Speculating on Vancouver's flippin' real estate market

Speculation in real estate is a big topic in Vancouver. For those not familiar with the term, it's the notion that you buy property for the purpose of reselling later at a profit. The problem lately in the Vancouver real estate market is that we are seeing this happen at an unreasonable pace.

Unintentional speculators

We bought our first house for sale by owner in the late 80's for $97,000 and a Chinatown parking pass for five years. Now that’s a story in itself, but it was the start of my interest in real estate and my awakening to what is now the last tax exempt bonus we have -- The Principal Residence.

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It wasn’t our dream home so years later we had it fixed up and sold it for $256,000 -- no tax payable. The next house ended up being in a very noisy location, so we moved again. Each time we were able to upgrade our house a little bit with every move, a bigger home or a better location.

In hindsight, we were unintentional speculators. Selling the home at a higher price enabled us to slowly move to where we wanted to, and could not have afforded to, the first time.

We all know someone that seems who seems to do this kind of activity as a living. It's not possible, by the way, to keep doing this for too long, because Revenue Canada will find out and consider this a source of income if a person sells too often or doesn't seem to have any other meaningful income. How many homes is too many is unclear, but if you're trying to flip three houses in 10 years, I would recommend getting some legal or accounting advice.

Upgrading and reselling

In the course of upgrading our homes to a slightly bigger or better home each time, my family had renovated and resold four homes. Each time we were making a little more money. The thought of moving with three kids isn't fun, but this process of finding hidden gems and cleaning them up is quite addicting so I decided to get my Real Estate license and help other people do this.

But it has now become harder and harder to do so. The prices on the market today are exceedingly high. How can a person add value to a property that is selling now for 20 per cent more than it did two or three years ago, with no upgrading done to the home? 

Were people like us speculating partly to blame for the current high prices for the state of the real estate market today? 

I don’t think so.

Back in the days of adding value, you bought a place and renovated the kitchen, bathrooms, entrance and yard over the years, then tacked on a profit and resold. There is value added to the home. 

Today, however, speculation in real estate is a much faster and higher stakes game.

Speculation by foreign buyers

We have all heard about the foreign buying issue.

Hundreds of thousands of dollars are added to a home for no reason other than there is someone out there willing to pay it. I know of a brand new big house in my neighbourhood (West Vancouver) that sold for $4.3 million two years ago and is now listed at $7.3 million.

I don’t believe anyone ever moved in -- the home just had a few visitors.

Is this healthy for our community? The concern now is the rate at which these prices are escalating. This is, I believe, largely a result of foreign buying. Foreign buyers are looking at a global economy and see Vancouver as undervalued compared to other large cities. Vancouverites don’t earn the types of salaries that people can earn in London or New York, however.

I've heard numbers in the press of around 15 per cent of transactions being offshore buyers. After discussing this with colleagues, I would say certain areas like Westside and West Van would probably be two, maybe even three times that. But is this a problem? Does it really matter who is speculating, whether they're local or foreign?

It becomes an issue when a large amount of non-resident foreign buyers buy up small neighborhoods. Where will the people go that need to live and work here live?

Keeping track: who's buying? 

We almost need to separate the issues of speculation and foreign ownership. Why don’t we keep track?

I would think the Canadian government should know this -- or Stats Can -- as this could be valuable information. There is a box to check off on the MLS contract if the buyer is a resident of Canada or not and I am not sure if anyone checks that. Instead, they currently resort to using the database where the B.C. tax assessments are mailed.  I have seen contracts written by foreign buyers using a local address…gee, I wonder where the assessment would be mailed?

We need to start tracking the amount of foreign buying so we can make knowledgeable decisions with facts instead of estimates.

What is happening now is not just foreign buying for speculation but also people finding a safe haven for money. More than just being a safe haven, Vancouver real estate is a great investment. Do you blame someone for selling when their investment could yield a million dollars in profit?

But what about the problem of lack of affordability? Where will the people go that need to live and work here live? To the people who have been saving to buy a home, it must be incredibly frustrating to see the goal posts moved out another $500,000 each year in some areas.

Independent city council candidate Sandy Garossino really brought the affordability issue forward this past election. Mayor Gregor Robertson and Olga Ilich are the co-chairs of a new task force set up to deal with this. It won't be easy, but there seems to be a collective will to do something about the issue this time.

Will the government try to slow speculation or foreign buying?

The province will most likely sit quietly and do nothing as it has the best money making scheme solidly in place -- the Property Transfer Tax, or PTT. Can you imagine what they are making on that now? I thought it was crazy they could tax a used car over and over again, but a $4 million dollar house?

As for the feds, I'm not sure they're going to complain about money coming into Canada in these tough economic times.

It is the City or the Districts of these affected municipalities that will have to tackle this. I think they may actually suffer. They don’t get new tax revenue and many municipalities are slowly going to user pay systems. If the house is basically empty and no one is using the facilities available, then no one is paying into them. If less people are using the local bistros, florists and dry cleaners and those close down, that will affect the municipality. When the fire fighters and police and teachers can no longer afford to live here, they will be asking for more money or they will leave. Ultimately, it will probably be the municipalities that will have to deal with this issue as they have the most to lose.

In the meantime, there may be some stabilizing in terms of foreign buying. For example, Canada is no longer accepting any down payments coming from Iran, due to the new sanctions obligations. Those who bought already can continue to play with their money here in Canada, but the money in Iran will stay there while the sanctions are on.

China has attempted to slow the amount of money leaving the country. There are now restrictions on the amount people  can bring out of China and the loophole of using several bank accounts is closed. I've heard some investors have found a way via Hong Kong to get money out but I haven’t confirmed it. Again, those that already bought may continue to flip but it is getting harder to get those big down payments. So perhaps we will see a slowing down of the foreign buying issue. But until the city starts tracking this, people won't really know.

I don’t believe the government should start messing around with regulation in speculation. I know there is something wrong when shelter is the best money-making gamble we can take but it is all we have so I am not going to diss it.  (The stock market was worth playing when we had a $100,0000 tax-free capital gains exemption, but even that is gone.)

Old school speculation, where you added value or bought low and held on through changing markets till you could make a profit, that should stay. We have created many jobs in the area of home improvement .

Besides, it’s the only way my children will be able to move from condo to townhouse to house if they so desire. It’s the only way we can build our nest egg, as the stats show Canadians aren’t saving. But we'll have to find innovative ways to live in the areas we want.

More on that next time.

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