The rapidly inflating housing market in the Vancouver area is turning into a system of toxic financial assets that threatens the entire region's economy.
A truly frightening blog from Sandy Garossino, an independent candidate in Vancouver’s recent civic election, highlights a situation that has been scaring quite a few people in this city for a while.
Housing is becoming a toxic financial asset that threatens the entire region.
Before we get into it, let’s look at what a toxic asset is. In the U.S., sub-prime mortgages were a toxic asset because they were converted into financial instruments (derivatives) that had no real value, but were continuously traded for ever-increasing prices until, eventually, the banks that were promoting them couldn’t back them any more. We’re all familiar with the results – massive writedowns and a whopping recession that’s still playing out.
Vancouver is undergoing something similar, Garossino indicates, because it’s allowing housing to be bid ever higher and far beyond its intrinsic value. As a result of this massive monetization of housing, the entire city’s social and economic scene is under intense pressure and is threatened with collapse.
Garossino mostly zeros in on how houses on the city’s west side have become just another asset to be bought and traded, often by people from outside the city who have absolutely no interest in living in them. While campaigning, she ran across entire blocks of expensive homes where perhaps only one family lived.
The houses had become just another abstract financial instrument.
But, of course, overall, houses aren’t financial instruments, they’re homes. And ordinary people who don’t make the kind of incomes needed to support mortgages for these overpriced houses have to live somewhere. So, when prices rapidly escalate like they are here, they move to where it’s cheaper.
This has resulted in Vancouver’s east side, where prices have also escalated, being turned into a bee’s nest of illegal suites that are crammed into supposedly single family homes, thus offering almost-affordable rents.
People who don’t want to be warehoused in some illegal suite leave the city. Many head for suburbs like Surrey, where the population is booming with these displaced people and businesses (which are also affected by rising prices for buildings). That pressure forces up prices there as well.
Many more – particularly the young who receive some of Canada’s lowest wages – simply flee the region, opting for Alberta or Ontario, which might not be as cool or pretty, but at least offers jobs and decent places to live.
So how do all these trends come together to create toxicity?
Well, eventually, it has to stop. When houses are continually traded for ever higher prices, the entire balance of population and housing becomes extremely distorted. Eventually it reaches such a distortion that it breaks.
Throughout history, we have seen that asset inflation can’t go on forever. Either a giant crash comes eventually, or – if there’s some sense around – authorities step in to slowly deflate the bubble to prevent catastrophe.
It’s time authorities here moved to prevent our own toxic assets from poisoning the entire region instead of gleefully scooping up the higher taxes they generate.