This article was published by The McAlvany Intelligence Advisor on Friday, February 10, 2017:
Vancouver on a rainy day
The collapse of the real estate market in Vancouver, BC, is forcing realtors there to “double-license” in Seattle (where home prices are half what they are in Vancouver) in order to stay in business. Some of them are representing sellers with property in Vancouver who are simultaneously buying in Seattle. The ripple effect in Vancouver is impacting builders and construction workers as well as those in related service industries.
Back in August, the tune was much different: home prices had increased by 50 percent over the previous three years thanks to foreign investors wanting property in Vancouver. “It’s a bubble!” was the cry and so do-gooder politicians in the local government decided to erect a tariff: starting on August 1 the “foreign buyer transfer tax” of 15 percent would be imposed on any foreign buyer of real estate in the city.
Within six weeks the high end of the market was off by 20 percent, and realtors were scrambling, builders were pulling back, and workers were being laid off.
The parallel with Trump’s plans to build a wall along the country’s southern border through tariffs of 35 percent is uncanny, with the results likely to be the same as Vancouver’s. Fred Floss, the chairman of the economics department at SUNY Buffalo State, says that imposing a tariff on Mexico will have a similar slowing effect in the United States. Because the US mainly imports auto parts and small engines from Mexico, “anything that has a small engine in it will start to cost more … the scary thing is that a lot of those motors go into things Americans make. So if all of a sudden it gets to be more expensive to make goods in the United States, then we’re going to start to see layoffs because our goods aren’t going to sell.” He added: “In other words, [Americans are] going to pay the cost of the wall” both directly and indirectly.
The ripple effect in Vancouver is just beginning to be felt as the slowdown starts to impact support jobs related to the real estate industry. Homeowners who have enjoyed seeing their paper profits escalate are now facing the new reality: their homes aren’t worth what they were as recently as last summer, and those who took advantage of low rates either to buy new or obtain a home equity loan are increasingly finding themselves underwater and unable to find a buyer to bail them out.
International trade unhampered by tariffs benefits consumers and sellers alike. Every trade results in each party being better off economically. Competition drives the prices of goods and services down, allowing purchasers to enjoy a higher standard of living. Those profiting from making the products consumers want, whether they be small motors, cell phones or automobiles, will be encouraged to expand their production, hiring new workers who then are able to increase their own purchasing power. Ad infinitim.
Adam Smith was right:
Every individual necessarily labors to render the annual revenue of the society as great as he can….
He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention…. (emphasis added)
By pursuing his own interests, he frequently promotes that of the society more effectually than when he really intends to promote it.
And then Smith adds his warning for Mr. Trump:
I have never known much good done by those who affected to trade for the public good.
Meddling always has its unintended consequences. Is Mr. Trump aware of what’s going on in Vancouver?
Sources:
The Wall Street Journal: For Chinese Home Buyers, Seattle Is the New Vancouver
Seattlepi.com: Vancouver smacks Chinese with real estate tax, but will they head south?
Background on US tariffs
WGRZ.com: How the Trump Tariff Proposal may Impact your Budget
Investopedia: The Basics Of Tariffs And Trade Barriers
Adam Smith’s “invisible hand” quote
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