Government policy and house prices.

Those that complain about the Vancouver Sun only printing pro-real estate fluff should read the latest Don Cayo article about the costs of home ownership and government influence over prices.  It brings up some interesting points about land management issues, tax incentives and speculation:

The impact of speculators on the market, at least as judged by visibly vacant homes, seems focused on condos, and mostly in just a few neighbourhoods such as Coal Harbour.

But property tax consultant Paul Sullivan, who with his wife, a builder, keeps a particularly close eye on West Side transactions, says almost half of condo pre-sale buyers won’t ever live there, and almost a quarter flip the properties before they’re ready to occupy.

Andy Yan, an analyst and researcher at Bing Thom Architects, sees this kind of speculation as hurtful to the economy, and suggests taking a leaf from places like Hong Kong, Singapore and Australia, which have found ways to curb it. Yan suggests more focused use of the Property Transfer Tax, exempting the kinds of transactions people make as they move through a normal life cycle, but nailing speculators. And then there’s a final policy area where it’s what governments don’t do that influences housing costs in two contradictory ways. It’s the issue of the ubiquitous “mortgage helpers” — basement suites that, legally or illegally, allow buyers to purchase much more home than they could otherwise afford. These both drive up the cost of residential property (though the net result is greater affordability), and provide low-cost rental units to those who can’t afford to buy.

There’s no way to know how many of these escape the taxman’s notice. But to the extent that neither income tax collectors nor property tax assessors aggressively track these suites down, they enjoy a degree of tacit official blessing.

Read the full article over at the Vancouver Sun

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Hogtown Hozer
Hogtown Hozer
10 years ago

@nonREgirl:

…… why should housing be so expensive NOW? If Vancouver is so special, why weren’t housing prices through the roof 10, 20, 30 years ago . ……….

And the real irony? Why wasn't housing a lot more expensive in Vancouver 20 years ago when it was actualy a much nicer, cleaner, and less congested place than it is now?

Wealthy House Owner
Wealthy House Owner
10 years ago

Come on give up now and change your corrupt life style.Save now for a down payment or you will be enslaved by us.

lowermainlander
lowermainlander
10 years ago

Ian Watt;"getting the crap kicked out of us"
http://www.youtube.com/watch?v=4IY5qN6ubk8

rf
rf
10 years ago

Just remember, "when they raid the whorehouse, they take all the girls…….and even the piano player".

LightsOut
LightsOut
10 years ago

"Ok, I’ll bite, what money creation does not involve interest?"

Please bear with me – just got up – no coffee yet.

Definition of FIAT (from Dictionary)

: a command or act of will that creates something without or as if without further effort

Where does it say there must be an interest obligation?

Don't forget we are talking about government money creation not private credit creation as a bank would do. A bank must create an interest obligation because it cannot create money – just credit. A sovereign government is under no such obligation.

Devore
Devore
10 years ago

Meanwhile, the prevailing low interest environment is a ticking time bomb. As virtually all defined benefit pension plans (which is to say all public, and most company ones) (I still think they're scams on the workers, and always have been) have geared for the last decade with the expectation of 6-8% annual returns, they are now in panic mode after 2-3 years of big losses. So many bet the farm on rising bond rates and an equities rally. As markets are sagging, bonds refuse to budge even a single basis point, current beneficiaries demand their benefits, and employer contributions are drying up, they are resorting to selling their assets (depressing the remaining ones even further) to meet their heavily underfunded obligations. What will the government do? They cannot afford rising rates, and they will probably have to bail out the… Read more »

Devore
Devore
10 years ago

@buff_butler: Regarding interest payments this depends; money is destroyed through taxation (and is a good question). Tax money though gets recycled back through the economy, either in form of benefits/payouts, public salaries, interest payments to bond holders. It doesn't get destroyed. If it did get destroyed, then an equivalent amount would need to be created again to cover the budget shortfall, unless the government is running a surplus. Hmm, although much of it is spent on non-productive activities, in that sense it is a net loss to the economy, so could be seen as money destruction. But then why do it in the first place? Why so much busy work just to take some money out of the economy? It must be very difficult to regulate as well, as taxes and government spending is extremely sticky, you can't just reverse… Read more »

Devore
Devore
10 years ago

@LightsOut:

Money creation doesn’t have to involve bond sales, and mostly doesn’t – thats the point. They don’t have to pay interest on the accounting offset.

Ok, I'll bite, what money creation does not involve interest?

buff_butler
buff_butler
10 years ago

Regarding interest payments this depends; money is destroyed through taxation (and is a good question). Its important to understand the accounting for a government with a controlled fiat currency is not the same as that of an individual. It is one-sided; the sole purpose of tresury bonds is to soak up liquidity; forgoing current spending for future cashflows. This is how you can have short term tresury bonds below the rate of inflation; they dont directly track it but are instead the "hegable" rate. This is one reason why housing is tracked so closely by wall street; it is another good reflection of near-term liquidity.

Devore
Devore
10 years ago

Well, I'm a bit disjoint today, it's late, but at some point all the new money, which is backed by debt, must have an impact on the real economy, otherwise we could just print forever with no harm. Clearly that is not the case. At some point, real productivity and wealth must be tapped as a result, in some way that is proportional to the amount of debt. Low debt countries don't have currency crises or default. If, as you say, at full capacity you're creating inflation (a form of taxation), at below full capacity you're creating dislocations and malinvestments for which the market is not ready. Likewise in a full capacity scenario. Money has to go somewhere. It will go where investors perceive they will get highest yield. Basically, deficit spending and debt financing, whether you control the currency… Read more »

LightsOut
LightsOut
10 years ago

"Interest still needs to be paid, no? Interest payments are a serious drain on government revenues. If interest was paid by issuing new money, we’d be well into hyperinflation-style territory a long time ago."

You are assuming all new money comes into being as a result of a bond sale.

If the government sells a bond then yes it must pay interest.

Money creation doesn't have to involve bond sales, and mostly doesn't – thats the point. They don't have to pay interest on the accounting offset.

paulb.
paulb.
10 years ago

@paulb fan:

Oops, your right. Need at least a 40% drop so I can sleep at night.

buff_butler
buff_butler
10 years ago

@LightsOut:

dude i wish i could high five you. Theres not many people that read much monitarist theory but its important if you want to be a bond nerd.

"Also if you owe money in foreign currencies you can default"

The magic touch of the IMF, causing sovern defaults since inception. I'm still counting down the days until the EMU dies. There are other ways to default but it again all involves foreign account surpluses/deficits and exchange.

You might like this blog too:

http://neweconomicperspectives.blogspot.com/

Devore
Devore
10 years ago

@LightsOut:

Government spending enters the economy as net new money, irrespective of the offset in the reserve accounts, so its functionally not offset as far as the private sector is concerned although the deficit goes up – but this doesn’t affect the private sector except through perception – there is no practical effect.

Interest still needs to be paid, no? Interest payments are a serious drain on government revenues. If interest was paid by issuing new money, we'd be well into hyperinflation-style territory a long time ago.

House
House
10 years ago

@oneangryslav2: Soverign defaults are much more common than people realize.

My parents were lamenting recently how their bond ladder was turning into more of a set of horizontal monkey bars. Retirement income is going to get squeezed. It's not hard to understand why properties netting 5% are being sought as part of a retirement plan.

LightsOut
LightsOut
10 years ago

@Devore "Hmm, but in double-entry accounting, when reserve accounts are created, what is balancing them? Bond debt." Bingo. No its not Bond debt – except in the narrow context of reserves management. I don't know the answer in enough detail to satisfy you but the offset whatever it is doesn't really matter (I think it gets dumped into the deficit somehow – but I'm not sure). You would have to dig through the reserve accounts to answer the question – good luck with that. Government spending enters the economy as net new money, irrespective of the offset in the reserve accounts, so its functionally not offset as far as the private sector is concerned although the deficit goes up – but this doesn't affect the private sector except through perception – there is no practical effect. This sounds wierd I… Read more »

paulb fan
paulb fan
10 years ago

@paulb.: thats 35% decline, not 57%, still amazing.

Devore
Devore
10 years ago

@LightsOut:

Government (all governments) spend by crediting reserve accounts – not by borrowing. In fact borrowing by governments is used just to manage reserves in order to make it easier to hit the overnight rate target.

Hmm, but in double-entry accounting, when reserve accounts are created, what is balancing them? Bond debt.

stagnate
stagnate
10 years ago

undecided and confused says:

I am not seeing it in the FV/Tri-City market where builders are combating price reductions by including legal basement suites as part of a complete package and areas such as Burke Mountain are currently almost completely sold out and there are even waiting lists for some lots (crazy…I know).

demand exceeds supply for what you are looking for, the price will only fluctuate dependant on what the demand can afford. reading your posts i think you realize this, probably your wife as well.

LightsOut
LightsOut
10 years ago

@oneangryslav2 "I also can’t believe the very strong claim that not only will there be no sovereign debt defaults, but that they are theoretically impossible" I took a quick look at your doc but haven't read it in its entirety. However I think the answer you are looking for is constraint. MMT refers to the post 1971 period when Nixon took gold convertibility away. "The Great Monetary Experiment". Prior to that spending was somewhat constrained since you had to, at some stage, get gold backing for it. Since 1971 spending has had no such constraint. All the examples in the doc seem to be prior to 1971 when there was, presumably, a similar constraint operating. Also governments can adopt constraints voluntarily, such as the UK government is doing now and the US is talking about. The point about MMT though… Read more »

observer
observer
10 years ago

I seem to remember the situation in the us turned once prices failed to keep increasing, because many of the investment principles and instruments were predicated on continual price appreciation. It will be interesting to see what will happen to our market once prices stop increasing and there is no longer any substantial stimulus available from lower interest rates (getting close to as low as they can get). Will investors be caught naked? Will demand side get cut off because it is the end of days for flipping?

Anonymous
Anonymous
10 years ago

@bums up2: "2 million people (+500 Tamils) can’t be wrong."

Well, the applicants for the investors category have increased 9 fold to beat the 1st September dateline when the new regulatory kicks in. The new investors will have a personal net worth of $1.6 million, up from $800,000, and will make an investment of $800,000, up from $400,000.

Vancouver house prices have only one way to go right? Or people will start minding their businesses and stop fucking at the casinos.

No More Gordocracies
No More Gordocracies
10 years ago

"suggests taking a leaf from places like Hong Kong, Singapore and Australia, which have found ways to curb it."

Guess I was way ahead of my time when I suggested this here 2 years ago.

oneangryslav2
oneangryslav2
10 years ago

@LightsOut: Thanks for the link. I'll take a look but I'm skeptical about the theory based on your thumbnail sketch. Hasn't Japan benefitted for years from the Yen carry trade? Were it not for that, would demand for Japanese government debt be as strong?

I also can't believe the very strong claim that not only will there be no sovereign debt defaults, but that they are theoretically impossible. Check out Table 1.1 in the attached link. Granted these are defaults and restructuring of debt, but at least some of these are sovereign defaults.

http://mitpress.mit.edu/books/chapters/0262195534

LightsOut
LightsOut
10 years ago

@undecided_n_confused Snippet from Garths blog tonight. "Yesterday economists were pulling out words like “devastating,” painful” and “fateful” to describe the current state of American housing. I’m sure you heard the news. Resales in July plunged by 27% across the US to the lowest level in 15 years in the worst one-month freefall since they started counting this stuff 42 years ago." "But the news gets worse. The biggest drop in sales came with affordable houses middle-class families would snap up, priced between $100,000 and $250,000 (the average US house now sells for about $180,000). There is a 12-month supply of unsold homes. Foreclosures have risen 1,000% in four years. Demand for single-family homes is at a decade-and-a-half low. Foreclosures and short sales account for a third of all transactions (vultures). Almost 25% of families with mortgages in the US are… Read more »