Monday, May 16, 2011

Carney says a four letter word

Vancouver's aspirations to become like New York took a big step up today with a feature article in bloomberg: China Buyers Make Vancouver Pricier Than NYC
Buyers from mainland China are leading a wave of Asian investment in Vancouver real estate as China tries to damp property speculation at home. Good schools, a marine climate and the large, established Asian community as a result of Canada’s liberal immigration policy make Vancouver attractive, said Cathy Gong, who moved from Shanghai to the Shaughnessy neighborhood on Vancouver’s Westside about three years ago.

“The schools here are the best and there are a lot of Chinese people here,” said Gong, whose son is in sixth grade at Shaughnessy Elementary School. Eastern Canada wasn’t an option because “I cannot bear cold weather,” Gong said. Vancouver has the second-largest immigrant Chinese population in Canada after Toronto.
The usual arguments of Vancouver's attractiveness, good schools, temperate climate, large Chinese community, and favourable immigration policies are cited as reasons for the high level of investment in Vancouver real estate. Of course the article fails to mention how, even after the multiple "waves" of Chinese immigrants over the years, the majority of homeowners and homebuyers are still local.

Anyways, the Bloomberg story is fun for discussion but not to be outdone, Bank of Canada Mark Carney gave a speech today on the shifting sands of the global economy. Although drier than Bloomberg, I tend to pay more attention to what Carney says, given the power and influence the Bank possesses over Canada's economy. Of particular interest to Vancouver housing market enthusiasts are the following quotes, first on capital flows (emphasis mine):
While emerging economies are having difficulties absorbing large private flows, advanced economies have often misallocated surges in yield-insensitive gross claims. In Canada, as elsewhere, large capital inflows will require vigilance from public authorities and private financial institutions. Financial history, particularly during times of large power shifts, is rife with examples of booms stoked by dumb money that turn good situations to bad.
And then on inflation risks:
The possibility of greater momentum in household borrowing and spending in Canada represents an upside risk to inflation in Canada. The persistent strength of the Canadian dollar could create even greater headwinds for our economy, putting additional downward pressure on inflation in Canada.
How does these statements segue with the Bloomberg article? Well it's hard to completely understand the context of Carney's statements regarding capital flows. If, for argument's sake, we were to look at the investment in Vancouver real estate in the past 5 years due to immigrants and nationals from Asia, we might start thinking that, on a cumulative basis so as to make it into a tangible and sizeable economic entity, Vancouver real estate might actually be drawing the attention of policy makers. Based on that inference alone it seems like articles like the one from Bloomberg are not going unread in the halls of Ottawa.

As I mentioned in a previous post, it looks unlikely that nation-wide action to further subdue household credit through CMHC policy changes is likely, with much of the country apparently cutting back debt growth. Two regions -- Vancouver and Toronto -- seem to be showing an immunity to debt curbs as prices continue to increase in the face of low yields -- i.e. "dumb money". Though it's wild speculation (as it were), I would not be surprised to see some targeted efforts to reverse price increases in both Vancouver and Toronto, markets that are annoyingly distorting the nation's house price figures.


Thomas said...

Property transfer tax. It's not racist and it can be targeted by province. BC clearly needs to raise the level. Why not raise it a lot at the high end? This effectively targets Vancouver because the rest of the province doesn't have those prices.

Here's the current rule:

* If the fair market value is $200,000 or less, the tax is 1% of the fair market value.

* If the fair market value is greater than $200,000, the tax is 1% of the fair market value up to $200,000, plus 2% on the portion of the fair market value that is greater than $200,000.

Since we're talking dumb money anyway, what's wrong with say 5% over 1.5mm.

What to do with the proceeds?
1. Olympic village debts
2. Affordable housing

Pick one or both.

jesse said...

Good idea, Thomas! On the racism front, there is no restriction on ethnic origin when buying property in Vancouver, nor should there be.

pod_x said...

In addition to the transfer tax (everyone loves progressive taxation!), why not involve CMHC as well? Why does CMHC back $2M mortgages? Or even $500k? That is clearly not affordable housing, and counter to CMHC's mandate.

mohican said...

My proposed CMHC policy:

Limit loan insurance to loans where the interest paid on the loan on a monthly basis does not exceed the monthly rental rate on a similar housing unit.

The risk on loans larger than this amount would need to be taken on by the financial institution.

jesse said...

FWIW, here's what I posted on Ben Rabidoux's blog for what CMHC can do:

1. Larger down payments
2. Further reduction in insured amortizations
3. Stricter credit rating restrictions for MI qualification

More severe:
4. Adjusting upwards the capital reserve ratio requirement for residential real estate related assets
5. Removing MI (mortgage insurance) on investor loans (WAY overdue IMO)
6. Reducing allowable DSRs
7. Require qualification at 5 year rate plus an additional premium (poster "John in Ottawa" also suggested a cap on the maximum allowable mortgage that CMHC will insure....a 'ceiling' that existed until 2003)

8. Remove government guarantee on CMHC insurance going forward -- privatize the mofo.
9. Limit insured loans based on rental equivalence.

mohican's suggestion I put as "ludicrous" because, for detached properties, it is. I think a requirement for rental equivalence would be better structured based on a long-run cap rate calculation for condos (which would be around 7%) from a third-party accredited appraiser. I would advocate that if someone is using underutilized land like an older vintage SFH in Vancouver (i.e. has justifiably lower cap rate), CMHC should only insure based on current utility; if owner rebuilds for highest and best use they can apply for a refi based on the new cap rate; until then, GTFO.

Provincial and civic bodies can of course impose other curbs based on their jurisdictions.

jesse said...

Thought of another one: increase the lender's deductible on defaults.