Vancouver drug economy and house prices

How much does the drug economy in Vancouver drive up prices? I was sceptical about it’s impact until I read this recent article in Vancouver Magazine:

Cam Hui was stunned when he moved back to his hometown after a stint on the East coast. “This city is not overrun with the super-rich,” he says. “But you can’t get into the Vancouver West Side for less than $1.5 million for something that’s not falling down.” In Stamford, Connecticut, where Hui, an investment counsellor, lived previously, prices were just as high. But there it was understandable. The place was infested with people working in the investment business. Stamford has the head office of GE Capital, and, with Swiss bank UBS, the world’s largest trading floor.

Hui doesn’t see that level of financial activity here; nor does he buy the standard explanation for Vancouver’s real-estate prices: that offshore investment or Asian money is largely responsible. In a private blog, he argues that there has to be a connection to the drug industry. “And just putting my economist’s hat on, if it winds up back in the local economy, it creates inflation.” He, by the way, has not bought here because Vancouver’s market is so crazy. He rents instead.

Read the full article here.

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jesse
Member

Yep prices and rents. The thought that all "Asians" buy and won't rent is one of the biggest false myths out there.

registered
Member
registered

From the article: " As American studies beloved by Freakonomics author Steven Levitt have shown, many small-time and mid-level dealers don’t actually make much money. The average wage for grunt-level dealers in one Chicago sample was $700 a month, which is why many of them live in their mother’s basements."

That particular case was specific to Sudhir Venkatesh's work inside Chicago public housing projects, among the city's poorest of the poor. It's a bit like drawing conclusions on Vancouver's drug industry from DTES street action.

vreaa
Member

"Hui doesn’t see that level of financial activity here; nor does he buy the standard explanation for Vancouver’s real-estate prices: that offshore investment or Asian money is largely responsible."

Thus, he concludes, drug money must be juicing the boom.

It's remarkable that, as an investment counsellor, he overlooks the actual far 'simpler' cause of the price escalation, namely, a speculative mania.

Once you realize this is a debt-driven bubble, factors like drugs, foreign buyers, etc, become sub-plot. Although arguably of some influence, those forces pall into insignificance when compared with the force of an entire population determined to borrow and buy their way to RE prosperity.

BTW, we have archived the two personal anecdotes from the article:
http://wp.me/pcq1o-2Q4

chip
Guest
chip

I've always found it weird that our second-biggest industry — and industry that overwhelmingly uses RE as a place of production and as an endpoint of investment (laundering) — is so often ignored when it comes to discussions about the bubble.

Vancouver is different, but mostly because no other city depends so much on the drug trade.

LordHuggington
Guest
LordHuggington

I dunno. Miami certainly isn't lacking for drug money, and that city's real estate market slammed into a wall. I'm not convinced of drug money having any meaningful impact on house prices in Vancouver either.

Van MD
Guest
Van MD
[CMHC results show changing housing market – CBC] In March, Finance Minister Jim Flaherty unveiled the latest round of tweaks to Canadian mortgage rules designed to make it harder for Canadians to bite off more debt than they can withstand. All Canadian home purchases where the buyer puts up less than 20 per cent as a downpayment require CMHC insurance. The two main rule changes implemented in March were a reduction of the maximum amortization time to 30 years from 35, and a reduction in the maximum amount a homeowner is allowed to refinance — to 85 per cent of the value of the home, down from 90. By the end of June, the impacts of those rules were already being felt, with the CMHC seeing an instant 10 per cent reduction in the number of mortgage insurance applications. That… Read more »
jesse
Member

@chip: "Vancouver is different, but mostly because no other city depends so much on the drug trade."

If drugs are such a large economic contributor, then why aren't rents going up faster than reported incomes?

Devore
Member
Devore

@Van MD:

At the end of June, refinancings were down by 40 per cent, CMHC said Monday.

Wonder how much slack banks picked up. They're probably more careful with their money without a government backstop, but you know, that's just a guess.

jesse
Member

@Van MD: Verrry interesting: "The average CMHC-insured mortgage had an amortization period of 24.6 years at the end of June; it was 23.9 during the same period in 2010."

There are a few reasons this could be happening, but the most interesting possibility is that people may be either refinancing into low-ratio but longer amortizing loans or paying off the mortgage entirely, which would cancel the CMHC insurance and raise the average amortization of CMHC's remaining portfolio.

Anonymous
Guest
Anonymous

@jesse: Or more people are simply taking out longer mortgages…

Space889
Guest
Space889

@jesse: Maybe because drug dealers don't rent? Maybe the right of landlord to inspect their property puts a crimp in renting to grow pots? Buying their place, Reno to grow, harvest, Reno to sell, launder the money. So buying would offer much more advantage to renting.

registered
Member
registered

7 jesse Says: "If drugs are such a large economic contributor, then why aren’t rents going up faster than reported incomes?"

Laundering money through rent is impractical?

Absinthe
Member
Absinthe
@Space889: No, drug dealers – and drug producers, which appears to be what you're referencing – rent. I've worked in rental housing and we've had to do the clean up afterword, or handle the increased activity of drug dealing from an apartment. Without catching someone in the act, it can be quite a process towards eviction. Straight up street-level dealers don't tend towards rich: that applies as much here as it does anywhere. Drug producers also rent, but they have to feel comfortable there won't be that much inspection of a property … and you only need long term accommodations for a grow op. One building I lived in, some "tenants" set up a meth lab for six months and then ditched without paying rent. They only really figured it out after the tenants were gone and they brought someone… Read more »
Anonymouse
Guest
Anonymouse

@Space889:

"Maybe the right of landlord to inspect their property puts a crimp in renting to grow pots? "

I thought landlords only have the right to inspect at the start and end of the lease?

Patiently Waiting
Member
Patiently Waiting

Grow-ops in rental houses in Coquitlam are fairly common. Many landlords don't care about the house itself, just the land, as the house has a later date with a bulldozer.

City hall will sometimes condemn former grow-ops, so the landlord does just enough to make the house legally habitable again.

If you see a really good deal on an older suburban rental house, keep this in mind. If you can, ask neighbours if its been a problem house.

Devore
Member
Devore

@Anonymouse: A landlord can conduct a monthly inspection, assuming proper notice of entry is given. He can also also give notice to enter for any "reasonable" purpose. If you think the purpose is not reasonable, I guess you can take it up with the RTO.

jesse
Member

@fixie guy: "Laundering money through rent is impractical"

But the argument is that drugs are contributing in a significant way to the economy. I would have thought this should show up through higher effective wages, which would lead to higher inflation. Yet rents aren't going up.

N
Guest
N

It is possible that drug crime has made some people in Vancouver rich, but how many new Vancouver millionaires does drug crime produce each year? A thousand? Unlikely, given that drug dealers are not overly fond of completion. But even a thousand new millionaires per year would not account for prices in the RE market.

Anonymouse
Guest
Anonymouse

@Devore:

"A landlord can conduct a monthly inspection, assuming proper notice of entry is given. He can also also give notice to enter for any “reasonable” purpose. If you think the purpose is not reasonable, I guess you can take it up with the RTO."

Thanks, do you have a link for that? I Googled about a bit and couldn't find such a concise statement.

Boche
Guest
Boche

It is possible that drug crime has made some people in Vancouver rich, but how many new Vancouver millionaires does drug crime produce each year? A thousand? Unlikely, given that drug dealers are not overly fond of completion. But even a thousand new millionaires per year would not account for prices in the RE market.

______

Drug dealing is lucrative – not everyone becomes millionaires but many can make an extra 25k to 100k growing weed easily. You may have an average job (like being a hair dresser) but the ability to buy something instead of renting becomes a reality when you have that extra cash. Throw in loose lending practices, which are key, and that small time grower becomes one of the tens of thousands of "middle class" buyers pushing prices up.

Eddie
Guest
Eddie

The drug is low interest rates, and the dealer is the BOC and the CMHC guarantee….. Period.

shriller
Guest
shriller

I thought the point of the article was that

(1) RE in vancouver is the capital used for grow-ops/meth labs — this is unlike Miami I believe. Here one needs a reasonably anonymous structure (housing) to produce. Even better if the house is leveraged highly since civil forfeiture wouldn't be too costly.

(2) money-laundering works through the re-sale market. Buy a house and renovate. Pay all contractors and suppliers in (drug) cash. Sell the house and deposit the proceeds. Money is laundered.

With (2) one can sell within a `group' because laundered money can be used to seed the re-sale.

I don't think money laundering is working through rents.

It's pretty clear that (2) also like high prices because that leads to more laundering.

But in general RE is both an input to production and an input to dividends.

Devore
Member
Devore
Devore
Member
Devore
Devore
Member
Devore

And the 'plain English' version

http://www.rto.gov.bc.ca/documents/Guides/ACT_Eng… (10.6.2)

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