Why work for a living when your house out-earns you?

Why work for a living when your house out-earns you? In a “truth is stranger than fiction” moment, the price appreciation of homes in greater Vancouver have produced more than the sum total of all work done by every single human being that lives in the city.

This is just the latest of many economic distortions being caused by Canada’s unprecedented real estate bubble. They make us incredibly vulnerable to shocks that might be set off by any number of things. Consider that residential real estate investment as a percentage of GDP is approaching 8%. Imagine a 50% slow-down in that area would take Canadian GDP from plus 1.3% down to negative 2.7% – a full fledged recession before you consider the knock-on effects that would cascade through all other sectors. Real estate is the largest industry in the country by itself, but it’s over 25% of the Canadian economy when you consider all related activity in finance and insurance. Looking through this lens, a mere 16% drop in selling each other houses would herald a similar economic slump.

With the median household income in Toronto and Vancouver at around 75 and 76K/yr respectively (per Statscan 2014 census), it’s easy to see how the typical 1.something million dollar home thoroughly emasculated its owners’ hard-earned income. The kind of double digit price increases we’ve seen in recent years mean a big six-figure pop in equity value. What’s more, all of us chumps who turn up to work on Monday morning must pay dearly in income taxes, whereas capital gains on your primary residence are exempt from taxation. Try making $200,000 at your job and you’ll find yourself on Justin Trudeau’s “enemy of the state” list and you’ll be marked for extra punishment (the new 54% tax bracket) brought in by the liberal’s latest budget.

Unsurprisingly, Canadians have been tapping into their home’s earning power in record numbers. Walk into your bank and ask for a HELOC (home equity line of credit) to the tune of 60% of your latest tax-free gains. You’ll practically be pre-approved before you even ask. So, when it comes time to buy that shiny new whatever, you’ve got your 50-something thousand of after-tax household income doing little more than paying the mortgage and the grocery bills, but the wealth effect of booming home equity is providing all of life’s luxuries for the better part of the nation. Take that away – even give us the mythical “soft-landing” that politicians and realtors pray for at night – and all of a sudden your local Keg or Starbucks will be a little less busy. There would be one hell of a ripple effect hitting anything driven by consumer spending – which is the vast majority of our economy.

Let’s not even think about the kind of blow-up we could have with our totally unregulated sub-prime lending market, or if the foreign flow of money into Canada hits the wall.

Of course, no one really knows where the music stops, but it feels a lot like the kind of “irrational exuberance” that caused tech to more than double between Greenspan’s 1996 warning and 2000 when the bubble finally burst.


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