Vancouver property values – a ponzi scheme?

Home sale Vancouver

Two quotes for a Hollywood movie Wall Street, 1987 that cuts too close to the bone:

Gordon Gekko: “The point is ladies and gentlemen that greed, for lack of a better word, is good.”

and

Lou: “The main thing about money, Bud, is that it makes you do things you don’t want to do.”

To any sane person a jump in the property market of 30% the past year should let alarm bells ring. Let’s face it, capitalism is based on the premise of adding value. Where was value added? Some people would argue it is based on the free market principle of supply and demand.  That would be quite a naïve stance on the topic as I will explain here-under.

A bizarre situation is unfolding in Canada, mainly in Toronto and Vancouver where normal hard working tax paying individuals can no longer afford to buy a detached house in their own country of birth. The prices are shooting up as you read this and it is not uncommon to find buyers in a bidding war to buy a property for more than the seller is asking.

One would imagine that the economy is booming and that some correlation can be drawn between the heated housing market and the heated economy. Except that the economy is everything but heated.

So what is really happening?

Dare I say it? It is whispered in conversations but never expressed loudly. Canada is selling itself to the Chinese. Bit by bit, just like eating an elephant. Politicians love the money, home owners are experiencing wealth beyond their wildest imagination and young Canadian people are living in their parents’ basements.

Data released by the city of Vancouver supports that 9 out of 10 newcomers to the city were born outside of Canada, mostly Asia and property owners are ‘circulatory migrants’ which means they buy here while still earning money outside Canada. Does the bell of money laundering ring faintly?

Politicians bask in the money the property market brings, blind to the fact it is hugely to the detriment of its citizens and not based on supply and demand but rather on a get-out-of-jail-fee-card system for Chinese hiding money they ‘exported’ from China. It’s a safe haven and currently also a fantastic investment.

But is it sustainable? My answer is no, it is not. As soon as the Chinese economy retracts or when they improve on their exchange controls and people can no longer hide their money in Canada the house market will fall to where normal supply and demand would peg it. Then the Ponzi scheme will be exposed in all its horrid colours.

Obviously it is any politicians’ biggest dilemma: should we stop the practice and ruin the economy for everyone? It’s hardly likely that that should happen, to follow the argument of Lou quoted above. The political conscience to do so is deeply buried and the money oh-so-good.

But let’s all pretend that Vancouver is Hong Kong with limited land and not the colossus of 9.98 million square kilometers it is.

I, for one, is waiting for the pop of the inflated bubble.

Lukas Coetsee, June 2016

 

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