Blessed by the Potato

Hard to miss the news out of BC this week as a surprise tax on foreign purchasers of Vancouver-area real estate was launched, along with new data showing that foreign money in BC real estate is actually quite substantial.

It’s hard to say what this will mean in the near-term: will foreign money find a loophole and keep pouring in? Will Vancouver crash while the firehose of hot money shifts to Toronto and Victoria? Will 15% prove to be no kind of barrier considering that prices have gone parabolic this last year, and how desperate some of the hot money is to leave? Indeed, that last point had been made often enough before this news on the high prices and risk of a crash in Vancouver — “so what if it crashed even 75%, walking away with $500k clean is better than losing all $2M” people would argue.

No Grandfathering

The tax takes effect next week — a good move so we don’t see a spike in sales looking to beat the change, as we have with long-anticipated CMHC changes in the past. However, one strange aspect is that there’s no grandfathering in: deals that were already in the works that close after Aug 2 will have the tax applied.

For some people, that’s going to be exceptionally painful: not all foreign purchasers are wealthy oligarchs skirting capital controls. A newly recruited UBC assistant professor coming up from the US who happened to buy a place at the wrong time is going to have a huge cash call at closing soon, or will have to forfeit their deposit to walk away from the deal if their lawyer can’t argue force majeure.

Normally when a tax such as this is put into place there’s a grandfathering provision, where people who had already made deals under the old rules get taxed according to the old rules. Whether this lack of grandfathering is a bug or oversight from the rushed nature of this tax or a deliberate feature is another question.

How could it be a feature, you ask? Well, this tax is not so much about raising revenue or equalizing opportunities in the market so much as it is a psychological message. I even saw (though I didn’t keep the article to link) a BC official say that if this tax succeeds in its mission it won’t collect a single dollar — it’s intended to run foreign money out of Vancouver, not just tax it. And it does this in a flashy, surprising, attention-grabbing way. By sucker-punching a few deals in progress it will sacrifice a few innocent bystanders and create huge resentment and awareness amongst foreign buyers (and their local realtors) that BC is not a place to be making deals you can’t afford to have go sour. It will help address that sticky notion that Canada is a safe place to park (or in the parlance, launder) money, with stable, reasonable government that is gun shy on meaningful interventions.

Indeed, if there’s any good to come out of this, it will be the anecdotes from this (and from the Urbancorp mess in Toronto) reminding buyers that there is significant risk to “investing” in real estate, especially with long-duration pre-construction contracts at massive multiples of rent where anything can happen between when you sign and when you take delivery. Hopefully this pain will resonate for a generation, like Nortel did for reminding equity investors in Canada that risk exists. Your grandchildren will start saying that “real estate can only go up” and the neighbour will over-hear and shout over the fence “the BC tax on foreigners! Fly, you fools!”

And yes, there’s also the “they should’ve” arguments that draw away from the impending martyrdom — no “regular” person should be buying pre-construction, that’s a playground that by all rights should be restricted to accredited investors who can afford the risks and delays (of which a 15% surprise tax is actually not the worst thing that could have happened). And junior UBC profs and other people coming in to actually live in the city should have waited until they got their permanent residency status before buying (and rented even then, given the price-to-rent insanity in the city). But that’s cold comfort to people who face a large, surprise tax because of a lack of a simple grandfathering clause (and a tax that’s a cash call at that — no word yet that they will be able to roll this into a mortgage).

A Clear Message

What Next for the Bubble?

At the same time as the tax was in the news, CMHC finally woke up and labelled BC as having “problematic conditions.”

What effect will all this have on the bubble? Hard to say. Bubbles are driven by the madness of crowds. On the one hand there are reports of locals trying to back out of deals on the news of the tax — the existence of the tax has shattered their confidence in the meme that rich foreigners will continue to drive the price of property up to something on par with Monaco or New York. If confidence in “infinity” as the upper bound to GVA house prices has indeed been shattered, then that alone may help the market come back to earth regardless of what happens with HAM and whether the tax actually changes anything on that side of the equation. However, Vancouver in particular has been astoundingly immune to the forces of reality (WMAGNFARB), and eschatology is a scary and imprecise business. Plenty of bubbles have caught second and third winds (and the GVA is at least on its third wind now); some have “melted” while others were “like someone flicked off the lights.” Even that second type takes time to appreciate as it plays out in real time — RE does move very slow, and even what we call a “hard stop” in the history books is still several months of uncertainty in the present.

As for the GTA, it would not surprise me if enough people will believe that HAM will flood the 416 instead, driving the parabola for another year or so to apogee.

These things take time to sort out, and in the meantime my core message remains to rent and avoid the whole mess.

I was stuck on the subway for a long time today. A really long, sweaty, stinky time. My commute this morning took two hours door-to-door thanks to numerous PAAs (Passenger Assistance Alarms — they happen so often they’re just referred to in acronym form) on the line. It’s a hot July day, and though the train is air conditioned, much of that time was spent loitering at various platforms with the doors wide open, sucking in the hot platform air (superheated by the A/C exhaust). It’s days like this that really drive home how much Toronto was not built for the enjoyment of its citizens.

Nelson had a post with a title that seemed targeted right at me today, explaining how much lower the cost of living is in small towns (mostly driven by the lower cost of housing), which is a great opportunity for teachers and other professions who get paid about the same amount no matter where they go (indeed, there is a surplus of new teachers in the big cities, while his local school has unfilled positions).

Comparing living in a small town to living in Toronto or Vancouver has a lot of subjective factors to consider, from amenities and attractions to salaries, job prospects, and the network effect. Indeed, I used to live in the virtual paradise of London, Ontario, which featured a modest cost-of-living, all the day-to-day amenities one could want, jobs within walking distance of livable communities, good curling, and all within a short drive of Toronto for weekend visits and the odd bit of ephemeral culture that wasn’t native to London. However, my family and Wayfare’s family live in Toronto, so — network effect at play — when we spawned we came back upstream to do so here in the GTA. Plus we both have graduate degrees and work in specialized fields, and we both make more in the GTA than we would have in London… though in London we might not have needed to make so much, possibly leaving more time for leisure and Blueberry.

Aside from my own situation, I see still more and more people pour into the GTA, and many of them do not have any particularly specialized jobs, family ties to the area, or difficult two-body problems to solve. Indeed, many are young and single, lamenting the costs of home ownership, and I’m left wondering: “Why are you in this city? GTFO!”

At what point does it make sense to take a paycut to move to a smaller city? At what point does a higher salary in a big city offset the higher costs of living? Enter the GTFO calculator.

Here you can enter your salary in the big city and a smaller centre, as well as the salary hit your spouse might have to take to follow you into fire, into storm, into darkness, or into Hamilton. Then you can enter the different housing costs and assume all else is equal to see approximately how much better off you’d be with the GTFO move — and how long it would take for your dirty city money to make up for the bubblicious living costs. There’s even a fudge factor cell for renters, or people who want to factor in having to get a 2nd car or whatever.

It’s set up as a Google Sheet with a protected range over where the magic happens, so you can just type right into the input range to get your answer instantly (a trick I copied from Sandi). So, how much more do you have to make to balance out the higher housing prices of Canada’s more expensive cities? Find out for yourself now!

Forced insight: you may find that seemingly large paycuts are still worth it (in a financial sense at least) because of how very expensive Toronto/Vancouver houses are now. It takes a lot of years — likely more than you have — making an extra $10-30k to outpace an extra half a million in mortgage debt.

Note: there is a way to parallelize the Google Sheets, so if you see more than ~4 people trying to edit it at once, let me know and I’ll get off my lazy butt and do that.

There’s been a bit of a protest over the current “pilot” project scheme¹ grant competition at CIHR. In fact, it’s so bad that the federal Minister has told them to meet with the scientists and sort it out.

The CBC does a surprisingly good job of explaining this to people who may not be scientists, but you might want a bit more context and background on the kerfuffle, which is where this post² comes in.

Grants Background: In brief, the Canadian Institutes of Health Research (CIHR) is one of Canada’s main source of research grants, funding basic, translational, and clinical research related to human health. A grant is some money given to a research team to pay for the costs of a research project — reagents and software, grad student and post-doctoral fellow stipends, etc., etc. There is never enough money from funding agencies to go around: human curiosity knows no bounds (and the research enterprise is big). To get a grant, typically a scientist will write³ a proposal describing what they intend to study, explaining why it’s important, demonstrating the need for the research (what questions will it answer, what problems will it solve, what impact will it have on health care), describing the methods they will use in the study, and justifying why they are the ones to get the money and do the research (track record, expertise).

This proposal — along with dozens or hundreds or thousands of others — gets reviewed by the funding agency and expert external peer reviewers, who point out potential flaws in the methodology, or other issues with the proposed work. It gets scored and ranked by a review panel, based on the input from the external reviews and discussions at the panel⁴. In this way, the best, most promising research usually gets funded. It’s not a perfect system, but (without bothering to look up the research) the top ~10% of proposals are generally consistently funded, the bottom portion generally rejected, with some random chance elements in the middle as to what made it over the funding cut-off and what didn’t.

Funding Shortfall: Funds are tight in research, there isn’t nearly enough money to go around. This has been a long-standing problem that has been getting worse and worse over the years, particularly under the Harper conservatives in Canada and the post-GFC/sequestration in the US. There are many ways to deal with a shortfall of funds, and none of them are perfect: NSERC, for example, maintains a high success rate in their core Discovery grants, but cuts the requested budget of all but the top few score ratings so that most awardees don’t receive enough money to pay the costs of even a single full-time trainee. For other grant competitions where budgets are not cut, the success rate becomes abysmal.

That funding crunch is part of the background to the changes that CIHR made to its funding programs.

Early Career Researchers: On top of the general funding tightness and peer review issues, another issue with the reforms is the effect on early career researchers. Cancelling a year’s worth of applications can lead to a gap in funding for many, which can be deadly for a career. Plus the change in the funding model on the foundation grant side reduced the amount of money going to early career researchers — will there be an increase on the project scheme side to offset that? (Unlikely)

The Changes: CIHR made a bunch of sweeping changes at once, from combining a bunch of separate programs into a single competition, to changing the application format, to changing the way peer review was handled. All aspects are drawing fire in one way or another, but it’s the changes to peer review in particular that are the centre of the current unrest and the open letter (and Ministerial response).

Oh, and all these changes were implemented at once, after cancelling a few competitions so there was added pressure to apply now. CIHR called this a “pilot”, but that suggests a partial, limited-scale test — this post covers that aspect of the affair.

Peer Review: Here’s a great idea: rather than spending money in an already stretched environment to fly peer reviewers from all over the world to Ottawa for face-to-face meetings, let’s use the technology of the internet to do virtual conferences. Sounds brilliant, like one of those obvious cost savings measures that you can’t believe they’re not doing already. But what’s hilarious/tragic in reading the background to this story is that it’s been tried before (in actual pilots) and has been a massive failure — indeed, back when the changes were first proposed, an open letter from a group of Universite de Montreal scientists in 2012 predicted exactly this outcome of virtual peer review.

The core problem is that scientists doing peer review are humans. Incredibly busy humans. So yes, reading other people’s grants and scoring them is important for science and the integrity of the peer review system… but lots of things are important today. What is it that ultimately makes a scientist sit down and start poring over research proposals? Usually, it’s the knowledge that they’re going to have to sit at a table with their colleagues to discuss these grants and the pressure to not be the only one who didn’t do their homework. Plus, that puts a hard deadline on the process to activate the panic monster, and gives them a nice plane ride to sit down and actually do the reviews in a panicked sweat. When things are virtual, they don’t have to look their peers in the eye (they may never even know who the slacker is), especially when the instructions acknowledge that they’re busy people and suggest they can do it, like, whenever. So the reviews aren’t as good, there’s less peer pressure to be timely, and that’s what’s driving a lot of the uproar here: a large number of grants still did not have all their reviews in as the virtual conferences were nearing their end, and many of the reviews were not of high quality.

On top of that, the circumstances of this particular competition have exacerbated the problem: to avoid conflicts-of-interest, people who have a grant in the current competition aren’t invited to serve as peer reviewers. However, everyone and their dog is applying to this competition — sometimes with more than one proposal — because of the pent-up demand caused by the poor funding environment and two cancelled rounds of the previous open operating grant. So more applications, and very few people left as eligible reviewers. Plus, figuring out who has the expertise to be an expert reviewer has changed, and many are finding that the system (which I believe is now automatic and keyword-based) is matching people to grants that they are not fully qualified to review — though it’s not clear to me if that’s because the system is inherently broken, or a unique feature of this round where there are so many applications and a relative paucity of reviewers (though I’m sure it’s something that’s on the agenda for the meetings with CIHR).

The virtual reviews has also created a point of contention around how the reviews are ultimately combined and averaged: the formula hasn’t actually been released.

The Future: The next round of the competition was supposed to have been announced last week, with applications to be due in the fall. For the moment that’s on hold while CIHR meets with some scientists to sort this out and possibly re-jig how peer review is handled. Given the uproar, it’s likely something will be tweaked.

However, the funding success rates continue to be poor. That’s part of the background to the story, but the reforms (and possibly reverting them) will not be able to change that — there still isn’t enough money to go around. Though success rates were over 30% in the not-too-distant past, they have plunged below 20% in recent years, and the estimates are that this competition will see a ~13% success rate (likely about 500 grants from about 3800 applications). If there can’t be more funding, people want to be sure that the awards that do get made are fairly — and clearly, observably fairly — given to the best grant proposals. With the current system it looks like there is more noise and randomness, so it’s not so clear that the best-ranked grants are truly the best applications, because of the issues happening with the quality of peer review. In other words, low success rate + random scores = lottery. Indeed, I have in the past made the quip that when grant competitions have heartbreakingly low success rates, you may be better off spending the time you would have been writing an application on a 2nd job flipping burgers, and using that money to buy scratchers at the convenience store to fund your research program.

Of course, more money for research would really help here, so take a moment to write your MP and ask them to increase tricouncil⁵ funding for research.

1. Wayfare says: “Calling it a scheme was their first mistake. Nothing good is called a scheme.”
2. A quick note: I work in developing grants for CIHR and other agencies as part of my day job. It is not done to openly criticize the people who give you money, unless it’s very constructive. The criticisms I’m posting are those of others, for context on the controversy.
3. If they’re very lucky, they’ll have someone like me help to write/edit it. {/self-promote}
4. And that this point I’ll have to say much of the mechanics of this is a bit of a black box to me — I likely know more than most of my readers, but I have never seen a review panel in action.
5. Tricouncil refers to Canada’s three core federal research funding agencies: NSERC, CIHR, and SSHRC. There are other funding bodies, some of which have received increases in targeted funding even in the black Harper years, but these are the ones that could really use a letter of support from the electorate. A letter I suppose I should draft and post here… stay tuned.