Why are Vancouver house prices so high?

I think most residents might end up blaming rich foreigners for outbidding locals for houses.

I don’t see that as the initial cause, however, they have certainly had an affect on the high end of the single family house market.

However, the vast majority of homes in Greater Vancouver are bought by locals willing to pay huge sums for housing enabled by extremely low interest rates that allow them to leverage their income to buy million+ dollar homes.

Foreigners account for a small percentage of the number of homes bought. I see them doing this for two reasons.

  1. They saw that house prices were going up and jumped on the bandwagon, speculating (correctly so far) that the price will keep going up. Basically investing in a tangible asset, like buying gold.
  2. They come to live here as a permanent resident as well, because the word on the street is that the Canada Revenue Agency (CRA) will turn a blind eye to them hiding their world income.

So they can live in Canada as millionaires, pay less taxes than refugees, and the government refuses to enforce the law because it is easier and more fruitful to chase local small business owners, who provide a greater return on investment for CRA auditors per hour than trying to fight millionaires with lawyers and going all over the globe trying to prove someone’s world income.

I can’t blame the rich permanent residents too much, even though they are breaking the law. If I could get away with not paying income tax would I? I don’t know if I can answer that honestly, because I haven’t actually had the opportunity.

I do blame the government and the Canada Revenue Agency. They know about the problem, and deliberately choose to ignore it. Probably because these millionaires are giving political contributions (bribes). But that is only speculation.

Middle class ends up paying all the taxes again.

Back to housing, wealthy foreigners have out-bid locals for the most expensive houses. And that certainly has had a ripple effect through the market. But locals are overpaying for the majority of homes. Why?

Interest rates and lack of supply.

They aren’t building any new houses close to Vancouver. Almost all the land is already built on, any available land is going to condo towers. Despite all the towers going up, new condos are apparently not keeping up with population growth.  Basic economics 101, lower supply increases prices.

Interest rates are near all time lows after the great recession. Europe and Japan have experimented with interest rates below 0%. But weird things happen at that point (you pay the bank to keep your money?!)

Interest rates have started going back up again in the USA. They are trying to get them back up again before the next recession hits so they have the ability to lower them again, crazy as that is.

When interest rates go up, the bank will lend people less money for mortgages based on their income. This means less money will be chasing homes, which will bring the prices down.

You can see this is already starting to happen in the Vancouver region, especially at the high end of the market.

However, when the next recession hits, the Bank of Canada will lower interest rates back to 0% and if Vancouverites still have their incomes, they will be able to borrow more money from the bank again. And house prices may come back up again.

But these extremely low interest rates will not last forever. My parents once paid 18% on their first mortgage. Imagine your term ends and you went from paying 2% interest to only 6%. Can people afford to pay triple their mortgage payments?

Once the interest rate climb begins these spectacular home price appreciations will start to drop just as dramatically. People who bought at the top will be underwater on their mortgage (owe more than their house is worth). And the difference between here and the USA in 2008, is that Americans could simply walk away from their mortgages. Canadians who overpaid will be stuck with the debt even if the bank forces them to sell their house because they broke the terms of the mortgage by being too underwater. (Read the fine print).  People could be left hundreds of thousands in debt with no house to show for it.

New homebuyers though will finally have an opportunity to buy at more reasonable prices.

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