How the Canadian Real Estate Market is About to Change
Wednesday Apr 27th, 2022
In early April, the 2022 Federal Budget was released and housing took top priority. Still needing to be voted into legislation, here is a summary of the real estate-related items that were included in the budget, in order of those that would likely have the biggest impact on the market to no impact:
HOME BUYERS’ BILL OF RIGHTS
PROPOSAL: Initiative to work together with the provinces to develop and implement a Bill of Rights that will end blind bidding, create a legal right to a home inspection, transparency in previous sold prices and title searches, and a publicly-accessible beneficial ownership registry.
THOUGHTS: Province of Ontario has already moved forward with a plan to take effect in April 2023 that will give sellers the option to disclose bidding information. Blind bidding or buyers being forced to waive home inspections are deemed to be the reasons why prices are soaring, and they’re hoping that transparency in the bidding process will level the playing field for buyers and tame rising prices. Working with the right realtor will ensure that buyers still protect themselves during the offer process relating to home inspections, and past sold prices are provided prior to making an offer. Transparency is always a good thing, but it will be challenging to implement a national program with buy-in from every province and territory.
EFFECT ON THE MARKET: There is evidence that shows that open bidding will lead to even higher prices. Open bidding in Australia has not done anything to lower prices. Once a sold price is revealed to a buyer who has lost in a bidding situation, they often will say that they would have paid that price or slightly higher in order to have been the winning bid for that property. So the jury is still out on whether or not this will cool market prices (if implemented).
TAXES ON FLIPPING
PROPOSAL: Requirement to hold a property for 12 months before selling, and if sold prior to 12 months, any profit would be taxed as business income.
THOUGHTS: Speculators are often thought to be the “bad guys” in a market of low inventory and rising prices – buyers who purchase a property, leave it vacant, and often list it for sale months later once prices have increased and most likely without any improvements to the property.
However this proposed legislation will also affect “flippers” – renovators who will take a property in need of some TLC, renovate/transform it and even if they’re able to do so in 8 months, will need to hang onto the vacant property until the 12 month mark, withholding inventory that is badly needed right now. With the majority of buyers being millennials who will likely not have the financial resources to do a major renovation, and with the price of renovations being so high at this time and deterring some buyers from purchasing older properties in need of work, flippers/renovators are much needed buyer pool. The current market is flattening, or is appreciating at a declining rate which removes most speculators from the market anyway, but the intention behind this is to somehow deter these buyers from competing against end-users in purchasing properties.
Note that there are exemptions to tax to those who need to sell within 12 months of purchasing a property: death, disability, birth of a child, new job, or divorce.
EFFECT ON THE MARKET: Some properties in need of work/updating will sit for longer or sell for less, empty properties may sit for longer before coming to market - neither helping with inventory problems we are experiencing in Toronto.
TAX ON ASSIGNMENTS
PROPOSAL: Effective May 7, 2022, assignment sales (sales of properties that have yet to be occupied or built/completed) will be subject to HST.
THOUGHTS: This is largely going to remove any incentive left for speculators who have been buying into the pre-construction landscape in hopes of “flipping” or re-selling their contracts for a designated condo unit prior to registration or “closing” of a building project. It is clear that they are trying to help end-users, but disincentivizing investors will impact the ability of builders to bring units to the market overall.
EFFECT ON THE MARKET: With pre-construction prices being higher, less incentives for speculators to purchase units, a ban on foreign buying, an increase in development charges in Toronto, soaring costs of construction, a slowing market and higher interest rates, certain projects could face challenges in selling enough units to move into the construction phase. If these projects aren’t able to move forward at today’s prices, builders can decide to focus on other markets (eg. Outside the GTA) which again will perpetuate our current inventory shortage.
BAN ON FOREIGN BUYERS
PROPOSAL: 2-year ban on foreign buyers from purchasing real estate in Canada.
THOUGHTS: While it seems like an easy target to ban foreign investors, affecting those who can’t even vote or protest this change, the foreign buyer market represents only a small fraction of the overall housing market (approx. less than 5%). The ban is not just on buyers from Dubai or China, whom many deem to be the culprits who have long seen Canada as a safe haven for real estate investing, but also our neighbours to the South in te US. The US is a popular destination for real estate purchases for Canadians – in retaliation, what if they impose a similar ban, preventing Canadians from purchasing real estate there? Will be interesting to see if any other countries pursue a similar strategy that will affect Canadians in their pursuit of buying real estate abroad.
EFFECT ON THE MARKET: This will likely create a minimal effect on market prices since it covers such a small percentage of the market. There is a long list of exemptions to this ban to consider as well. One segment of the market that may feel it most is the pre-construction condo market, often with sales forces outside of Canada targeting investors who buy multiple units in a given project.
HOUSING ACCELERATOR FUND
PROPOSAL: $4B in incentives over the next 5 years to boost housing supply with a goal of creating 100,000 units
THOUGHTS: Canada produces the lowest number of housing supply units per capita of any G7 nation so any support to create more supply is good news. Priorities will go towards rural communities, affordable housing and women-focused housing projects.
EFFECT ON THE MARKET: If approved, this will hopefully improve choice for buyers in the long term, but very little effect on today’s current market. The incentives are being allocated over the next 5 years and depending on the project, it can take an average of 2-6 years to bring a project to completion, so there will be a minimal effect on the market until these units are completed.
TAX-FREE FIRST TIME HOME BUYERS SAVINGS ACCOUNT
PROPOSAL: Up to $40,000 over 5 years in tax-free savings to help first time home buyers purchase a home
THOUGHTS: There’s a maximum of $8,000 per year for a maximum of $40,000 to be saved over 5 years. Any support to help first time buyers is a great thing and every first time buyer should take advantage of all of the programs available to them.
EFFECT ON THE MARKET: None. Helping first time buyers save does nothing to resolve current prices due to low inventory.
FIRST TIME HOME BUYERS TAX CREDIT
PROPOSAL: Double the tax credit offered to first time homebuyers (available on filing taxes the next year after purchasing a property) up to $10,000.
THOUGHTS: Again, any support to help first time homebuyers is welcome.
EFFECT ON THE MARKET: None
PROPOSAL: extend anti-money laundering and anti-terrorist financing requirements to all businesses conducting mortgage lending in Canada
THOUGHTS: an increase in mortgage lending by businesses and “lenders” currently not under the same legislation as traditional financial institutions have led to an increase in money laundering in the financial part of the real estate industry. Some of these “lenders” may exit the business.
EFFECT ON THE MARKET: None
PROPOSAL: $200M in support to develop rent-to-own projects across Canada
THOUGHTS: Not a big financial commitment to develop these types of homes, and impacts a very small segment of the market.
EFFECT ON THE MARKET: None