SmartAB™ Wisdom #6: Learn From The Housing Bubbles

For the last 6+ years, I solemnly declared that the Canadian Housing Bubble is far worse than the similar bubble in the USA. And that’s the case for several reasons… 

 But beyond the above thesis, a more important question to ask is as follows: what can entrepreneurs learn from how well or how poorly the Housing Crisis has been handled? As it turns out – we can learn quite a lot. And it all boils down to mastering the ability to ask the right question, or as I called it:

“Mastering The Power Of The Opposites”

So, What Is So Bad About The Canadian Housing Bubble?

 For years, we could see the incompetence of the housing policymakers described as:

 “Ottawa policy-makers at large are very, very careful not to do something rash that could affect everybody from coast to coast to coast. They’re trying to be much more surgical and this research will help in that endeavour”.

 Well, I strongly opposed such idiotic excuses in many of my posts over the last 6+ years. For example, in “The Canadian Housing Bubble – And How To Fix It At One Fell Swoop” – I said the following:

“My search for answers brought me to the December 2014 document prepared by DBRS: “Home Price Indices: A Fifty City Comparison - The Best and Worst Housing Markets Over The Past Decade”.

The DBRS study reviewed 50 major housing markets across Australia, Canada, the UK, and the US over the past decade. The most STRIKING finding to me was the fact the first US city, Portland, was ranked as the 21st worst performer. The highest CAGR spots were all taken by Canadian, Australian, and UK cities.

So, I wanted to further investigate what is so unique about the housing bubble in Canada, Australia, and the UK? Lo and behold, it became clear to me, that in all three countries, the real estate market is TAXED the same way:

·         Mortgage interest payments are NOT TAX DEDUCTABLE

·         Capital gains on a prime residence are NOT TAXED

The taxation in the US is exactly the opposite: mortgage interest payments are tax-deductible and when you sell your home, you will pay taxes on capital gains”…  

More recently, in “Elections & The Canadian Housing Bubble”, I reiterated, that as long as the STRUCTURAL problems of a housing bubble are not properly addressed – we are not going to solve the root causes. And once more, I recommended the following:

• Eliminating Real Estate Capital Gains Exemptions - at the time of property sale

• Mortgage Interest Payments Deductibility – to increase homeownership affordability by deducting  mortgage payments from the taxable income of young Canadian families. 

To me, it was hardly a big surprise when UBS published its “Global Real Estate Bubble Index 2021”. I looked at the biggest offenders and found Toronto (No. 2 on the list) and Vancouver (No. 6 on the list) – as expected… 

But since Frankfurt was a clear “winner” - I quickly checked what kind of policies on mortgage payments deductibility or capital gains taxation during the sale of a prime residence are used in Germany… 

You guessed it – these are similar policies to what we have in Canada, UK, or Australia. So, I rest my case… And once more, the first US city, Miami, Florida – was only a No. 12 on this list…

Not surprisingly, therefore, in “Canada Is The World’s Greatest Manufacturer Of… HOUSING BUBBLES”, I said the following:

“If I only had a dollar for each time I see a hopeful prediction that the housing bubble is about to burst. Unfortunately, as I wrote in my previous posts: hope is no substitute for an effective strategy…

 Without far-reaching policy changes, placing the “miracle of change” EXCLUSIVELY on the shoulders of rising interest rates - is as misguided as it is… naïve. As if interest rates were the only tool to consider?

 Have we forgotten about the TAXATION? The last time I checked, the definition of FISCAL POLICY hasn’t changed. It still says: “the use of government spending and tax policies to influence economic conditions”…

Unless foreign and domestic speculators are subjected to a vacancy tax and higher taxes when they hold 5,6, or even 10 mortgages and can deduct 100% of the interest paid – the real estate bubbles will continue to grow… bigger.

For 40 years we are allowing speculators to twist themselves into a pretzel using Smith Maneuvers and Combined Mortgage-HELOC Loan Plans (CLPs). Without changing outdated housing taxation policies not much is going to change - and we are not going to solve anything”

Without addressing the root cause, focusing on the housing bubble symptoms is not helpful. Of course, we will be facing a dwindling housing supply – if we allow the speculators to own 3,4,5, or even 10 income-generating properties – without a higher level of taxation to discourage such practices…

So, no matter how many more units one builds, all will be gobbled up by the foreign and domestic speculators – before the young Canadian families can even finish scanning the listings. Adding additional supply without effective housing policies in place is like pouring gasoline on fire…

But What About the American Housing Bubble?

So, if Canada lacks proper fiscal policies that are the backbone of the housing market in the USA – why are we now beginning to hear more and more about the American Housing Bubbles, too?

 To answer the above question, I asked myself the following:

 “Who are the progressive fiscal and monetary policies helping the most?”

And I am convinced that the properly designed and implemented housing policies would benefit the mortgage holders, the most.

 However, since I always encouraged the entrepreneurs to ask for the opposites (see “My 1001 Entrepreneurial Tales: The Power Of The OPPOSITES”) - my next question was as follows:

 “Who are the progressive monetary policies not helping at all?

The answer: buyers who don’t need mortgages and can pay cash for the houses they buy…

If the Canadian and American housing markets were comprised of only retail home buyers, the policies I described would have worked. Unfortunately, this is not the case anymore. In addition to foreign and domestic speculators, the young families must now compete with institutional investors who buy the homes for cash. No mortgage is required…

So, it’s no longer just the Chinese comrades and the Russian oligarchs that are looking for safe havens to park their money. Who can blame them for escaping China Communist Party and Putin’s clutches, anyway? But if they buy houses for cash and at ease, without the proper safeguards to protect the Canadian and American families – the housing bubbles will flourish…

 Recently, I added another group of speculators to the fray - the fintech startups. Such are raising hundreds of millions and offering “all-cash” immediate purchases of houses to their clients – in exchange for a significant fee or the lucrative lease payments… 

 And when billions are raised by all the “Buy Now, Pay Later” and “Lease To Own” Fintech startups - the young families and individual home buyers are a no match for such “unicorns”.  Especially, when they are financed by deep-pocketed VCs, CVCs, PEs, and hedge funds…

 However, never underestimate the lobbyists working for the institutional investors… We have already heard:

·         “The idea that institutional investors are somehow largely to blame for the current housing market catastrophe is wrong and obscures the real problem. 

·         Housing prices have been skyrocketing due to historically low supply, low mortgage rates, and the largest generation in American history entering the market looking for starter homes”

 Well, remember how the tobacco industry disputed cancer for so long? 

The Solution Is Simpler Than You Think…

 So, if tinkering with fiscal and monetary policies is such a taboo – is there anything else the governments can do? My answer: ABSOLUTELY. The solution to such abuses is quite simple. It’s similar to the way Canadian and American employers need to comply with the Labour Market Impact Assessment (LMIA) regulations…

Regulations such as LMIA, verify that there is a need for the job the employers are offering to foreign workers and that there are no Canadian or American workers to be hired by the companies, instead…

 IMHO, similar criteria can be applied (call it Home Buyer Impact Assessment, or HBIA) - to allow institutional home buying ONLY when there is no retail home buyer interested to buy the property and live in it

 For example, since we already use LMIA to control who has the right to work in Canada and we ensure that the Canadian citizens are not disadvantaged by the foreign workers - shouldn’t we use HBIA to prevent the abuses of homeownership by foreign and domestic speculators?

Just imagine, without the LMIA, what would have prevented greedy entrepreneurs from offering foreign workers to all the Canadian or American enterprises - at a huge discount and much lower wages?

 And yet, we allow foreigners, domestic speculators, hedge funds, and VCs - to take advantage of Canadian families seeking a place to call home…

And one more thing, the blockchain technologies would allow the verification of HBIA compliance and ensure that all such regulations are being followed by legal and real estate industries, too…

In Conclusion

 There is no doubt in my mind that rapid interest rate increases will slow down house purchases. But it will mostly occur due to the higher costs of mortgages and affect the young families that need the home to live in.

 In addition, higher interest rates affect the entire economy and not just the housing market – so it will bring a whole slew of unintended consequences with it.

 To burst the housing bubbles and bring real estate prices down – we need far more innovative approaches to solve the problems. And I described just a few solutions that work…

For More Information

 Please see my additional posts on Linkedin, Twitter, Medium, and CGE’s website.

 AI Boogeyman

 You can also find additional info in my book on amazon: “AI Boogeyman – Dispelling Fake News About Job Losses”, and on our YouTube Studio channel… Thank you.

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Disclaimer: The opinions are my own. If you require professional guidance about taxation, accounting, or legal issues – please contact qualified lawyers and certified accountants. Thank you.