The Drug Trade in BC: You’re Soaking In It..

Marijuana MisgivingsBritish Columbia’s economy has remained relatively bouyant through the global economic turmoil.  One example of this is home prices… whereas Real Estate in popular cities like Los Angeles, Miami, and others have experienced 20%-40% declines amid massive economic carnage — Vancouver (and, by extension, the rest of the province) has not been nearly as hard hit.

Many tend to argue that our status as a desirable place to live is the major driver of our seeming resilience, or that the 2010 Olympics (a 3-week event) is maintaining property values.  These certainly don’t hurt, but there is the small issue of the average joe’s capacity to pay. As I pointed out in January, there is little on the books to explain how an average Vancouver family could afford to buy a house. What’s the sustaining economic factor pinning up personal incomes, allowing them to fork over $1 Million for a simple 2500 s.f. fixer-upper?

There may not be more bottom in local real estate … but I’m not buying the party line, here, either. 

I believe there may be an unseen force that has been sustaining growth and holding up the real estate market — and, indeed, the economy — in British Columbia through the current global downturn.  Researchers claim that the marijuana growth industry employs between 90,000 – 150,000 people in the province directly. The Economist pegged the drug trade in BC (with Vancouver as its distribution hub) at greater than $7 Billion per year.  This includes the importation of heroin and cocaine (which frequently serves as a form of payment for the receipt of BC pot) by more than 130 gangs, who vie for control of distribution and importation on the streets of Greater Vancouver daily, resulting in a record-breaking murder spree, as the following map portrays.

View Metro Vancouver homicides in a larger map…

A film released in 2007 called “The Union” debunks many myths about marijuana and the pot trade — but more revealingly digs into the impact that the growth and distribution of pot has on the BC economy.  Much of this data came from a 2004 report by SFU professor Stephen Easton entitled “Marijuana Growth in British Columbia“.   Take some time out of your day to watch the movie here:

What we learn from the report, the movie, and other publicly available data is that the growth of Marijuana, largely indoors, drives demand for real estate and for services associated with it.  Landlords are often complicit in tolerating the development of grow-ops by pot entrepreneurs and turn a blind eye in exchange for premium rents — an essential in a market so overheated by price inflation that mortgages can cost $4,000/month for a single-family dwelling.  Contractors earn a fortune outfitting basements with hydroponics, heat lamps and rigging for plants.  Realtors, investment firms, brokers, and a plethora of financial services professionals launder the proceeds of drug growing and distribution through real estate investments.

You simply cannot inject $7 Billion into a population of 4 Million without that money having a major, major effect. If the $7.2 Billion figure is to be believed, then the pot industry in British Columbia trumps even the province’s forest industry, employing more people and contributing more to the economy.  According to Statistics Canada, the lumber industry employs only 145,000 people and contributes $7.6 Billion annually (as at 2006) nationwide, with BC accounting for 63% — or $4.8 Billion.  Our precious timber harvest nets a far lower bounty than a crop which is grown in basements, hidden in remote valleys, and incubated in rail cars concealed in sprawling underground caverns.  This has, obviously, led to a growing movement to legalize marijuana and bring an end to decades of official prohibition.

But short of adopting a rational policy, what can a government do to embrace the impact of a massive underground economy?  As tax revenue starts to tail off from the dwindling legitimate industries suffering from the downturn you need to make up the shortfall somehow.  Fortunately, drug dealers and pot growers alike buy cars, clothes, boats, and consumer electronics … they also buy expensive dinners, go out on the town for drinks, and throw cash around enjoying themselves.

Our province’s seemingly pragmatic answer:  More consumption taxes, in the form of a broadly-applied Harmonized Sales Tax (HST).  In our province, many consumables have always been exempt from provincial sales tax, while a goods and services tax (federal) applies across the board.  Provincial sales tax, for those items which are covered, has in recent years been 7%; whereas the GST was reduced twice in the last few years from 7% to 6% to 5%.  The Harmonized Sales Tax allows the province to assume administration and handling of all consumption taxes, and applies both provincial and federal sales taxes to nearly every transaction in the system.  And we in BC will be getting an HST in the summer of 2010.

Consumption taxes levied at the cash register are the only way for governments to monetize an underground economy, and our politicians know it.  While none among them is brave enough to actually champion a realistic policy towards drugs like Marijuana, the HST is a perfect way to generate 5% for the provincial coffers from the billions flowing through the province from the pot industry.  That’s $360 million for the kitty folks, not to mention the extra get from those of us who haplessly obey the law and pay our taxes on income — a fact which compounds the problem.

With these policies (prohibition and increased taxation) we are left with the worst of both worlds:  rampant and increasing gang violence and property crimes stemming from the illegal drug trade and those victimized by it; hundreds of millions of dollars wasted on law enforcement trying to plug the leaky dam; and increased taxes across the board for no substantial increase in services.  The only people who truly benefit are those in the drug industry, while those of us who DON’T engage in the trade of pot (or worse drugs) are simply forced to pay higher taxes to subsidize the whole circus. Drug dealers and gang bangers alike don’t fear the law … they have only one real enemy: decriminalization and regulation.

The end of Prohibition in the United States nearly put the mobsters out of business in the 1930s, forcing them to adapt their practises to an economy where they simply could not compete with commercial liquor makers. Let me ask you this:  when was the last time you heard about someone caught in the crossfire as two rum runners blasted it out in front of their favourite night club?  I didn’t think so. 

When the Fraser Institute, a notorious conservative think-tank, is advocating a re-evaluation of the policy of prohibition on drugs, don’t you think it’s time to take an honest look and engage in a constructive, evaluative debate? By all medical evidence, pot seems to be less harmful than commercially-produced cigarettes. Why are we letting criminals enjoy all of the profits?

4 thoughts on “The Drug Trade in BC: You’re Soaking In It..

  1. “Drug dealers and gang bangers alike don’t fear the law … they have only one real enemy: decriminalization and regulation.”

    I know this would be a step in the right direction and stop lots of the violence and the immoral punishment of marijuana users, but why do you want it regulated like alcohol. Legal, unregulated and untaxed would really put them out of business because criminals couldn’t even dodge regulation and taxation to make a buck. There is no grounds to tax pot anyways. Unless you can identify an innocent third party harmed by marijuana use then I dont see the point in a tax.

  2. I was a real estate bear until recently. The problem is, all of these arguments, which do make sense on paper, have been trotted out year after year after year by so many of us, but the Vancouver real estate market just doesn’t cooperate. We’ve been waiting for years and years for prices to decrease: but, aside from a blip in 2008, they simply go up and up and up … and up.

    My theory is that it has less to do with pot or low interest rates, both of which I think do contribute, and much more to do with psychology. I’ve never seen another city in which real estate has become pretty much a religious issue. People are more than willing here to spend 75% of their income on housing. I am not, so I’m priced out. The multiplier of median income to median house price is something like 11x, which is several percentage points higher than New York City. Vancouver is nice, but it’s no NYC in terms of opportunity, employment, arts, etc. Even Seattle makes it look pretty sad. But people have been fooled into thinking it’s the best place in the world, and they’re more than willing to shell out.

    I really doubt we’ll see more than a 10% dip in prices any time soon. Look, we are in the midst of a severe recession, and prices have INCREASED. What happens when times are good?

  3. BC’s economy has been steam-rollered by the recession. Look at any resource industry in BC and it’s been crushed into the dirt to an extent not seen in years. Not sure where you get the idea that it’s somehow remained relatively sheltered, unless you’re seeing real estate prices in Vancouver and Victoria as evidence of this.

    The real driver of real estate in Vancouver (and most of the rest of Canada) is nothing more complex than cheap money — this and this alone is the sole reason it has seemed immune to the broader economy. Most Canadians have been suckered into thinking it’s better to rent lots of money at low interest rates than it is just to rent housing directly.

    Similarly, most Canadians are utterly ignorant of economics, to the extent that they cannot or will not understand why interest rates will have to rise in the relatively near future, why the cost of borrowing will sky-rocket when it comes time to renew that five-year mortgage, or why their real income won’t be increasing by 60% – 100% over the same time frame. And least of all why getting a big mortgage with a small down-payment right now is just about the most foolish financial decision they’ll make in their lifetime.

    Real estate prices are controlled by affordability and right now low interest rates have made real estate relatively more affordable than when rates were high. Unfortunately, most of Canada’s middle class have taken unsustainable gains in home prices as the consolation prize to make themselves feel better that their real incomes are just as crappy now as they were 20 – 30 years ago. Seriously, how many people do you know who make even $200k / year in Vancouver? It doesn’t matter one bit if it’s “different here” — at some point the math is inescapable.

    Most young / first-time buyers also don’t understand that the huge appreciation in value of their parents’ real estate was paid for with mortgages in the double digits and then some. We’re probably going back to those days or at least to mortgage rates of ~8%, and prices will drop as a consequence of this shift.

    Oh, and before anyone jumps all over me for being a “jealous renter”, I doubled my money in under three years on the last property I bought and sold. My family income is well North of $500k / year, but we’re choosing to rent our principal residence right now. You can make money with real estate, but you have to understand that, no matter what your knuckle-dragging realtor says, it hasn’t, doesn’t and won’t always increase in value.

    Pot has absolutely nothing to do with it.

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