Canada's real estate market is hotter than the rhetoric coming out of Donald Trump's mouth; moving faster than the speed at which Hilary Clinton runs from debates; climbing higher than Bernie Sanders polling numbers with millennial's. From Vancouver to Toronto, it's not a bird, it's not a plane, it's the price of homes that's flying through the air.
The price of a detached home in Vancouver increased 37% over last year, meaning that those in the city would need 1.5 million dollars on average to purchase a property. Toronto isn't too much better, with the average home in May going for $782,051 dollars.
The average yearly income in Vancouver is $71,660 dollars, meaning a home in the city is being sold for roughly 20 times what its residents earn.
Toronto's median income is $76,219, meaning its homes are being sold for roughly 10 times its residents income. The cost of homes in these cities increasingly bares no relation to the salaries earned by the people living there; and that's dangerous.
Much has been written about this phenomenon -- its unsustainability, its proximate cause being cheap mortgages and the risk of a housing bubble, even the effect that foreign investors are having on housing prices.
Most of this is generally boring and has been exhaustively discussed, but what's rarely mentioned, despite its enormous moral significance, is the extent to which international money laundering is fueling the real estate market in two of Canada's most important, global cities.
The phrase "Foreign Investors" is much like the word "Sports" -- Golf and Ultimate Fighting are both considered "Sports" yet drastically different; one may leave you with a mortal injury, the other with a sunburn.
A money launderer and wealthy entrepreneur from abroad may both be considered "Foreign Investors" with similarly disparate outcomes. A great deal of the former (money launderers) are infiltrating a porous Canadian financial system to purchase real estate in Vancouver and Toronto and have contributed to the out of control housing prices in both cities.
"At least 85 real estate companies in Canada have not implemented a plan showing how they are trying to detect money laundering or other suspicious transactions; and why would they? This is a commission-based business, remember?"
It is not simply a situation whereby the wealthy from abroad have come to love our cold weather (in Toronto) or rainy season (in Vancouver), Canada's global cities have become a place where the international wealthy but corrupt can clean and park their illegal cash.
At least 85 real estate companies in Canada have not implemented a plan showing how they are trying to detect money laundering or other suspicious transactions; and why would they? This is a commission-based business, remember?
Cities like Vancouver have become places where corrupt Chinese officials can openly flaunt their money. Money that at its core, represents a theft of wealth from the Chinese people, the majority of whom still have an average income of around $10,000 Canadian a year -- or a fifth of what the average Canadian earns.
We are turning a blind eye to a massive theft of wealth from poor people on the other side of the world -- and for the most part we are doing it on purpose.
"The realtors appear not to be taking the rules [for detecting money laundering] or the reporting obligations seriously, and Fintrac seems to not be too concerned when they see mass non-compliance."
Marc Cohodes, former head of Cooper River Management (a hedge fund) says he believes it's money laundering and other illegal activity that's driving home prices in Vancouver. And it's my suspicion much of the same illegal activity is driving home prices in Toronto -- particularly in the condominium market.
This isn't just a problem because of ethical considerations; it's also a problem because of the enormous bubbles it creates in our real estate markets. Large Wall Street Investors who made billions when the U.S. Housing market crashed in 2008 are making a similar bet about the Vancouver and Toronto markets in the future.
Other countries have taken serious steps to remedy this problem. In Australia buyers from outside the country are limited to newly constructed houses and apartments.
The Swiss assign quotas to the country's 26 cantons, limiting the number of properties that can be sold to foreigners.
Hong Kong charges a 15% surcharge on homes purchased by non-permanent citizens and has areas of the city where real estate may only be sold to permanent residents of Hong Kong for the next 30 years.
Some combination of these elements, along with strong oversight, should reach the right mix of allowing foreign buyers to acquire Canadian assets while ensuring ordinary Canadians are not priced out of the market. Home is where the heart is; let's make sure the dream of a home keeps beating in the hearts of as many Canadians as possible.
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