Two Practical Guiding Principles

Most of life’s governing principles are quite obvious once we see them. An example is happening in British Columbia.  The province will impose a 15% land transfer tax on property acquired by non-residents of Canada.

The reason is there are hundreds of millions of dollars pouring into BC real estate from outside Canada, particularly in Vancouver.  The price of single family dwellings has risen to previously unimaginable levels.  The median price for such a home now exceeds $1.5 million.  I took a look at the MLS service for Vancouver and of 917 houses listed, five were listed for less than $1,000,000.  Those below a million look more like the start price for a hoped for auction.

Real estate pricing is a common political action area.  Most politicians realize that if voters cannot afford housing near work or schools or family, they will turn against them. Politicians always act on matters that can affect their continuing employment and use of power.

BC is not the first to impose such a tax.  A 20% version visited Ontario in 1974 and lasted for a couple of years.  It chilled the real estate market although it is hard to tell if it did so by itself.  There was imposed coincidentally a “Land Speculation Tax” that amputated 50% of the gain on flipped properties.  The Land Speculation Tax was not a deductible expense for income tax purposes so any gain completely disappeared.

So far as I know, no similar tax has yet been suggested for BC, but there are rumblings in Ontario as the Toronto market is similarly wildly exuberant.  Again politicians act on things that threaten them.

On the people side, the effects are clear and follow a rule:

Things you reward, you get more of;
Things you punish you get less of

For persons who see real estate purchase and resale as an easy way to riches, beware.  The governments can chill the market overnight.  Even cheap financing will not save you.  When liquidity and enthusiasm disappear from a market, prices fall.

The second rule that applies is:

To panic is usually not a good thing,
but when you must panic, panic first.

The bloom in housing prices is evidence of how the market pricing mechanism and the value mechanism do not always generate the same number.  When market price exceeds value, know the factors that can make the pricing mechanism adjust.  Removing incentives and imposing new costs both work.

Good investing includes an element of anticipation about how the market works.  Use it.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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One Response to Two Practical Guiding Principles

  1. John Page says:

    It’s shocking to remember real estate prices here going up by 100-125% over the five years between 1985-1989 when you consider that mortgages cost more than double what they do now. I don’t pretend to understand, but I do recall studying the TO real estate market in 1988 and was surprised to find that it had pretty well never dropped. Who know that freefall was around the corner? At the time we had someone in our office who bought, sold, and arranged mortgages. In 1990 we used to joke that we always thought that real estate could never become worthless. Boy were we dead wrong!

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