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episode # 68

The Minority Report with Tom Davidoff

We check in with Associate Professor at the UBC Sauder School of Business Tom Davidoff for his thoughts on how yesterday’s provincial election results will affect the Vancouver Real Estate Market.

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Episode Summary


 

About Tom:

Tom teaches real estate, finance and economics at UBC’s Sauder School of Business. He is originally from the US, where he worked for a shopping centre development after finishing school. Following that, Tom went to grad school and has been enjoying economics ever since.

On last night’s elections:

Tom was on the top floor of his place and lay in bed at 10:30pm, wondering what would happen. When he peeked at the results after 1:00am, he wasn’t surprised. However, he thought the Liberals would have won by a bigger margin. If the Green party weren’t running, the NDP would have easily formed government. The Liberals still may get majority without having to include anyone else. A colleague pointed out that you need a speaker (so 44+1) to be in control. The Greens will have to be a significant influence on this government—people have trouble with political contributions and environmental issues, but they also have trouble with the NDP on certain economic issues. For housing and other markets, it will matter how things play out in the next few weeks.

On the (potential) minority government’s impact on housing:

The Greens had punitive taxes in mind:

  • Ban out-of-the-closet foreign buyers with a 30% tax rate. This is effectively a ban—it doesn’t make sense to totally eliminate foreign buyers because of the forfeited tax revenue. They took the Liberals’ existing step with the property transfer tax (paying more as a percent of value) of up to 12% for luxury homes.
  • Capital gains taxation. This makes sense if you make a lot of money selling your home, just like with anything else.

These things could slow down the high end of the market. People want affordability, but nobody wants the market to shut right down. Fully implementing the Green’s ideas isn’t realistic, but the trade-off will be interesting.

On which party had the best housing policy:

Tom feels the tax and the subsidy approach of the NDP is best, compared to those of the other parties.

The NDP came closest to adopting the BC Housing Affordability Fund (the foreign buyers’ tax is the politicized version). We’re in an economy where you pay high taxes to work for someone, you pay a lot of sales taxes if you sell things, and if you buy and hold real estate you pay property transfer tax—of which the rate is very low. So, we’re telling the world not to come to BC to make a living or sell stuff, but to invest in real estate. You combine that notion with the zoning rules and the mountains and oceans which make it hard to build, and this drives up prices. This and the low take-home incomes give us unaffordability. The NDP’s solution was to forget whether you’re foreign, as just owning property means you should be taxed high, unless you’re earning a living or serving as the landlord of someone who is earning a living. You get credit for taxes paid, being in a home long-term, being a landlord, etc. The tax base would be shifted from working for a living to buying and selling. This is a great solution.

The $400 apiece renter credit got some grief, although Tom likes it. It is a small benefit going to a lot of people. People say this money should go towards building apartments, but if you take, say, the $200 million dollars a year it would work out to, you would only get 200 apartments. That means a big benefit going only to a few people.

On why the NDP did so well in Metro Vancouver:

There is a lot of multi-family housing in Vancouver, with so many renters. If you’re low income and renting, you generally prefer the NDP. High income homeowners generally prefer the Liberals. Most urban audiences are generally young renters with more of a left-wing view on social issues. So, Vancouver was a natural fit. We see this in the US: most cities are democratic, not for economic reasons, but for cultural ones.

On what the market has done since Tom was on the show in January:

Don’t play back what he said then! That’s when the market turned around—there was the foreign buyers’ tax, and the new mortgage qualification rules from Ottawa, which had a great effect on the market. Tom would love to blame the BC Home Partnership Loan Program (which allows people with modest incomes buying homes under $750,000 to put down just 2.5% and get interest-free money for five years). The problem is, he’s not sure there have been enough of these loans to explain the huge increase in the condo market. The low interest rate environment must be part of it, but there is most likely something else going on as well. High-end condos do very well, too.

On if inventory is a big issue right now:

Pre-sale flippers are somewhat a good thing, as they are acting like builders: they invest equity, which creates supply and should eventually lower prices. However, there are a lot of starts but not a lot of new completions. It may be that pre-sale frenzy spec buyers are competing with completed home market buyers. Tom was looking for an inventory buildup in the spring, but it’s been the opposite: there were only about 2,300 units over the whole season. There are many buyers now, but there weren’t in January. People say if you didn’t sell in 2016 when prices were so high, you must not want to sell.

For the US, even from the mid-2000s housing boom, it’s hard to find data evidence of people responding to high home prices by leaving the market. But there are stories of the “halfers” from Vancouver who left for Vancouver Island (to buy real estate with half of their proceeds, and invest the other half). Because price movements have been so huge, many people would either never leave or they would jump on the chance and cash out.

Bob Rennie’s stat: 193,000 homes are owned outright in Vancouver, clear title, which amounts to about $197 billion worth of real estate. You can imagine that is impacting today’s market.

Yes. There’s recycled family home equity that everyone thought was part of the story. Even with a small correction in January, people are still in positive equity positions. The millennials using family money are still a strong force.

On that since we’re now down to only 3-4% foreign buyers, whether the foreign buyers’ tax was effective:

There is a bigger dip in single-family and higher value, better situated homes, so there was some effect. After the fact, it looked more concentrated than people thought because condos dipped, but it’s clear single-family homes took the worst hit. This is consistent with foreign buyers being concentrated in higher-end product, and their willingness to move to a lower-end product to pay a lower tax amount. They also may have been pushed to the presale market.

On his predictions for the rest of the year:

In the long run, today is about as good as it gets. In the short run, inventory (speed of sales vs. what’s available) forecasts well. Bryan Yu from Central 1 sees continued price growth through the year. In Toronto, Home Capital Group loans weren’t performing—it’s important to watch if capital markets lose confidence in real estate because in places like Vancouver, the amount people think real estate is worth will absolutely affect what it costs. Barring a rapid increase in interest rates, or a collapse in buyer confidence from home capital, Tom doesn’t see the same reason for bearishness that we saw earlier in the year.

Five-wire:

  1. Favorite area in Vancouver: Kits
  2. Favorite restaurant or bar: Kirin Chinese food
  3. Downtown penthouse or west-side mansion: West-side mansion
  4. First place he takes someone from out-of-town: Kits Beach
  5. Drinks with Bill Clinton or Barack Obama: Obama

To find out more about Tom:

Twitter: @TomDavidoff
Blog: http://blogs.ubc.ca/davidoff/

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