"The Deals Are Collapsing" - Vancouver's Housing Bubble Has Burst

Tyler Durden's picture

When a week ago we reported that in a long-overdue decision, the British Columbia government finally cracked down on Vancouver's unprecedented "Chinese hot money" driven housing bubble by implementing a 15% property tax (which we had advocated for one month earlier), we said that "with today's tax, Vancouver's real estate nightmare in which local housing had become the "new normal" anonymous Swiss bank account, and also made real estate virtually unaffordable to local, hard working Canadians, is finally set to end."

However, not even we were confident that a 15% tax would be "prove to be a sufficient deterrent to future Chinese buyers." Now thanks to the Financial Post we now know that not only was the tax sufficient, but it has led to the prompt, much anticipated, and generally welcome bursting of the Vancouver housing bubble.

As FP writes, on Thursday and Friday of last week, realtors and lawyers were desperate to get in under the tax hike deadline, and filed a record-setting 15,000 property transfer applications on the last two business days before B.C.’s punishing new 15-per-cent tax on foreign property buyers went into effect. As a result, more than 9,200 transactions were filed on Friday, breaking the 2007-2008 record of more than 8,400 in a single day, according to the B.C. Land Title and Survey Authority. It also reported over 5,800 transactions on Thursday, representing nearly as many deals registered at month’s end in April. 

The demand was so heavy that it crashed the land titles office’s electronic filing service on both days, the authority said.

That was last week. What about now that the tax is in place? As a new dawn breaks in Metro Vancouver’s real estate market, realty companies and real estate boards are reporting the first anecdotes of deals falling through as foreign buyers forfeited deposits on binding deals rather than pay the new tax. Worse, if only for the unprecedented local housing bubble, and certainly better for potential local homeowners who were locked out from the massively overpriced market, they report evidence of local buyers withdrawing offers in expectation that the market will soften.

Elton Ash, executive vice-president of Re/Max Western Region, said it is too early to accurately quantify how many deals fell apart, but he’s heard from realtors in some of the company’s 30 Metro Vancouver offices of cases where foreign buyers who couldn’t rearrange previously negotiated closing dates have already walked away.

Our expectation is that there will be a percentage of transactions collapse due to the buyer basically defaulting on the contract,” Ash said.

He said that while it may take up to two or three months to gauge the full effect of the new tax, the outcome appears clear: the bubble has popped.

Next up: a court bottleneck which may cripple the home purchasing process for months, if not years. Jonathan Cooper, vice-president of operations at MacDonald Realty, expects many cases to go to court because deposits are held in trust by realtors and usually can’t be released without a court order. “I think the next chapters in this story are going to be written by lawyers,” Cooper said. “There are going to be cases for sellers trying to get the deposit out of trust and maybe suing the buyer for specific performance trying to get them to complete, and/or for damages if they are not able to find a buyer at a similar price point.”

Good luck collecting from the Chinese oligarch buyers.... or even finding them.

But the most dramatic impact will be on future transactions. With the soaring uncertainty about the future rate of home appreciation, and the availability of "greater Chinese fools", buyers will be far more pessimistic and cautious about paying the asking price, or engaging in the kinds of ridiculous auctions profiled here before, such as that of a house valued at $16 Million, selling for $68 Million "In 7200 Seconds."

Quoted by FP, Dan Morrison, chairman of the Real Estate Board of Greater Vancouver, said he’s heard of instances of Canadian buyers and sellers who backed out because of the uncertainty in the market. Philipp said one of his offices reported four cancelled deals as a result of the tax, while another reported five failed transactions on Friday alone, with one directly tied to the tax.

“There’s a domino effect here. One deal collapses, there’s so many other deals impacted by that,” Philipp said.

“I’m getting people coming to our open houses saying, ‘this means the prices are going to come way down,’ said Re/Max realtor Dave Vallee.

* * *

Last week we concluded by saying that "the good news is that if the transaction tax succeeds, Vancouver housing is about to become far more affordable. The bad news is that if it leads to a selling scramble, the worst case outcome - one predicted by the OECD at the start of June, namely a "disorderly housing market correction" - may have just been triggered leading to a dramatic collapse in Vancouver home prices."

It now appears that the worst case scenario may have been unleashed: 

Cooper said the tax, rather than stabilizing the market, appears to be harming it. “When the government intervenes in the market this way and imposes costs that are retroactive … that almost by definition introduces an element of instability in the market.

Perhaps, it will be ironic if as a result of the government intervention, what was until recently the world's biggest housing bubble, quickly morphs into the world's most violent housing market collapse.

On the other hand, considering the latest data just released from the Real Estate Board of Vancouver, according to which home prices rose 32.6% in July from a year ago, with the average selling price of a single-family detached home in the Greater Vancouver Area rising 38.0% to C$1,578,300, even as the actual number of sales collapsed by 18.9% y/y in July, we have a feeling the local population will be far more excited by the option of finally being able to buy a house at an affordable price, than the consequences of having to nurse what will shortly be a burst housing bubble for the ages.

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drink or die's picture

How many tulips does a house there cost now?

junction's picture

Depends on whether the tulip is black or not.  Black tulips are valuable.  Unlike black presidents like Obama, who are a sign of impending world disaster.

Pigeon's picture

He is only really black (in the sense of being malevolent) in his heart. Otherwise, he's a wanna-be. Of course, Warren at 1/32 Cherokee is an Indian, so what the hell do I know?

y3maxx's picture

Canada and in particular Vancouver and Toronto are looking very very safe R E locations with W W 3 on the short term horizon between USA and China.

ParkAveFlasher's picture

I'd have cash-at-hand ready to jump on anything and everything after the internment camps open and confiscations start piling up. Just saying.

MalteseFalcon's picture

Just like in the mid 2000s, when RE goes to hell, the FED is powerless.

 

This bubble is too big.

Laowei Gweilo's picture

a couple slimey real estate AGENTS anecdotally reporting that there's a decline in deals a week after there was an unprecdented surge is incredibly useless evidence that Vancouver RE is crashing lol

most of the RE agents I know in VAN are purposefully fear mongering cuz they're pissed off. 

 

not saying it WILL or WONT crash. but seriously, trusting a couple RE agents from TWO DAYS (monday was a holiday) of data is insaaaaaaane.

 

seriously, would any of you trust a car salesman or stock advisors based on a couple anecdotes like that? and you're going trust VAN RE agents, which are about as slimey as all the Florida and Arizona mortgage NINJA mortgage pushers circa 2005-2007?!

 

not only that, VAN RE is still cheaper in real terms (price in YUAN weighted against Beiing) after the tax than it was 2 years ago, and barely 5-10% more expensive than last summer pre-oil crash. relative to other RE, VAN is still a better deal than back home or compared to the other tax rates in US or AUS.

this hurts RE agents more than investors because their comissions are based on margins, and the tax hurts margins far more than the real value of the house.

 

and again, not saying VAN won't or cash crash... I HOPE it does cuz i can't effing afford property in either bejing or van. but citing a vancouver real estate agent and what he's heard after two days is insaane... if he was saying the same thing about any other investment asset you wouldn't give him two shits.

Al Tinfoil's picture

That wailing sound reverbrating from the local Vancuver mountains is from the real estate agents who are mourning the puncturing of their market balloons.  This will soon be followed by wails from local speculators who bet the family jewels on the Greater Vancouver market continuing to inflate like a mushroom cloud.  

One of the most popular games for the last 10 or more years was to sign up to buy yet-to-be constructed condominiums.  The deposit required was only about $5,000 per unit, and completion date was usually 12 to 24 months away.  The buyer could flip the purchase contract at any time up until the actual sale completion date, and often the price inflated by several tens of $Thousands during the waiting period.  The percentage return on investment has been huge.

  Condo developers would set up sales offices with detailed floor plans of future units, and on the opening of sales day, could expect long lineups of purchasers wishing to tie up one or several units.  Recently there have been stories of people selling places near the head of the lines for $20,000.  But only a small percentage of the "purchasers" had any intention to actually buy a completed unit - they expected to flip the purchase rights for a large profit before actual sales completion date.

As the 1989-1991 Tokyo run-up and meltdown showed, bubbles can continue as long as there are sufficient purchasers who will actually complete a purchase, while most market activity is just speculators flipping purchase contract rights without actually having to complete a purchase.  Once the supply of actual purchasers became tight, the flippers had to face actual sales completion (which many were unable to afford) and so the flippers were forced to offer their contracts in an attempt to escape, but flooded the market with falling prices, and the whole bubble market collapsed with astonishing speed, bankrupting many speculators and their financing banks.  For decades after, Japan struggled with the legacy of the Tokyo bubble and the financial devastation that refused to go away and which Japan refused to acknowledge and clear out.

Recently China put in place more measures to control capital outflow, and there has been an apparent slowdown in the purchases in Greater Vancouver by non-resident buyers as a result.  Now the local government has imposed an extra 15% purchase tax on non-resident buyers, sending a chill down the spines of local speculators.  With the supply of actual end purchasers falling, the speculators may soon create a Tokyo-like crash as they try to escape their contracts.

Houses Depreciate's picture

The housing meltdown is already underway. And this one will dwarf the previous correction.

Houses Depreciate's picture

Borrowing a lifetime of earnings to buy a rapidly depreciating asset at a 300% premium isn't "safe".

anarchitect's picture

What are you, a shill for the Vancouver Real Estate Board?

The tax only applies to Greater Vancouver.  The Okanagan will probably become the next bubble.  Actually, it still is something of a bubble.

JustPastPeacefield's picture

Not true. She isn't even 1/32 Indian. In fact, one of her ancestors participated in the Trail of Tears. How's that for ironic, and ballzy on her part. 

FreeMoney's picture

This is a perfect example of how taxes are actually punishment, and cause behavioral change.  The dickweed statists want us to think taxes are about raising revenue so they can do their goods works.

ParkAveFlasher's picture

Good works are for the religious.  Charity is voluntary.  If you are paid for it, it is not charity.

Houses Depreciate's picture

Doesn't make more sense to go after the masssive mortgage fraud there? It is for that reason prices are massively inflated 300% higher than long term trend. Prices will crater sooner or later. Why not make it sooner and correct the market?

Quantum Bunk's picture

I AM NOT BUYING THIS YET. TOO EARLY.

Ex-Oligarch's picture

I thought this bubble was inflated by cash sales, no?

Ex-Oligarch's picture

So in your understanding, who exactly is lending to these foreign purchasers?

Schwarze Tulpe's picture

Black tulips are valuable.    Mmmhmmmm, indeed they are.  

oneno's picture

With rampant world over-population and increasing disparity between classes as a result of the new fudalism installed in Canada, the holders of money and fiat will decide the outcome of Vancouver's Housing Bubble.

Pigeon's picture

I find it a bit hard to believe that the 15% tax was the only thing causing deal failures. AFter all, weren't these folks bidding 10, 20, 50% more than ask-price?

Son of Loki's picture

The Chinese government has more then tightened again on those money transfers overseas.  Not as easy as before and there is so much fraud from those people hwo say they'll help you transfer your $200k that the transfers have plunged. Plus, there's other opportunities now in Japan and elsewhere so that may account for some diversion to other safer markets. Safe for now, anyway.

Bastille Day's picture

Right.  A 32% increase in price yoy.  15% tax is just that, a tax for these people.  Besides, they will just move on to the next bubble.  Up next, Toronto?  New York?  

Sam Spayed's picture

Why Vancouver anyway?  Why not Seattle, Portland, etc.?  Is it because Canada has easier immigration standards?  Hey, they can just pay Khizr Khan's law firm to get them into the US.  However, this will cost them dearly.

Quantum Bunk's picture

Its a bubble. Why the nasdaq ? why not the DOW ?

August's picture

One advantage in the Canadian column is that a Chinese investor who obtains residency or citizenship in Canada does not fuck up his tax filing status for the rest of his life, as typically happens to a new US Person (assuming they play by the books).

armageddon addahere's picture

A 32% price increase while the Loonie is falling 25% is a small increase to a foreign buyer. But everybody hates to pay taxes. Remember if the price goes up it is more valuable when you sell while a tax is gone forever,

highandwired's picture

yes...and now...they have to pay a tax of 15% for each one of those WASH bids.  Money laundering doesn't sound all that exciting when you have to pay 15% tax every time you want to launder some.

buzzsaw99's picture

:nelson points: ha ha!

RadioFlyer's picture

Pssst, trade you this tanker of Maple Syrup for that 4 bedroom rambler...

 

http://modernfarmer.com/2014/01/illustrated-account-great-maple-syrup-he...

One And Only's picture

If you look at all the shitty real estate and whose selling it they're almosttttt all Chinese names. 

Rich Stoehner's picture

Wutch u tulking aboot eh?

pitz's picture

3 years of stagnation, and they're finally acknowledging it.  Right on schedule. 

Richard Head's picture

You still insisting there's no Chinese hot money in the Vancouver housing market?

pitz's picture

Of course because there isn't.  There might be Chinese in Vancouver's housing market, but there's little to no external money.  Just big-ass mortgages.

Bay of Pigs's picture

Apparently you didnt read the article.

You're a stooge buddy. Go peddle your bullshit somewhere else.

Houses Depreciate's picture

That is correct. It's all dumb.borrowed.noney.

nailgunner44's picture

A lot of slimy yellow scenester worms slithering around in here.

Houses Depreciate's picture

Houses are inferior depreciating assets that cost you money every day you own them.

CarpetShag's picture

Tylers, please provide a logout button on the mobile website. Thanks.

pashley1411's picture

Since when does a government impose a tax "to protect the market"?   The government imposes a tax for more revenue; was there a sunset clause?

A 15% transaction tax simply moves the dot on the supply-demand curve.     The driver is still the demand to move hot money from the mainland.

Houses Depreciate's picture

There is no "hot money" or "cash deals". It's all dumb, borrowed, money.

Make_Mine_A_Double's picture

VBC realtors need to run hot lesbian adds for housing.

Say like Janet Reno and Rosie Odonnell in REI gear have a carpet munch on the deck over looking the harbor.

Stormtrooper's picture

Wait a minute!  Are you telling me that Janet Reno is a woman?  Huh?