This is a weekly thread for people to discuss international news, foreign policy or IR history. I usually start off with coverage of some current events from a mix of countries I follow personally and countries I think the forum might be interested in. I’m increasingly doing more coverage of countries we’re likely to have a userbase living in, or just that I think our userbase would be more interested in. This does mean going a little outside of my comfort zone and I’ll probably make mistakes, so chime in where you see any. Feel free as well to drop in with coverage of countries you’re interested in, talk about ongoing dynamics like the wars in Israel or Ukraine, or even just whatever you’re reading.
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Notes -
Posting here for better visibility, was posted in last weeks thread.
Today we're going to discus the most exciting topic ever, Canadian real estate!
I'm largely just talking about Ontario, but Vancouver has also had crazy real estate for decades.
Toronto area real estate is famous for being a bit odd. California prices without California salaries. Or California weather.
There's a post on Reddit (circa 2022) showing similarly sized homes in Niagara Falls, ON and Niagara Falls, NY. 11 minutes apart. The US home was listed at $69k. The Canadian home was listed at $1.18M. That was about 900k USD at the time. That house was a bit of an outlier, but average sale price in Niagara Falls, ON was $617,100 (445k USD) vs $215.3K in Buffalo, NY.
And Niagara Falls is outside of comfortable Toronto commuting range, where the high paying jobs are. To get to downtown Toronto for 9AM Google maps recommends leaving at 6:10AM. Median household income in the city is $74,500 (54K USD).
When you get closer to Toronto, things get worse.
So how did we get here?
First cities learned that taxes on new construction were an easy way to get money without upsetting current residents. A new detached home typically has $186,300 (135k USD) in development fees*. I've heard people argue that it's higher if you calculate interest accrued due to government delays, often caused by no hiring someone with connections to work the system.
Combine that with high immigration and there's a significant structural housing shortage. Toronto has 360 housing units per 1000 residents. The US has 427, France has 540* all 2020 numbers.
Next there's the foreign investment issue. Some of the details here aren't proven since they aren't knowable for obvious reasons.
25 years ago China was less stable but getting richer. It was difficult to move money out of the country but wealthy Chinese could buy a home in Vancouver if they were frequently there for business or a condo for their kids studying without upsetting the CCP. This turned into smuggling money into Canadian real estate as a safe nest egg, and the Canadian government told regulators to turn a blind eye.
Things escalated into serious money laundering.
Again, I'll admit this is unproven before anyone jumps on me...
But Mexican narco gangs produce fentanyl in Mexico with precursor chemicals from Chinese companies. The fentanyl is sold in the US. The US government watches for big unexplained transfers of money going back to Mexico or to the Chinese chemical companies.
So they are using Canadian real estate to close the loop. The chemical companies sell the debt to a broker. The broker finds families in China who want to pool their money and get it out of the country. Then he connects with the narco gangs to transfer the money to be used in a home purchase by one of the family's kids studying in Canada.
But back to better grounded discussion.
The constant rise in home prices made house flipping and rental properties common. Airbnb became a driving force behind tiny expensive condo construction.
Then covid hit.
Canada had some pretty extreme covid lockdowns. This drove up home prices even more. And home flippers started buying home far from Toronto. Prices in small towns exploded.
However, the rental market in cities was hurting as living in a small apartment when everything is shut down for months is not fun. However a lot of federal politicians have invested in rental properties. The previous minister in charge of affordable housing owned two rental properties with hefty mortgages.
So the feds came up with a way to turn the city rental market around fast. In 2019 they had issued 404,000 new student visas. In 2022 they loosed up restrictions on employment as a student and brought in 551,405 new students.
No thought was given to where these 150k additional new students would live. See the housing deficit since 2020 as above.
Or work, as they all (and a big chunk of the other 400k) came in with the promise of being able to work 20 hours a week and assumed they could all land a part time IT job at least.
There are mass line ups for fast food jobs and stories of rented homes with 10 students living there.
But back to real estate.
A few things happened in 2023.
Business have been phasing out work from home, and commuting from that small town where they bought a house at the peak of the market in 2022 isn't manageable long term.
Interest rates have spiked. This is worse in Canada because mortgages typically renew at the current interest rate every 5 years. With the rate spike your mortgage payment can double or more.
Airbnb income has collapsed due to economic fears. This is happening across the US as well.
The Chinese economy is in trouble. So many people want to dump their investment properties in Canada because they need the money at home.
What's the result? A total shit show.
First there's the pre-construction market. A buyer puts a 20% down (35% for non Canadian resident) and is obligated to buy the house / condo when it's complete.
People were buying these to flip before closing. It was seen as a safe and easy way to make money. They couldn't actually afford the mortgage on the new place, but figured they couldn't lose money.
The risks were significant. If they don't close the builder does an assignment sale and the original buyer owes the builder for any shortfall from the agreed purchase price.
A quick Twitter search for an example turns up an assignment sale where a 2.2 million dollar home (1.6M USD) is being sold at a 332k (240k USD) loss after agent fees.
It's not an isolated example.
The new ultra luxury condo building at 1 Bloor West, marketed as "The One", has entered receivership with $1.2 billion in loans already in default (870M USD).
The normal sale market isn't doing well either. Ontario is in a weird situation where there's a glut of luxury homes but still a severe shortage of homes people can actually afford. Everything has been renovated and flipped. I don't think they've built a two bedroom starter home in the past 30 years.
There are some good Twitter accounts tracking real estate price crashes:
https://twitter.com/jasongofficial
https://twitter.com/ShaziGoalie
Again keep in mind it's just beginning. Investors are still trying to diamond hands it, but the mortgage resets are coming and there just aren't enough people with piles of cash who actually want to live in Ontario. They can't HODL forever.
Go to https://www.realtor.ca/ and search for Toronto homes over 1.5 million. Zoom out. There just aren't that many people in the province looking to buy homes at that price. Especially look at all of the listings in the middle of no where.
People have been joking, with less exaggeration than you'd expect, that during covid speculators purchased the entire town of Bancroft, ON and are now desperately trying to flip it.
WTF. Are Canadian governments literally retarded? Obviously they get that taxes aren’t an infinite money tap and have second order effects, it sounds like they picked these second order effects because they knew that.
Non-residents can't vote in municipal elections; native residents have, in essence, already paid the tax by virtue of having a house, since the cost of new construction being artificially raised by that tax in turn raises the value of your home. Which also effectively raises property tax revenue without having to suffer the optics of having to raise the rate (and might even allow the city to lower it, which residents will remember for a long time).
Of course, that's also a massive tax increase against the children of Boomers, since especially with life extension that generation won't be able to inherit the house until they're in their 50s or 60s (women have hit menopause by that point). Obviously the solution is to raise taxes on existing residents, but a democracy that does this won't survive past the next election even if a significant minority agree that fixing the taxes is badly needed.
(Honestly, COVID responses were this dynamic compressed into the span of 2 weeks: people over 60 are scared of the flu, so they impose a 20% inflation to have a 0.001% less chance of dying of it that affects liquid assets, but not solid ones, like land. So prices jump up yet again.)
But why fix the problem for the people living in the country already (who aren't getting rich) if we can just import people who are already OK with living in conditions/environments far better than their home country? It's all in service of this fucking bubble; I wonder if we've passed the South Sea Company in its scope yet?
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They do this everywhere they can. The justification in Sweden the municipalities use is that they have to sell the land at "market rate", which of course they are in complete control of...
It seems like the presence of places which do not do this then requires explanation.
I'm not aware of any place where the explanation isn't very simple and also not replicable for places this happens, especially since you become ever more path dependant as the market inflates.
More strictly, I'm not aware of any place that has fixed this issue though policy, and for good reason. The incentives are very strong for everyone that gets a say.
How do red states in the US(which are democracies and not particularly concerned with making life better for renters and young people at the expense of old people and owners) avoid this trap? For that matter, how does France?
During the early industrial era all the old buildings got covered in soot. Most countries tore down the old ugly buildings. France realized that they could power wash them and restore the old lovely architecture.
So the downtown core became a place for rich people to enjoy. When brining in refugees and poor migrants Protestant countries got this idea that the new arrivals deserve to live downtown. France was more elitist and decided to build towers in the suburbs for them.
So there's a long tradition where the government has the power build high rises in cities around the metro core.
Additionally people in Anglo countries refuse to think about HBD crime theories. So, at least in Toronto, people commonly believe that high rises cause crime. It ends up being sort of true, because lefty activists believe it's wrong to evict drug dealers and addicts. As a result it's impossible to build a new high rise and fill it with well behaved residents who happen to have a median income.
So French elitism traditionally protected the downtown while ensuring housing gets built outside the core.
In red states it's just that there is a lot of cheap land and no scenic views to be disrupted. So people don't fight new development.
In my experience of living in multiple Red areas that were (or are) undergoing development booms, it's that Red Tribe people generally are effectively YIMBY, or at least YIEBYBINMJTTYWTDWYL (Yes in everyone's back yard because it's not my job to tell you what to do with your land.)
As a very strong example, I once lived in a rural area gradually on the edge of becoming suburban. The state and county has long had a policy of "fence me out" in regards to animals. That is, if I have animals, and you don't want them to wander into your property, then fence me out. You can't make me build a fence, it's my land after all. There was a lot of conflict over this with the newcomers, and eventually transplants pushed to change the law. Locals never tried to block the new development, but they did try to block any changes that made things more restrictive or added rules. Eventually they were outnumbered, and now it's pretty typical city government with your standard NIMBY rules, and the culture I love continues to vanish.
It's one of the many reasons people say "don't bring California with you" when people move from more populous areas.
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Good post, but I've been waiting for the housing crash for 20 years and have become convinced that it will never happen without massively cutting immigration rates. Enjoy the slightly decreased prices for a season and then hold on for the next run up...
Yeah the only way housing is coming down is if building housing becomes immensely faster/easier/cheaper (which will never happen because homeowners won't allow it) or if the population goes into decline (which will never happen because the powers that be will never allow our Ponzi scheme of an economy to collapse.)
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I kind of doubt it's going to happen even then because of internal migration. What I think will happen is that the marginal places might see a crash (or just continual decline) but where you'd actually want to live (IE where there are jobs and services) will at best see a mild decline or stagnate.
This is absolutely true, and if for no other reasons it's because the major cities are so unbelievably undersupplied in housing. This estimate puts it at a need for over 4 million more housing units in San Francisco alone being needed: https://www.theatlantic.com/ideas/archive/2022/11/us-housing-gap-cost-affordability-big-cities/672184/
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Yeah the housing bubble was supposed to be popping in Vancouver back in ye olde 1980s when interest rates pushed a nice place down to like $100K -- for a few years, then a steady climb until the mid naughties, now that place is a couple of million.
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