Housing Has Become Vancouver's Toxic Asset
The rapidly inflating housing market in the Vancouver area is turning into a system of toxic financial assets that threatens the entire region's economy.
A truly frightening blog from Sandy Garossino, an independent candidate in Vancouver’s recent civic election, highlights a situation that has been scaring quite a few people in this city for a while.
Housing is becoming a toxic financial asset that threatens the entire region.
Before we get into it, let’s look at what a toxic asset is. In the U.S., sub-prime mortgages were a toxic asset because they were converted into financial instruments (derivatives) that had no real value, but were continuously traded for ever-increasing prices until, eventually, the banks that were promoting them couldn’t back them any more. We’re all familiar with the results – massive writedowns and a whopping recession that’s still playing out.
Vancouver is undergoing something similar, Garossino indicates, because it’s allowing housing to be bid ever higher and far beyond its intrinsic value. As a result of this massive monetization of housing, the entire city’s social and economic scene is under intense pressure and is threatened with collapse.
Garossino mostly zeros in on how houses on the city’s west side have become just another asset to be bought and traded, often by people from outside the city who have absolutely no interest in living in them. While campaigning, she ran across entire blocks of expensive homes where perhaps only one family lived.
The houses had become just another abstract financial instrument.
But, of course, overall, houses aren’t financial instruments, they’re homes. And ordinary people who don’t make the kind of incomes needed to support mortgages for these overpriced houses have to live somewhere. So, when prices rapidly escalate like they are here, they move to where it’s cheaper.
This has resulted in Vancouver’s east side, where prices have also escalated, being turned into a bee’s nest of illegal suites that are crammed into supposedly single family homes, thus offering almost-affordable rents.
People who don’t want to be warehoused in some illegal suite leave the city. Many head for suburbs like Surrey, where the population is booming with these displaced people and businesses (which are also affected by rising prices for buildings). That pressure forces up prices there as well.
Many more – particularly the young who receive some of Canada’s lowest wages – simply flee the region, opting for Alberta or Ontario, which might not be as cool or pretty, but at least offers jobs and decent places to live.
So how do all these trends come together to create toxicity?
Well, eventually, it has to stop. When houses are continually traded for ever higher prices, the entire balance of population and housing becomes extremely distorted. Eventually it reaches such a distortion that it breaks.
Throughout history, we have seen that asset inflation can’t go on forever. Either a giant crash comes eventually, or – if there’s some sense around – authorities step in to slowly deflate the bubble to prevent catastrophe.
It’s time authorities here moved to prevent our own toxic assets from poisoning the entire region instead of gleefully scooping up the higher taxes they generate.
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Scary picture, but how real is it
Submitted by Tony Wanless on Fri, 2011-12-09 11:25.Alistair:
I guess it's semantics: one person's price "depression" might be another's price "crash". Of course, housing will always have some value -- houses are hard assets.
But value is a relative term and even the value of hard assets can be inflated and correspondingly deflated. In the process of deflation, many people's version of wealth is obliterated.
That potential obliteration is what makes inflated housing prices "toxic".
Many people will lose big when this game of musical chairs stops, and not just the people who (supposedly) own houses. That kind of wealth deflation has ripple effects all over the local economy.
I've heard all the stuff about Vancouver being one of the most desirable/liveable cities in the world, but it sounds to me like people convincing themselves with the usual real-estate hype.
No place is desirable or liveable when people can no longer afford to live in it. Neither is it desirable as a wealth generator when it gets near the top of the real-estate cycle and drives people away or prevents people from coming here. We are already seeing people flee Vancouver because they simply can't afford to live here.
Vancouver has seen several of these inflation/deflation scenarios throughout its history. Invariably a period of rapid real-estate inflation (not backed by any other kind of wealth generating industry)results in a long period of poverty or stagnation when the music stops.
All cities have areas populated by the wealthy. But most also have areas where the non-wealthy who do most of the work can live. Vancouver appears to have eliminated those areas, or covertly created them by allowing expensive houses to be turned into illegal apartment buildings.
This cycle is being driven by wealth that's pouring into Vancouver, not only from offshore, but also from other parts of Canada, and also from those in our own population who want to get in on the game.
But, eventually, this has to crack. Nothing grows forever, and some day the prices will be too high for even the holders of wealth or those who pretend to do so.
Will we be turned into some kind of wasteland, a la parts of California? No. But we may go through a long period of poverty as a result of our greed.
Scary picture, but how real is it?
Submitted by alistaircalder on Thu, 2011-12-08 16:45.There has been a lot of discussion about this recently and I'm concerned about the picture it paints of Vancouver's housing market.
However, comparing the housing market in one of the most desirable/livable cities in the world (judged by various organizations and publications) to sub-prime mortgages is a stretch. Zeroing in on your words:
"sub-prime mortgages were a toxic asset because they were converted into financial instruments (derivatives) that had no real value, but were continuously traded for ever-increasing prices until, eventually, the banks that were promoting them couldn’t back them any more"
The problem I have is that these are hard assets with a guaranteed value at some point. It's true that the value may be below what the market can bear which could result in a housing depression, but I am not convinced that "... a giant crash comes".
Speaking of which, and I would like to get your comment on this, how would you see a crash play out in the city of Vancouver? Let's assume for a moment that the predictions are true and a "crash" (you can use your own definition for this) occurs. Does that mean the houses and property will have no value? Doesn't it follow that other investors will come in and scoop up property at sub-market value?
In my thinking, Vancouver will remain a favourable place for people to live even if there is a huge market correction and houses will be snapped up by those who currently cannot afford to move in the market.
So, perhaps I am not seeing the bigger picture. Can you comment?
Over-Value Equates Disparity
Submitted by J on Tue, 2011-12-06 17:03.This is profound, I've yet to see the television media make or give good coverage of this topic.
The ramifications are devastating in that it really makes this coastal place, "as Vancouver _is_ coming into its own" -so to speak (as an internationally recognized global beautiful place), a place that will also suffer the very societal collapse through this wonderful fact -by, in fact, an over-pricing in liveability of and from its success and beauty, again, so to speak.
What comes to be something we can be proud of -the City itself- is then given over to greed -the dirtiest thing a City could not afford.