Why Bother With Stocks in Vancouver's Relentless Housing Market?By
Boomers banking on homes for retirement in the money -- so far
‘People told me I was crazy,’ says 45-year-old investor
In the spring of 2012, Dustan Woodhouse, then a 40-year-old Vancouver mortgage broker, broke the cardinal rule of saving for retirement: he liquidated his retirement fund, took the tax hit and plowed the rest into the local real estate market.
"People told me I was crazy," says Woodhouse, 45, whose plan is to buy and have paid off 10 such investments by his late sixties. "But that’s our pension -- that’s what that property is."
Maybe not as crazy as it sounds. Vancouver is among a clutch of cosmopolitan, attractive cities around the globe where the appreciation in home prices is seemingly unstoppable. New-home prices have gained 5 percent since March, the biggest three-month increase since 1990, data released earlier this month show. Prices in Hong Kong and Sydney also continue to soar.
Woodhouse’s decision to flout traditional investment strategies has so far proved to be a winner. With the roughly C$60,000 ($47,000) he had in hand, he took out a mortgage and bought a wood-shingled townhouse near a coastal inlet east of Vancouver for C$240,000. Five years later, he figures his house has risen about 60 percent in value if sales of nearby properties are anything to go by. In the meantime, he’s accrued a nest egg of roughly C$24,000 from rental income, even after accounting for expenses, mortgage payments and taxes.
Vancouver, consistently voted one of the world’s most livable cities, shows just how difficult it is for policymakers to control runaway prices. Despite a succession of government tightening measures, including a 15 percent tax on foreign buyers, the price of the typical detached house surged to a record C$1.6 million ($1.3 million) in July.
“It’s obviously very frustrating for local residents, but I don’t see that buying interest going away anytime soon,” Frank Giustra, a mining and film magnate based in the city, said in an interview. “All this free money has driven assets through the roof in Beverly Hills, London, Paris, all these desirable places."
In the city of Vancouver proper, which includes the downtown and some of the poshest neighborhoods, sitting on a house can be more lucrative than working a job. A single-family property appreciated almost C$600,000 on average in the area in 2016, according to Jens von Bergmann, a mathematician and founder of MountainMath Software, a Vancouver-based data analysis and visualization company. As a group, the value of the properties surged by C$47 billion, more than double the cumulative take-home income of Vancouver’s residents, Von Bergmann calculated.
Eye-popping returns -- coupled with Canada’s reputation as a stable sanctuary -- has made Vancouver a particular magnet for global cash. British Columbia slapped a 15 percent tax on foreign buyers a year ago after data showed more than C$1 billion of overseas cash flooded into property in the region, mostly from China.
The levy had an immediate impact on overseas investor participation but not on prices. Foreign buyers, who accounted for as much as 17 percent of sales by value before the tax, plummeted to 1.8 percent the month afterward. The cost of a typical home fell no more than 4 percent before resuming its climb, according to figures from the Real Estate Board of Greater Vancouver.
That indicates that Canadians, as much as foreign investors, are inflating the market. It’s easy to understand why. The price of a typical detached home in Vancouver rose 69 percent in the five years through July, compared with a return of 51 percent for the S&P/TSX Composite Index, the country’s benchmark equity index, and 7.6 percent for Canadian government bonds. Some 41 percent of baby boomers said home equity made up more than 60 percent of their household wealth, according to a survey by Manuflife Bank published in May. For 21 percent, it made up more than 80 percent.
But as in many asset classes, timing can be everything.
“Especially one that rises really quickly, there can be some really precipitous drops there too,” said Andrew Hallam, whose book on how he built a million-dollar portfolio on a teacher’s salary was a top-selling personal finance book on Amazon, said by phone from Phuket, Thailand. “If wages aren’t increasing by 15 percent a year, then houses can’t. At some point, there’s a tipping component there."
Once they tip, they can take a long time recover: It took about a decade for U.S. home prices to return to the peak they’d reached before the housing market crash and more than 10 years for Toronto to recover levels lost in the late-1980s slump.
"In this environment, every purchaser has become a speculator," says Rhys Kesselman, an economist and public-policy expert at Simon Fraser University. He believes a capital-gains tax on home sales is the way to cool the market. Property sellers don’t pay taxes on gains made from a principal residence in Canada.
"We tax our gains in the stock and bond markets, and small businesses, but we don’t tax the money we put into homes," says Kesselman. "There’s an extra incentive to put our money into housing. Savings and capital are diverted from the productive sector of our economy."
The New Democratic Party, which took power last month, campaigned on a speculator’s tax, suggesting taxing gains on properties that are flipped could lie ahead. It’s propped up by the Green Party, which supports the introduction of a capital-gains tax. Realtors have described any such move as "political suicide" in a country where homeownership is considered a basic right, with many banking on real estate to fund their retirement.
Still, it’s not clear even that would have the intended effect in a city where homes to many appear to be the closest thing to a sure bet. Woodhouse says a capital-gains tax wouldn’t faze him because he never intends to sell. He owns his primary home plus two rental properties, has paid the down payment on a fourth and is looking for a fifth to invest in. His plans to own 10 properties will be funded by working harder, belt-tightening and leveraging the equity in his existing homes.
"If the values fall by half, I don’t care -- it’s going to give me grocery money, clothes, a roof over my head," says Woodhouse, who quotes the 19th-century steel tycoon, Andrew Carnegie. "The way to become rich is to put all your eggs in one basket and then watch that basket."
— With assistance by Erik Hertzberg