It seems a day doesn’t go by that we don’t see another eye-popping report pointing to skyrocketing prices in Vancouver’s real estate market.
But are properties really worth what they’re going for? Canadian real estate consultant Ross Kay doesn’t think so – and infact says inflated prices are actually the result of a Ponzi Scheme.
So what, exactly is a Ponzi scheme? Kay says it’s when an asset is traded over and over again purely to drive up the price.
“When someone purchases an asset with the understanding they’re going to sell it to someone else at an inflated price, that is not tied to the value of the asset. And that process is repeated over and over again artificially creating value that really does not exist.”
And he says that’s exactly what’s going on here – and he’s penned a detailed blog explaining just how it works in our market.
Kay says investors are buying property as a way to translate foreign currency into Canadian dollars, and then driving up the prices in order to flip the property and get out with no loss on the transaction.
He says his firm has sophisticated market intelligence which allows them to track the flow of equity within the Canadian market, and that selling prices simply can’t account for the real flow of money within the country.
“In other words, we couldn’t say here’s where the equity is coming from, there’s enough of it to propel the price forward. There was not enough equity flowing into Vancouver’s more expensive areas to justify the prices those houses were selling for.”
Pumping up prices
According to Kay’s blog, the high selling prices of properties in a tiny slice of the region, Vancouver West and West Vancouver are so far beyond the pale, they’re skewing the averages for everyone else and pushing the market upward.
He says that 0.7% of sales – 365 out of 50,000 homes sold, represent a full 5% of price appreciation – and he argues it’s being done so that investors can get in and get out while still breaking even.
Kay argues that if those few ultra-luxury homes didn’t move, it would be viewed as a housing correction and could be the domino that set off a nasty chain reaction.
He says there’s plenty of blame to go around about how this “real mess” happened.
But he points the finger particularly at the real estate community which he says has turned its back on federal laws, particularly reporting to financial regulators, the Real Estate Council of BC, which he says appears unwilling to hold agents accountable, and politicians who are afraid they’ll be blamed for popping the bubble.
“Well I can assure you, you are in a house price bubble, and the house price bubble is going to break, irrespective of what the premier does.”
As for when that might happen?
Kay says he’ll be able to see it coming three months down the road, and says we’re on the precipice… but says it’s still not clear exactly when the axe could fall.