Affordable Housing: Canada’s Struggle for a Sustainable Market

Increasing wealth inequality is the major force impelling the rise of the radical right of the white working-class and it’s tied to unaffordable housing costs.

They are losing their ability to simply buy a house and see worse for their children’s future. And it is the purchase of a house that allows the salaried classes to amass capital and pass it on to their children.

Liberals and leftists wring their hands and point their fingers calling these newly vociferous conservatives names such as racist, anti-immigrant, Islamophobe, homophobe, or such. They resort to logic, or appeals to kindness, to persuade them of the error of their ways. But this has nothing to do with logic. As Abraham Maslow wisely pointed out: A hungry man cannot love. Their fear is the result of financial insecurity. Their financial security must be restored — and there is a way. A way that does not take one penny from a single wealthy Canadian.

In his 2014 breakthrough bestseller, Capital in the 21st-Century, economists Thomas Piketty identified the primary cause of this rising wealth inequality and why the salaried classes could no longer afford to buy a house. Supported by thorough research, displayed in understandable graphs, Piketty showed that the value of capital has been rising greater than the value of wages. We have reached that stage where wages are longer sufficient for the average citizen to buy that bit of capital they once could, a house. It is going to get worse in the future.

The newly defiant, right wing white working class conservatives are very correct. Something is very wrong with our economy, but they are also very wrong on the ways to correct it.

They are correct that the wealth disparity is returning society to the early 1900's during which a small number of wealthy families controlled all the wealth; the rest of us were servants earning barely enough to pay our rent to them and for a change of clothes.

For decades, headlines from the media have been blaring condemnations of the ballooning wealth gap increasing since the 1970s. Yet not a single policy has been implemented to successfully reduce it.

Cutting the Demand

In the housing market, it’s a simple question of supply and demand. The demand from the average Canadian has dried up because they cannot afford a house. So who can? Who has the money to pay these exorbitant prices?

Apart from Canadians in the top ten percent willing to pay 50% of their income in mortgage payments, there are two huge sources of demand, both foreign: drug lords and superrich tax evaders.

A Huge, Big, Enormous Number

How do we know this is such a big number?

First: need. Consider the problem of the average drug lord who makes $I billion profit every year. A billion dollars in bankmachine generated 20s, shrink-wrapped on skids, fills a warehouse. They can’t leave it that way. They have no trouble getting this money into the banking system as the recent revelations called the FinCen files (Financial Crimes Enforcement Division of the US Treasury Department) has revealed. The US Treasury routinely ignored reports by the banks of probable drug lord money-laundering transactions so the banks could continue to earn their commissions.

The whistleblower who revealed this on going corruption in the Fincen leaks was charged and convicted for breaching her obligations as a civil servant in a near media blackout.

As the whistleblower got jail, and no banker went to jail, drug lords have the proof that they can continue to safely get thier profits into the banking system. But, like all prudent investors they want diversity in their portfolio, some in a safe, secure venture.

So it’s unlikely that we’re going to see more evidence of just how great is the ability of organized crime to hide their identity when buying houses in Canada.

We did have an earlier revevealation. In 2014, the Panama Papers gave us a glimpse into how serious the matter is for Canada. They revealed that the wealth management industry regards Canada as a lax jurisdiction, making us a preferred destination to pass black money into and through. Financial advisors in the tax evasion game have, dubbed the process ‘snow washing’.

The drug lords successfully pioneered methods to hide their identities and the source of their income, but wealthy tax evaders have adopted their supremely effective methodology.

Canadians firmly believe that this type of activity only happens in other countries; it doesn’t happen here in Canada the good. But here’s what a wealth management consultant from Switzerland has to say about Canada as quoted in the Canada Papers:

“Canada is a horrible tax haven. Everybody is now switched over from using BVI companies and Cayman companies to Canadian LPs. It’s like the ultimate tax haven entity in the world,” — Mark Morris, independent tax consultant based in Zurich who specializes in international tax agreements.

The liberals have proposed at 2% speculation tax, but this is not speculation this is long-term investing.

What is Affordable Housing?

According to Jennifer Keesmaat, former Toronto city planner, housing prices in Toronto would have to fall by 2/3rds (66%) to become affordable for most Canadians between 25 and 34 years of age.

Keesmat says the average family in the GTA makes $82,000.00.

Taking Without Giving

Economists gave us ahelpful concept. Some economic activity is purely extractive. It is a form of taking without giving, yet accepted as a basic right of anyone who has enough money to do it. Economists call it by an unhelpful name that does not reveal it’s harmful nature: rent seeking.

Foreign investment in the Canadian housing market is a prime example of rent seeking: taking from the average Canadian without giving any benefit to Canadian society.

Three Causes of Exorbitant Housing Prices

I’ve spoken of foreign investment, but there are two other causes to mention before I go further.

● House and/or condo flipping

● Real estate developers buying land around cities

All three depend on land speculation. Speculation extracts value but adds nothing to the house itself or the society which provides the security for the investment.

Foreign Black Money

“You cannot but help look at the issue of money laundering. Having a degree of anonymity allows individuals to obfuscate,” — Peter Dent, forensic accountant and past chair of Transparency International Canada, “Rules that allow you to obfuscate the true source of money behind transactions facilitate money laundering on a global scale.”

Confirming Data

Ontario has seen 1.4 million residential property transactions dating back to 2008. Privately-owned corporations have spent $28.4 billion on luxury residential homes (those worth between $7–10 million).

Transparency International, a watchdog group that monitors money laundering across the world, reported that between 2008 to 2018, $25.4 billion in residential mortgages in the GTA came from unregistered lenders (shadow banks)[4].

• Techniques perfected by drug lords beginning in the 1980s

serious problem — visualize their dire straits — 20 million a year profit in $20 bills

•$1,000,000x20 bills = a warehouse several transport trucks. All shrink-wrapped on skids

• get into the system — hide the source. Investments in safe countries

Black Money

Statistic collectors really don’t know the extent of foreign ownership because of secret ownership corporations and the refusal of governments to enact effective laws to reveal beneficial ownership.

Provincial Non-Compliance

Calls for more data on foreign investors had been rejected by the BC Liberal government under Christy Clark[5]. The BC Liberals are known as a centre-right government, in contrast to the Federal Liberals which are centre-left.

More recently, the Ontario Progressive Conservatives under Doug Ford have stopped reporting data on foreign housing ownership and made it virtually impossible to track how the market is being affected by these speculators[6].

Signatures for sale

Another contributor to the issue is the use of “nominee directors”, paid signees to various companies used to keep the real owners off the paperwork[7]. These signatures for sale have allowed black money to operate in Canada quite extensively, especially from foreign buyers.

Because vacant houses have become a rallying point for those who oppose foreign investment, these investors are hiring local people to make it appear that the houses occupied. They cut the grass, collect junk mail, turn the lights on and off and such.

Likely Cause

Tax evasion and illicit drug money is being parked in the safety of Canadian real estate; a parachute for those worried about leaving all their wealth in potentially unstable home countries.

Secretly Owned Shell Corporations

● All private corporations are secret ownership corporations

● Incorporation papers only have to show a director who is a resident of Canada

● Trustees can have all of the powers of ownership and are called legal owners. Actual owners are called Beneficial Owners in law

A Simple Tax Evasion Scheme for John Smith

  • Cayman Islands– Bank account, name of Sarah Jones [secrecy jurisdiction]
  • Seychelles island— Secret Trust Sarah for Corporation [Seychelle’s lawyer’s office only]
  • BVIs— Corporation Director William White, director and shareholder [Secret ownership corporation in secrecy jurisdiction]
  • Nevada— Signs Secret Power of Attorney for John Smith
  • Ultimate owner, John Smith ‘s identity kept in Nevada lawyer’s office file only

BTW: Surprised to see Nevada? That’s because your not a billionaire. Nevada is being called the New Switzerland.

This pattern can be repeated three or more times. The resulting diagram would look like the complicated rating of the three masted schooner.

For more on how they do it: Venice Film Festival Premier, “The Laundromat” Reveals Tax Havens[8].

Ineffective attempts at ending secret ownership of corporations

New rules mandate the establishment and maintenance of a new but private register of individuals with “significant control” over the corporation

Canadian Business Corporation

21.1 (1) The corporation shall prepare and maintain, at its registered office or at any other place in Canada designated by the directors, a register of individuals with significant control over the corporation that contains

1. (a) the names, dates of birth, and the latest known address of each individual with significant control;

(Definition Section) Significant number of shares

2.1 (3) For the purposes of this section, a significant number of shares of a corporation is

1. (a) any number of shares that carry 25% or more of the voting rights attached to all of the corporation’s outstanding voting shares; or

2. (b) any number of shares that is equal to 25% or more of all of the corporation’s outstanding shares measured by fair market value.

The Freight Train sized loophole

The justification for the 25% exemption is to save administration costs. There are few private corporations that this would apply to. Having a clerical person making $25/hr copy and paste even 100 names and addresses would not be a significant cost.

Determining 25% ownership, especially if there is a string of shell corporations, is a significant cost. Here’s what the CPA Society said about it:

“Other than the simplest cases, such as where one individual owns a single corporation, these recordkeeping requirements could be quite complicated. In particular, the broad definition of ‘significant control’ means you need to trace through a tiered corporate structure to identify which individuals ultimately hold interests and rights in shares. You then need to determine whether the holdings are significant. You also need to review the impact of a shareholders’ agreement or other similar agreements.”[9]

● Purpose of private register to keep things hidden from journalists and watchdogs (re: Panama Papers)

Public Registration Useless

The NDP propose a public registry

https://www.thestar.com/politics/federal/2019/10/08/singh-promises-to-ease-bc-housing-costs-by-fighting-money-laundering.html

But with a 25% loophole that is no better.

The UK has a public registry that has serious flaws. An ICIJ analysis found 208,572 companies listed post box addresses with no connection to the company’s owner, 140,409 companies with owners or others who provided addresses in tax havens, and 416 companies that changed names more than five times, possibly to obscure corporate activity.

https://www.icij.org/blog/2018/08/loopholes-in-uk-company-register-show-crime-can-still-flourish-study-finds/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+GlobalMuckraker+%28The+Global+Muckraker%29

Clarifications and Proposed Solutions

Real Estate Industry Propaganda

Developers and their industry often use the following ideas to perpetuate misinformation in the public:

● The notion that housing prices cannot be lowered and that we have to learn to live with them.

● The idea that people should give up on ownership and be content to rent.

● That environmental laws need to be loosened to destroy assigned green spaces and instead develop them into rental units.

Always ask:

Do they have a financial interest?

What’s their bias?

Do I have a financial interest? What’s my bias?

Beware of economists not disclosing they are paid for their opinion. See: Interview of leading economist Frederic Mishkin:

https://www.youtube.com/watch?v=8lHvTKzfu8Q

• Canada 1% (10%0 -only can understand. Enough fair distribution- more vulnerable- better society

• Critical mass- not majority

House Flipping Contributed to the 2008 Crash

Contrary to the popular idea that middle income buyers with bad credit caused the real estate crash and subsequent recession of 2008, it was in fact the fault of wealthy borrowers who flooded the market with properties bought for the intent of “flipping”.[10]

Ineffective Policies

While some solutions could be genuinely effective in the fight against rising housing prices, other programs and suggestions have proven wholly useless. These latter include:

● $20,000 First-Time Home Buyer’s Incentive — Although well-intentioned, this measure will have little to no impact for the larger problem markets like Toronto and Vancouver, and is open to exploitation by the recipient[13].

● Reduced amortization to 25 years.

● 15% foreign owner tax — This is largely ineffective as it doesn’t prevent the root problem of housing scarcity to exist, nor does it directly fund any kind of measure to provide more affordable housing. Tax created small pause, then continued upward

The Danger in Certain Policies

They encourage buyers in bubble market. When the next recession hits, buyers will loose hundreds of thousands of dollars

Foreign ownership tax useless

The Liberal, Conservative and NDP platforms all propose taxing nonresident buyers of housing properties. These taxes and through ineffective for two reasons, the land values will escalate to more to cover the one time tax; and these buyers are not concerned about cost. This is the illegal money, and Canada allows one of the most cost-effective methods of investing illegal money in a secure environment. Even if the tax was doubled or tripled, it would not have much effect.

Compounding the issues , the Ontario Progressive Conserative party under Doug Ford is no longer publishing data about the foreign buyers tax data mandated by the Ontario liberal government, making it impossible to track who is buying what, how the tax is being collected, and how effective the program actually is[14].

Last week, a report to the B.C. government suggested $5.3 billion in crime proceeds was used to buy real estate in that province in 2018. That report recommends the province take steps to increase data collection and boost transparency in real estate transactions.

Most government measures are also woefully unprepared to deal with emergent issues such as cryptocurrencies used in this type of money laundering. While some are scams, others like BitCoin are well-maintained by their supporters and can prove impenetrable without specific and qualified knowledge of their inner workings. Policy makers with this kind of expertise are currently in short supply, giving BitCoin and others an advantage where money laundering and other dark money practices are concerned.

Proposed Solutions

First: Get the information: Require all deeds to single family dwelling units to disclose the beneficial owner with no exceptions. The Ontario liberals had required that in 2016 on all new purchases for calculation of the 15% foreign ownership tax.

● Prohibit foreign ownership of single-family dwelling units, including condominium units.

● Speculation tax on house flipping. Any single family dwelling sold within one year of purchase would be subject to a 20% tax. [1976 ended flipping]

● Encourage more affordable housing in terms of smaller houses, townhouses and condominiums, not these monster homes on small lots.

● Prohibit ownership by corporations, trusts or any way except, by the beneficial owner (an individual)

● Prohibit ownership of more than two single dwelling unit properties by any individual or corporation

● 20% per year tax on all land held for speculation

Andrew Weaver, leader of the B.C. Green Party, is proposing measures similar to those found in New Zealand, which strongly restricts or even bans foreign ownership of residential properties[11].

US Treasury pilot project requiring title insurance companies to require beneficial owner disclosure. This resulted in a 70% reduction in cash purchases by such companies[12].

Creating a Sustainable Market

The unfortunate long-term consequence of all these issues is that Canadians become priced out of their own cities, creating a market gap that precedes a recession. This ultimately works against every party except the very wealthy, who can remain untouched due to their resources.

New buyers, low- and middle-income landlords and realtors are left with bad investments and often bankrupted. The housing market as a whole has a ripple effect on the broader economy.

Realtors and landlords can contribute meaningfully to a sustainable market, but to do so means refraining from taking advantage of the market, and playing a longer game that is just as equitable, without destabilizing the economy.

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Footnotes

[1] Jennifer Keesmaat — May 8 2019, The Globe and Mail

[2] Michael Goldstein — June 8, 2018 — Forbes

[3] Robert Cribb and Marco Chown Oved — January 25, 2017 — Canada Papers, Toronto Star

[4] Philip Lee-Shanok — March 21, 2019 — CBC News

[5] Greg Rasmussen- May 14, 2015 — CBC News

[6] Mike Crawley — May 13, 2019 — CBC News

[7] Marco Chown Oved and Robert Cribb — January 22, 2017 — Canada Papers, Toronto Star

[8] Jan Weir — November 13, 2017 — Rantt Media

[9] Bruce Ball, FCPA, FCA, CFP — April 9, 2019 — Chartered Professional Accountants Canada https://www.cpacanada.ca/en/business-and-accounting-resources/taxation/blog/2019/march/beneficial-ownership-rules-start-preparing-now

[10] Gwynn Guilford — August 29, 2017 — Quartz

[11] Liam Britten — August 15, 2018 — CBC News

[12] Max de Haldevang — June 11, 2019 — Quartz

[13] Daniel Tencer — June 17 2019 — Huffington Post

[14] Mike Crawley — May 13, 2019 — CBC News

Trial lawyer, has taught Business Law at the University of Toronto, Author, Critical Concepts Canadian Business Law @JanWeirLaw | http://jdweir.com

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