Why Houses Are So Expensive Across The World

In 1993, this house in Vancouver

sold for $350,000. Today it's worth $2 million. That means your $20,000 downpayment

would have turned into $1.7 million. That is a lot of money

for literally doing nothing. Now let's do some math. Let's say

I put $20,000 into that home in 1993. It would be worth $1.7 million. But if I took that $20,000

and put it into the S&P 500, it would be worth half of that. Now, this video isn't just about

Vancouver. Vancouver is one of many cities around

the world that has the exact same problem. Housing is too dang expensive. This is best captured by one chart. Home prices in the OECD

have risen by 16% faster than incomes in countries like America, Canada

and Australia even more. But this video isn't just random numbers

about how housing is expensive. It's about why

and whether it can be fixed. I'm Kam from 2&20 and this is:

The Seven Deadly Sins of Housing. Okay, let's level set for a second. We believe that housing problems

are 100% solvable. But for cities like Vancouver, S.F. or Sydney,

they likely will never be solved. And that all starts

with arguably the most powerful sin. The one that started it all. The belief that you're single family

home is an investment. Now I can already hear Graham Stephan

typing in the comments. It is an investment

and he is partially right. So after World War two, the US was worried about returning

to Great Depression-style instability. To avoid this, they created the G.I. Bill. This helped Americans secure low down

payment mortgages to buy homes as a form of forced savings,

but not for speculation. Countries

like Canada had something similar with the introduction of government-

backed mortgage insurance. And initially, this wasn't a bad idea. It helped force long term savings among the population

and helped strengthen communities. But you see, there's a fundamental problem

with thinking of your house as an investment. Let's take a factory, for example. Unlike a factory, your house doesn't produce any products

and it doesn't generate any profit. You sleep there, eat there, watch TV,

and that's really it. A factory becomes more valuable

when it sells more products and makes more profits. You following? But a house can't do that. So how do you make a house more valuable? Simple. The second sin. The foundational concept of economics

is supply and demand. If demand increases but supply doesn't,

then the price of the supply goes up. Pretty simple right? Well, say hello to the second sin, restrictive zoning

and its little brother NIMBYism. So, all cities have zoning. This basically tells you what you can and

cannot build on any given parcel of land. S.F. was one of the first U.S. cities to adopt a zoning code. Here's how it worked. They divided the city

into first residential, which were homes for the rich, and second

residential: everything else. The idea was really simple. By making it harder

to build in first residential zones, you'd increase the value of homes

and prevent racial minorities from moving into predominantly white

neighborhoods. Sadly, this was one of the first case studies

on how to effectively weaponize zoning. And the results were scary. In 2019,

it was shown that 75% of SF's land was restricted to single family homes

or small duplexes. Vancouver was even worse, with 81% of

the land reserved for single family homes. And we can even see a similar pattern

in all of these other cities, too. NIMBYs will often cite issues of community

character when fighting projects. But in reality, it is always a battle

between the haves and the have nots. And when densification does rear

its ugly head and home prices begin to decline, homeowners

introduce additional barriers. For example, the California Environmental Quality Act

was passed to stop industrial pollution. A noble cause, right? But it was quickly weaponized

by homeowners to block housing. Between 2018 and 2020. It was estimated that 60% of

all CEQA lawsuits were filed against housing developments.

In Vancouver, the city implemented view cones

to preserve the views of the mountains. But what this does is it

caps the height of buildings, which artificially lowers

potential supply. And yeah, Vancouver

has a beautiful skyline. But one study found that

even slight modifications to the cones could unlock 30,000

potential homes over a few decades. And as more and more of these complex

zoning laws comes into effect, home prices begin to rise

and home owners begin to complain because higher home

prices equals more property taxes. In 2003, Warren Buffett was advising Arnold Schwarzenegger on his bid

to become governor. Buffett gave an interview

to The Wall Street Journal, and he explained how property taxes

were deeply flawed. So here's what he said. His $500,000 home in Omaha paid

$14,401 in property taxes, while his $4 million California home paid only $2,264 in property taxes. Naturally, he thought this was unfair

and kept home prices artificially high in California. So what he suggested

was the repeal of Prop 13, Prop 13 capped property taxes at 1% of cash value at purchase,

restricts annual increases to at most 2%, and requires a two thirds

majority in the legislature to repeal. In short, it's political suicide. Naturally, Arnold backed off of it,

and Warren quietly left the campaign. This might be the most controversial sin. Low taxes on housing. The father of modern economics,

Adam Smith, argued in 1776 that a tax on land was the most perfect

tax possible. The logic is simple. The value of the land has nothing to do

with the skills or labor of the owner of the land. Therefore, it's appropriate to tax it. On the other hand, a factory worker

must be productive to generate value and therefore they should be taxed less. Many other economists and thinkers agree. Henry George, David Ricardo,

John Stuart Mill, and even the most fun house party guest, Milton Friedman,

who called it the least bad tax. To show you what we mean,

let's look at Australia and Canada. Cities like Vancouver,

Sydney and Melbourne have seriously high housing prices, but they each

have seriously low property taxes. The average property tax on $1 million home in

these cities is around $2,500 per year. Compare that to a more affordable city

like Dallas, where the property tax bill is $19,000

per year. This isn't simply an anecdote. It's been studied

ad nauseum. To prove our point, here are a number of studies on the relationship

between property taxes and housing prices. And every one of them

basically concludes the same thing. Higher property taxes increases

affordability, especially for younger people. But here's a simple problem. Young people are not the majority voter,

so politicians are left with one option. Continue to keep property taxes low,

but it doesn't end with property taxes. Now that homeowners have built up

all this hard earned equity, they don't want to pay taxes

when they sell. God, no taxes! Why should they pay taxes for building up

wealth for literally doing nothing? Let me explain. Places like New Zealand,

Australia, Canada, Norway and others have no tax

on the sale of primary homes. And often what happens is

you can use this benefit unlimited times, meaning you buy a home,

it increases in value. You sell it, pay no taxes by another. It becomes your primary home. It increases in value. You sell it, pay

no taxes, and so on and so on and so on. Let me show you how crazy

this actually sounds. So if you work,

you paid 30 to 50% of your wages in taxes, if you have a business,

you paid 30% of your profits in taxes. And if you sell your business,

you pay taxes on 50% of your gains. But if you sit on your butt

on a piece of land that is now worth more than you can count,

you pay $0 in taxes. Sounds like a fair system, right? What this does is this tax system

also has a ripple effect of making investment into productive business way less attractive, which slows down real economic

growth, wage growth, and job growth. As you can see, you now

have a number of issues that arise. Housing is becoming very expensive

and regular hard working folks can no longer afford it. But the government doesn't

want housing prices to come down because they'll lose their election. And at the same time, they need money to provide services

because life is becoming unaffordable. But the government can't collect

tax revenue from property. So what are they supposed to do? We'll get there in a second. But before we do, let me tell you

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throws in a free 100 pack of blades. Two years of shaving free. And now back to the video. Sin four: tax the workers. This sin sounds hyperbolic,

but it's not. Since property taxes are super low, government needs a way

to fund infrastructure in their ever- ballooning budgets. So the simplest thing you can do

is tax new housing. Wait, what? Listen, you might think this is crazy

and you would be right. But as city struggled to fund projects,

and politicians fight to keep their seats, they're forced to tax renters and would-be

owners instead of their constituents. In essence, politicians

want to make sure that homeowners continue to hoard land but contribute

as little as possible to the city. So municipalities

introduce development fees, and these fees are no laughing matter. Toronto's development charges

at 20 to 25% to the cost of a home. In SF, impact fees can add up to 18% and it's a similar story in Vancouver,

Sydney and LA. Now, city workers and politicians who,

may I remind you, likely failed Grade 12 math will tell you that: Don't worry, the developers

will simply eat these costs. But anyone with half a brain

would tell you that this makes no sense. In fact, smart people who studied

development fees discovered not so shockingly,

that these fees increase housing prices, whereas property taxes lower and stabilize

housing prices, Again, for effect, here are a number of studies

that conclude this, and we'll link these in the description

so you can check them out later. The logic is simple. Land taxes encourage densification and reduce the ability

for people to be house rich and cash poor. In essence, if property taxes are high,

homeowners won't want their house to be worth millions

because they will owe a ton in taxes. This means home prices don't outgrow wages because you need high wages

to afford high property taxes. Whereas development charges

basically make it harder for developers to get a return on their housing project,

and as such, to make the numbers work, they have to pass the cost

onto the workers, i.e. us. Okay, now we are getting really spicy

and home prices are going sky high baby. So how the heck is anyone

supposed to buy these homes? Now this one might be controversial, but in select markets this has likely been

one of the biggest contributors to housing prices. We're talking about foreign buyers. Portugal is the prime example of this. In 2012,

to recover from the eurozone debt crisis, the government introduced

a golden visa program for foreigners who invested €500K in Portuguese

real estate. Good idea right? This led to the purchase

of billions of dollars worth of developments in Lisbon and Porto

by rich foreigners. To make matters worse, the government

introduced non-habitual resident status, which allowed high value professionals

and retirees to have reduced tax rates

on pensions, dividends and the like. The program was a great success. 17,700 investors

purchased the visa and generated €7.5 billion of upfront investment,

with real estate comprising 90% of it. On top of this,

100,000 people claimed in NHR status, bringing with them

high savings and incomes. Naturally, the government was ecstatic. The economy was growing,

the rich were spending. But then they noticed something. Between 2013 and 2025,

real estate prices grew 191%. During that same period,

Portugal saw wages only rise 60%, meaning home prices increased

at three times the rate of wages. But you see, Portugal isn't alone. For example, Vancouver saw a massive increase in real estate

prices driven by foreign investment. And most Canadians are likely unaware

of Canada's own golden visa. The province of Quebec runs a program called the Quebec

Immigrant Investor Program. Here's how it works. Foreigners

give Quebec an interest free loan of about $1 million,

and in return they receive PR status. But instead of living in Quebec,

90% of participants relocate elsewhere. With the vast majority of the 50,000

wealthy individuals settling in Vancouver and Richmond. London, Spain

and others have had similar issues. The argument for foreign investment

is always simple rich foreigners will bring money, spend it

locally and stimulate the economy. But here's the thing:

that is empirically wrong. Nearly every study we could find on

the subject comes to the same conclusion. Yes, the economy will grow, but it is almost entirely driven

by housing speculation and consumption. Investment doesn't increase. Wages are outstripped by asset prices

and Dutch disease can kick in, leading to a real estate pandemonium. The crowds out other investment

opportunities and it makes perfect sense. If you let a bunch of rich people who made

their money abroad come to your country. They inherently have an advantage

over the local population. Secondly, these people are not interested

in growing their wealth. They are interested in preserving it. This means plopping money into real estate

and kicking back. And the proof is in the pudding. None of these cities mentioned

have seen any meaningful improvements in anything

but housing prices. But this leads to a knock on effect.

Because housing has exploded, construction and real estate adjacent industries become

the dominant pillars of the economy. So if you are in government, how do you

make sure to keep the Ponzi scheme going? The government has always had the best intentions,

but often the worst execution. And it makes sense. The people who go into government are often trained in winning elections,

not in thinking rationally. Canada is possibly the best example

of this next sin: daddy government. Canada has some of the lowest mortgage

rates in the Western world, and most Canadians take this for granted

and likely have no idea why. This is. Through the National Housing Act, the government allows banks

to sell their mortgages to investors. Sounds normal so far, right? But just wait. When these banks sell mortgages

to investors, the Government of Canada, via

the CMHC guarantees them meaning these mortgage backed securities

are no riskier than sovereign bonds. But there is more. The government, again,

through the CMHC, provides insurance. The bank stops the bank in case homeowners

default on their mortgages. In a worst case scenario, the government of Canada, moronically, would be on the hook for the majority

of residential mortgage risk. Just imagine if the government guaranteed

that Amazon's share price wouldn't go down, or that your friend's strawberry matcha

focaccia pop up wouldn't go bankrupt. What would you do? You would invest irrationally into Amazon

and your friend’s pop up. Wild example, I know, but this basically

misprices the risk of homeownership driving more investment into the space

than would be warranted in a rational market. But Canada

kept going with government programs. They introduced the FHSA and HBP,

which are investment savings accounts that are tax shielded

so that people can save to buy a home. This sounds nice on paper,

but even the CMHC said that these demand side

subsidies only raise the price of homes. Think about it. You basically created a carve out

that allows homebuyers to save more money to afford homes

that are otherwise unaffordable. This simply keeps up the charade. But wait, there is more. Canada softened mortgage renewal requirements

and stress tests. Simply put,

they lowered the bar to get loans. Think about that. The government introduced more risk into

a system that they ultimately backstop. And when I say they, I mean the taxpayer. But you see this all makes perfect sense. Like I said before, the goal of

a politician is to get elected. And most citizens

don't have a clue on what's going on. If you can show voters home price

go high and economy go up, you've sealed your fate. I mean, look at this video of Canada's

housing minister basically saying home prices can't come down. No, I think that we need to deliver

more supply. Or Trump saying the same: Existing

housing, people that own their homes, We're going to keep them wealthy. We're going to keep those prices up. Think about that. Both the left and the right won't let home

prices come down. This is not a partisan issue. Instead, they discuss the idea of

affordable housing, which makes no sense. How can you create affordable housing

when the land you are buying to build

housing is inherently unaffordable? But eventually the pressure becomes

too much and nothing makes sense anymore. Prices are so damn high that not even Jeff

Bezos can afford a house. Well, maybe he can, but you get the point. What happens next

is why this problem will never go away. Okay, we have

talked a lot about sins. Daddy government wanting to meddle, taxing

productive work, foreign buyers and more. But it all started

with the most deadly sin of them all. Housing is an investment. If this house of cards is built

under the notion that your home is an investment,

what does that mean for an economy? It means that the vast majority

of household wealth is real estate. Also means that real estate adjacent activities are often

the largest contributors to an economy. Cities like Vancouver, Toronto, Melbourne,

Sydney and others are heavily tilted toward the housing market. Each of these cities derives around 20% of their direct GDP

from housing related activities. If prices collapse, then the ripple

effects are going to be catastrophic. This leads to the last sin,

the government bailout. The craziest example of

this is the Japanese financial crisis, which we detailed a bit in our Oscar

nominated documentary linked below. Just joking. Don't get mad at me. When Japan's real estate bubble burst. Land values, which are the bedrock

of the country's bank collateral, crashed by up to 80%,

leaving the entire financial system insolvent. To prevent a total collapse,

the government injected ¥60 trillion to buy up toxic real estate

debt and nationalized failing banks, effectively socializing

the losses for private investors. This intervention saved the system

from immediate death, but created zombie companies and triggered the lost

decade of economic stagnation. And we are starting to see grumblings

of this in other countries. The US bailed out banks in the GFC. Yeah, we know it's not exactly the same,

but similar enough. Canada is purchasing 30 billion in Canada

mortgage bonds to inject liquidity and keep mortgage

rates artificially suppressed. And on a smaller scale, Ontario is using

taxpayer money to buy up real estate. I mean, this is insane. You might think these are good ideas,

but this is no different than putting polysporin

and a Band-Aid on a gunshot wound. Eventually,

no amount of polysporin will work, and unfortunately, the bleeding

won't impact homeowners today. They'll be fine. It will simply destroy

the future of the young. This is the broader point. These housing sins

won't matter for older people. These sins exist

to make their lives easier. But you see,

nothing is without trade offs. These trade offs will directly impact you. Our viewers are generally 20

to 40 years of age. You are the exact people

that these sins will destroy. But often you are the exact people who seem to vote

without thinking about this at all. Listen, we talk to a lot of young voters,

and not a single person we have ever spoken with has pointed out

these issues. Instead,

they often blame greedy developers. They often blame a lack of affordable

housing development. Simple talking points that politicians

continue to repeat to get your vote. This isn't the issue. The issue is a system

that is flawed at its core. Housing is an investment,

so we must keep prices high. So we must build less

housing to keep prices high. So we must lower housing taxes to make it affordable

for me to own an expensive home. So we must tax workers to provide services

that my taxes don't cover. So we must bring in foreign capital

because local people can't afford homes. So we must bring in government programs

that artificially prop up homes. So we must build me up, because if you

don't, home prices will fall. And that cannot happen. Yes, Grand Regent landlord! In the immortal words of Charlie Munger: Show me the incentive

and I'll show you the outcome. Thank you for watching.

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