouver casinos to wash drug cash, helping ultrawealthy high-rollers from China buy Vancouver real estate, and fund fentanyl imports into Canada.”

...

Please. A wide-ranging, long-term commission is critical to exposing the truth and rooting out corruption in the province. And it’s well worth the money (as a member of the Charbonneau Commission has said) — it might even pay for itself in fines and funds saved through reforms. Moreover, findings from a commission, which can compel witnesses to appear before it and require them to testify under oath, can be used in prosecutions. Meanwhile, every day without an inquiry is an extra day for thugs and crooks to get away with illicit acts that harm citizens and residents of the province.

Nine students own $57M worth of Vancouver property

Nine students own $57M worth of Vancouver property

A total of $40-million worth of that property involved securing a mortgage.
...
Fundamentally, Eby is concerned this lax lending approach by some Canadian banks may be contributing to real estate speculation and the rapid price increases we’ve seen in our real estate market in recent times.

Leak reveals secret tax crackdown on foreign-money real estate deals in Vancouver

Leak reveals secret tax crackdown on foreign-money real estate deals in Vancouver

But the employee feared the sweep would prove inadequate. “Sure, they’ve upped the numbers because it’s hitting the papers,” they said. But on average, they estimated, each redeployed income auditor would only be able to conduct 10 to 12 audits per year – about 500 or 600 in total. “This is nothing,” compared to the likely scale of the cheating, they said.
...
Census data from 2011 has previously shown that 25,000 households in the City of Vancouver spent more on their housing costs than their entire declared income, with these representing 9.5 per cent of all households.
But far from being impoverished, such households were concentrated in some of the city’s most expensive neighbourhoods, where homes sell for multi-million-dollar prices.

Mailing in the keys in non-recourse Alberta

Jingle mail rears its ugly head in Alberta again Why is this ugly? The banks entered willing into a contract that said, hey you don't feel like paying that mortgage, fine, we'll take the house in lieu of further payment. This is the way it is supposed to work. The banks (presumably, one hopes) have much better information than the consumer. If the handful of large banks' army of accountants and actuaries can't do their jobs and assess risk properly, then that isn't the fault of the consumer.

If you walk away, you lose your home, but otherwise have no personal liability. Elsewhere in Canada, your lender can take you to court and seize other assets, such as RRSPs, vehicles, and even garnishee your wages.

You know what really destroys an economy where employment is driven by services? Killing consumer spending. What a great idea in the teeth of a downturn.

Mortgage Debt Relative to Economy Size : Australia, Canada, U.S.

Australia
1.6 trillion (AUS) GDP
1.3 trillion (AUS) residential mortgage debt
81%

Canada
1.55 trillion (CAN) GDP
1.2 trillion (CAN) residential mortgage debt (http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/fin21-eng.htm)
77%

U.S.A.
16 trillion (US) GDP
11 trillion (US) residential mortgage debt (http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm)
69%

The Economist: Canadian real estate among world's most overvalued

Canadian Real Estate Among World's Most Overvalued, The Economist Says

A chart provided by the publication showed that Canada's price-to-rent ratio sat at 175.9 per cent in the second quarter of 2014, right on top of the world alongside Hong Kong and New Zealand.

Charts from the Economist

Sympathy for the Doomster Devil

Three reasons bears predictions have not come true for Canadian housing:

Extremely easy monetary policy
Demographics (the echo boom)
Foreign Buying
Three ‘unusual’ reasons you should have sympathy for Canada’s housing doomsters

Over the past 11 years average housing prices have doubled despite the recession, mortgage debt has topped $1.23-trillion (a record 60% of GDP) and Canada’s housing market is fully valued by price to rent and price to income measures.

But he points out that this remedy [demographics] has a short shelf life. BMO economists expect demographics to turn against the housing market by the turn of the decade, just when rising interest rates really begin to bite, creating a “potential double-whammy” for housing.

The Haves and Have-nots of Canadian Real Estate Market

How the housing market has cooled in most of Canada
Canada overall up 7% year on year.
Up 5.2% ex-Vancouver and Toronto.
Vancouver is 10x income.
Toronto is 7x income.

"We really haven't seen a national market like this where we have such sharp regional differences."

In provinces like Manitoba and Saskatchewan, sales continue to be reasonably strong, Rabidoux said, but there is "unprecedented inventory" on the market.

"Especially in places like Winnipeg and Regina, you have these extremely soft markets. and that's going to keep prices very weak for probably another year."

Ontario is a bit of mixed bag, he said. Sales are strong in Toronto and Hamilton, but weaken once you head east.

"I think the low interest rates have become a curse, not a blessing for the economy because it's encouraging people to pay even higher prices for housing relative to their income," Madani said. "And when interest rates start to creep back up, affordability will become an even greater problem."

Fitch: Canada 20% Overvalued Overall

Why Fitch is sticking to its 20% Canadian home price overvaluation

The 20 per cent is derived from our sustainable home price model for the Canadian market, where we compare changes in home prices historically to changes in five major macroeconomic indicators that we consider to drive the housing market, which are income, employment, interest rates, housing supply and population growth.

I don’t think we’re the first to draw connections between the Canadian market and the Australian market. They’ve similarly benefited from positive home price growth, even throughout the financial crisis. So where we are with Canada at about 20-per-cent overvaluation for the country, and up to maybe 25 or 26 per cent for provinces like British Columbia and Ontario, we have similar market value decline projections for the Australian market in the range of 25 to 30 per cent. And it’s a similar story, you’ve got low interest rates that have supported affordability, again limited supply in the big cities like Melbourne, Sydney, Perth, and also you’ve had in that market population growth that’s been above historical averages that’s also supporting house prices on the demand side.

They also say the U.S. market is 10% overvalued.

IMF's most overvalued housing markets around the world

Era of Benign Neglect of House Price Booms is Over

Theory asserts that house prices, rents, and incomes should move in tandem over the long run. If house prices and rents get way out of line, people would switch between buying and renting, eventually bringing the two in alignment. Similarly, in the long run, the price of houses cannot stray too far from people’s ability to afford them––that is, from their income. The ratios of house prices to rents and incomes are thus often used as an initial check on whether house prices are out of line with economic fundamentals. 

Hence we also need macroprudential policies aimed at increasing the resilience of the system as a whole. The main macroprudential tools used to contain housing booms are limits on loan-to-value (LTV) ratios and debt-to-income (DTI) ratios and sectoral capital requirements (Figure 4). Hong Kong SAR has imposed caps on loan-to-value and debt-to-income ratios since 1990s, Korea since 2000s, and during and after the global financial crisis, over 20 advanced and emerging economies have followed their example.

Another macroprudential tool is to impose stricter capital requirements on loans to a specific sector such as real estate. This forces banks to hold more capital against these loans, discouraging heavy exposure to the sector. In many advanced economies—Ireland, Norway, and Spain— and emerging market economies— Estonia, Peru, and Thailand— capital adequacy risk weights were increased on mortgage loans with high loan to value ratios.

IMF have posted several graphs. (Yes, they let a graphic artist go a bit wild with them…)

According to the blog, Belgium is an exception to being in trouble, despite the higher than average price to income and rent. That leaves Canada as the most troubled country on both measures with New Zealand and Australia not far behind. Also flirting with a worrisome bubble are France, UK, Sweden, Norway.

IMF have also launched a new site to pull together all their data on world housing markets.

IMF's New Global House Price Watch

It's not just an unaffordability index, it's real quality of life being lost

Barbara Yaffe: Vancouver house prices pushed by apathetic politicians and offshore demand

Doug McCandless grumbles that a building project can drag on for two years: “The neighbourhood is held hostage to contractors coming and going, huge messes accumulating on site with no deadline in sight.”

A year ago, University of B.C. geography professor David Ley told the South China Morning Post’s Ian Young he was surprised Vancouver hasn’t seen a political pushback.

Of course, foreign buyers are a mixed blessing, boosting the economy as they make their property purchases. And for now at least, that’s more of a priority for government than any lack of affordability.

Record gap between Canadian and U.S. house prices

Canada-U.S. House Price Gap Hits A Record High: BMO Is there a fundamental reason why Canadian prices would be 50% more expensive, or is it just offsetting cycles?

The graph from the article says it all.

Top calls on Canadian Real Estate from Bank Economists

"Boom times are over for Canada’s housing sector" Canadian real estate and housing boom may be ending, Scotiabank warns

Housing has generated a staggering $1.7 trillion in net new wealth for Canadians since 2000.

I find that claim a bit misleading. Because housing is priced at the margin (i.e, one person in a neighborhood of 100 houses sells for 10k more and suddenly collectively the neighborhood is a million dollars richer. Are they really? They can't all access that wealth through selling, as that would tank the market. Unless there is a real structural change, locally, say, a company headquarters moves into town.

If everyone accesses that wealth through refinancing, that's not real wealth either as you've still got debt on the other side of the balance sheet which is sticking around no matter what the price is when you sell. And if you sell and move up the street, overpaying by 10k to get back into the market, then that's not real wealth either, that's a shell game.

· That investment increased, on average, by 4.2 per cent between 2000 and 2012, almost double the GDP growth rate of 2.2 per cent, and accounts for almost 7 per cent of overall economic output, the highest among the G7 countries and double the rate of the U.S.

· Forty-five per cent of that boost to the economy comes from new construction, 37 per cent from renovation and 18 per cent from real estate transaction and transfer costs.

Did you know that inefficiencies in a system could constitute economic "boost"?

· The total spent to create all those granite-clad kitchens and Euro-style bathrooms, and boost the value of Canada’s housing stock, ...

UGH. There is only so much in wages that can be spent on shelter, over the long term. Granite or no granite. The rest is an economic sinkhole. Now, if you actually invested in efficiency, or healthfulness, that might come back as a return. Granite? Not so much. By the way, don't forget to seal those shiny new counters annually, or you will have to replace it a lot sooner than you think.

Globe and Mail's Canada House Price Correction Calculator

How badly would you be hurt in a housing market price correction?

Ottawa home prices are down 2.5 per cent on a year-to-date basis, according to the Teranet – National Bank National Composite House Price Index. Montreal is off 1.0 per cent, Quebec 1.2 per cent and Halifax 2.6 per cent. “The next markets that will crack are the Prairies outside of Alberta,” said Mr. Rabidoux, president of market research firm North Cove Advisors Inc.

link to the calculator

 As you play with the % downturn buttons, note that bubble corrections tend to be shark-fin shaped. Like this chart of the Dow Jones

Chinese, Canadians, U.S. and Singapore big buyers of Australian Real Estate

Locals priced out by $24b Chinese property splurge

Wealthy Chinese buyers have purchased $24 billion of Australia housing in the past seven years, and over the next seven years an additional $44 billion will be spent on residential property, Credit Suisse estimates.

Chinese top the list of foreign investors in Australian residential property. Chinese top the list of foreign investors in Australian residential property. There was $17.2 billion worth of approved residential property investment coming in from overseas in the year June 30 2013, down from $19.7 billion in the previous period, according to the Foreign Investment Review Board.

Foreign money is roughly 5% of the entire market. Deutsche Bank economist pins high costs on low interest rates and domestic buyers. But first time buyers appear to be feeling the squeeze.

First-time buyers in February comprised less than 10 per cent of all mortgages processed by mortgage broker AFG for the first time since June 2010.

The article goes on to list the ways foreign investment could be avoiding FIRB approval.

Real Estate Highlights of Credit Suisse Wealth Report

Global Wealth 2013

India

Along with most countries in the developing world, personal wealth in India is heavily skewed towards property and other real assets, which make up 86% of household assets.

France

Much of the pre-2007 rise was due to the appreciation of the euro against the US dollar. However, France also experienced a rapid rise in house prices, as a result of which real property now accounts for about two-thirds of household assets. Personal debts are just 12% of household assets, a relatively low ratio for a developed economy..

Australia

nterestingly, the composition of wealth is heavily skewed towards real assets, which amount on average to USD 294,100 and form 59% of gross household assets. This average level of real assets is the second highest in the world after Norway. In part, it reflects a sparsely populated country with a large endowment of land and natural resources, but it is also a manifestation of high urban real estate prices.

Canada

The long-term rise in real estate was interrupted only briefly, and since 2008 the market has seen both new construction and house price increases. Rapid growth in mortgages has fuelled a continuing rise in household debt. Mortgage terms were tightened in 2012 and the market cooled somewhat, but there are continuing concerns. It is not clear whether the final landing will be soft or hard.

Hamilton, ON house prices suffering from substitution effect

Bidding wars, soaring house prices hit Hamilton real estate

The former librarians were shocked to discover that for about half the price, $295,000, they could get everything they’d hoped to find in Toronto — a cool condo close to a burgeoning arts scene, thriving cafes, up-and-coming restaurants, and bike paths that meander along a waterfront undergoing a rebirth.

There they discovered elegant, and sometimes unloved, brick Victorians, charming workers’ cottages and even Rosedale-like mansions. And they were all shockingly affordable — at least by Toronto’s sky-high standards.

Median price for residential was $342,000 last month according to the RAHB chart for May 2013
Median household income was $79300 using statcan.gc.ca and applying the last 4 years average median increase to the latest data.
Resulting in a median multiple of 4.3x.

Not sustainable, but more interesting in the medium term is what will the fallout be. As Toronto wanes will Hamilton continue to be seen as a boom town and weather the national downturn better, or will a contraction hit harder due to the weaker base to fall back on. If it remains clear that the transport project will finish I expect more of the former.

Canadian Revenue Crackdown on Condo Flips

Long overdue. Lots of anecdotal evidence tax dodging in flipped assignments is widespread. If so, just wind of a crackdown will put a damper on speculative sales.
Currently there are three tiers:
No tax on gains from sales of primary residence.
Tax on half the gain from selling a recreational, rental, or investment property.
Full tax for making a business of real estate investment.
Some Toronto condo sales face CRA scrutiny

The CRA has yet to disclose how many sellers have been affected. But Toronto tax lawyer and text author David Sherman and other tax experts, accuse auditors of unfairly ignoring some legitimate explanations for sales. Meanwhile, Finance Minister Jim Flaherty wants the CRA to collect more than $500 million extra from suspected tax cheats this year.

“The auditors have applied a rare 50 per cent penalty for ‘gross negligence,’ even on those who had never owned a condo previously,” says Sherman.

Sure sounds like they want to make a point about the seriousness here, not just collect the tax.

One of Rhodes’ clients was single when he bought a condo in downtown Toronto in 2005. By 2009 he was engaged, and his fiancée wanted to be closer to her work in Guelph. So, he sold it, soon after it was registered. An auditor decided that the sale so soon after registration was suspicious, and so was the original choice of a two-bedroom apartment: “There is no reason to purchase a two bedroom condominium for one person,” he claimed. Rhodes says his client was assessed with over $100,000 of business income, resulting in a tax bill of roughly $50,000. He also faced a $25,000 penalty. “I estimate the cost to take this to the Tax Court (of Canada) will be around $10,000 to $15,000.”

It will be interesting to see if the decisions from this crackdown stand. Real estate seems to get its way on these things. Given the long timeline between condo sales and registration, most everyone could come up with a life excuse for bailing.

Condo Developers in Toronto backing off

Toronto Condo Kings Retreating to Avert Crash: Mortages

“Most developers have their hands in their pockets right now,” said Brad Lamb, president of Brad J. Lamb Realty Inc., a developer and the city’s largest condominium broker. His firm, which is marketing more than 45 high-rise developments in the city, won’t start a new project until 2014, Lamb said in an interview at Bloomberg’s office in Toronto. Lamb said he has eight projects in Toronto and Ottawa “on the drawing board.”

The supply of new high-rise units reached 21,262 in February, 34 percent more than the same period a year ago and close to a record 21,696 in October 2012, RealNet figures show. About 61,000 units are currently under construction -- the most ever -- and a record 35,757 residential units will come on stream next year, RealNet said.

Sales of high-rise homes in the city have dropped 34 percent since 2011, after rising 64 percent in the past decade until 2012. Prices have declined 5.5 percent over the past two years, according to RealNet.

Rising supply facing the headwind of sharply declining sales this year, implies this move is too late. Hat tip: vangrl posting at vancouvercondo.info

Current house price correction in Canada has couple more years to run

The correction currently underway will persist for next couple of years. More adjustment to come in home prices: Carney

“Real wealth is built through innovation, and it’s gained through hard work,” Mr. Carney explained in an interview taped before this weekend’s G20 finance ministers and central bankers meeting in Moscow. “It’s not through some magical asset inflation.”

Mr. Carney said the pace of debt accumulation has slowed to about 3 per cent a year from 10 per cent.

Mr. Carney rejected the suggestion that he may be remembered as Canada’s Alan Greenspan – the former U.S. Federal Reserve Bank chief who many critics blame for inflating the housing bubble in that country – if there’s a housing crash.

“I’m coming back, so I’ll take responsibility if, if, well, that’s not going to happen,” he said. “I’m also coming back, so I’m here to face the consequences, ultimately.”

Sure you will. We look forward to it.