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Still waiting for the Bank of Canada's promised real estate rebound: Don Pittis



History tells us that with very rare exceptions, no matter how far property values fall, eventually they will come back even stronger.

The latest housing market data shows sales are down and prices have dropped an average of 11 per cent across Canada over the past year, so the difficult task facing people thinking of buying or selling is trying to figure out exactly where we are in the property value cycle, and whether they have the ability to hold out through the dip, however long it lasts.

Only last month, Bank of Canada governor Stephen Poloz and his senior deputy, Carolyn Wilkins, said the decline in sales activity in the first three months of the year (referred to as the first quarter, or Q1) would be temporary.

'We expect it to bounce back'

They said the imposition in January of stress tests — forcing new buyers and those wanting to change to a different lender to prove they could handle a hike in interest rates — meant many buyers rushed their purchases to beat the change. 

That effectively boosted sales in late 2017 at the expense of business in the new year.

"We do expect [the new mortgage rules] to have a dampening effect on housing throughout the year but not to see the continued decline like we saw in Q1," said Wilkins. "We expect it to bounce back."

Even after the most devastating declines, house prices do bounce back.

Montreal real estate has been one of the hot spots in Canada, but overall sales and prices in the country are falling. (Graham Hughes/Canadian Press)

There have been exceptions, such as Canadian towns supported by a dying resource, or the departure of an entire industry as happened in Detroit, where residential neighbourhoods were turned back into fields. But those exceptions are rare.

I had a reminder last week during a visit to Ireland, which had a disastrous housing crash following the 2007 credit crunch. Construction projects underway were left unfinished and homeowners found themselves deep underwater as valuations fell below what they had paid.

Irish boom revisited

But ten years later that has all blown away. Last week, Ireland's Poloz equivalent, Philip Lane, issued a strong warning about Irish property prices being too high, a warning reiterated this week by the International Monetary Fund.

The net wealth of the average Irish person — in other words their assets minus what they owe — is now higher than it was before the crash, largely due to the rebound in house prices.

There are some lessons for Canadians from the Irish experience as they contemplate the future of house prices here.

People pass a sign reading 'Sold Out' in front of a condo building under construction in Toronto. (Chris Helgren/Reuters)

One is that the Irish price rebound didn't help everyone. Many people who overextended themselves in Ireland's Celtic Tiger boom and were forced to sell during the ensuing property collapse are likely still suffering from the personal finance debacle.

The other lesson is that sitting tight during a property crash can pay off — that is, if you can afford to wait long enough.

Small consolation

Of course, if the price declines that we've seen in the past two sets of Canadian Real Estate Association data continue, even the very likely prospect of an eventual rebound in house prices will be small consolation to those anxious to sell now or soon.

Most people planning to stay in a new or current property for the medium or long term should be fine. 

But a job loss, a forced move or the arrival of a brace of children could change that calculus. The group that might not be able to wait could also include older people hoping to cash out and new buyers in over their heads as interest rates rise.

Even if prices continue to slide, odds are they will bounce back to new highs, but no one knows when that will happen. (Mark Blinch/Reuters)

That rise in mortgage costs seems even more likely to continue after yesterday's spike in Canadian bond rates to a seven-year high.

While some people in the real estate industry complain government interference is hurting their business, the entire purpose of stress tests is to prevent that last group — the over-borrowed — from being forced to sell during a dip in prices, something that could accentuate a serious property crash, should one occur.

Canadians care about the value of their houses and there is some evidence that falling house prices can rein in consumer spending because homeowners feel poorer, the so-called inverse wealth effect.

What comes next?

But for those hoping to move into or out of the property market, knowing what prices will do in the medium term — how far they will fall and how soon they might recover — is of crucial importance to their planning.

Unfortunately, while each of us can try to predict the future based on various considerations, all those things are uncertain.

Yesterday's CREA numbers for April seem to show that the optimism of Poloz and Wilkins following the first quarter dip has not yet played out. 

TD Bank says the Canadian housing market will recover at the end of this year and strengthen in 2019 on the back of rising employment and a growing population. Of course, they are in the business of selling mortgages, and predictions of housing market doom by Canadian bank economists are notable due to their rarity.

Others have been more gloomy. Over the years, international banks and organizations such as the IMF have predicted Canadian house price declines of anywhere from 30 per cent to more than 60 per cent.

But barring a catastrophe that would hurt a lot more than house prices, odds are that whatever the decline, real estate prices will recover. The only question is how long you will have to wait and whether you can afford to.

Follow Don on Twitter @don_pittis    

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Real Estate

How the New Tax Law Affects Your Real Estate Business




Tax reform should have a positive impact on the real estate sector. Make sure your business is prepared for these major changes.

4 min read

The Tax Cuts and Jobs Act (TCJA) brings big tax changes to the real estate sector, the likes of which haven't been seen since the Tax Reform Act of 1986.

Fortunately, the impact on real estate businesses should be mostly positive. That said, there are some crucial changes that business owners and entrepreneurs in the real estate sector should look out for moving forward.

Related: The New Tax Law Has Made It a Great Time to Invest in Real Estate. Here's How to Get the Most From Your Investment.

Pass-through entities

You have probably heard about the 40 percent reduction in the corporate tax rate to 21 percent under the TCJA. However, if you operate as a sole proprietor, or in a pass-through entity such as a partnership, LLC or S Corporation, the TCJA also contains a significant change to how you will be taxed.

A deduction of up to 20 percent of qualified business income is now permitted. This deduction is limited to the lesser of:

  • 20 percent of qualified business income
  • The greater of 50 percent of W-2 wages, or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis of qualified depreciable property

Congress and the IRS need to issue new rules to further clarify and explain some of the nuances of this provision, but real estate businesses should clearly benefit from it.

Related: How to Avoid the Common Pitfalls of Real Estate Investing


Real estate depreciation rules were already favorable, but the TCJA improved them even further. Qualifying property — including, for the first time, used property — acquired after Sept. 27, 2017 is eligible for 100 percent bonus depreciation in the year it is placed in service.

Eligible assets are those with a depreciable life of 20 years or less. This encompasses personal property, and was intended to include "qualified improvement property" defined as work done to the interior of a commercial building excluding costs related to enlargement, elevators and escalators or the internal framework. Because of a drafting error, however, it was not assigned the correct class life, so this is an important provision requiring Congressional remedy.

Remember that bonus depreciation will begin to wind down in 2023. The rate will drop by 20 percent per year beginning in 2023 until it is eventually eliminated in 2027.

Additionally, Section 179, which permits the expensing of assets for commercial properties, has been expanded. The annual limitation has increased from $500,000 to $1 million, with a phase-out beginning at $2.5 million for qualifying assets. For the first time, this provision now includes roofs, fire protection and alarm systems, HVACs and security systems.

Related: 5 Reasons Why Real Estate Is a Great Investment

Limitations on business interest and losses

The way the losses and gains from your real estate business are taxed is also impacted by the new law. For example, debt-financed real estate operations should note that any business with more than $25 million in average annual gross revenue over the prior three years will be limited in its interest expense deduction to interest income plus 30 percent of adjusted taxable income. Rental property owners and others in real property businesses can, in some cases, opt out of this rule and claim the full interest deduction, but that comes with certain trade-offs.

If you're on the opposite side of the scale with an overall tax loss, a new loss limitation rule allows only $500,000 for joint filers ($250,000 for single) to be used to shelter non-real estate income such as wages, interest, dividends and capital gains. These provisions will likely have the largest impact on qualifying real estate professionals.

Related: Sell a House and Pay $0 in Taxes With This Tip

Final points

There are many other pieces of the tax law that could affect real estate companies and investors. Section 1031 like-kind exchanges for real estate (but not for personal property) remained intact, but the taxation of carried interests, doubling of the estate and gift exemption and changes to some popular tax credits could affect your real estate holdings, taxes and financial planning.

In order to ensure you're getting the most out of your corporate and individual taxes — in real estate and elsewhere — make sure to work with a tax professional well-versed in these changes. The sooner you review these changes with a professional, the less likely you will be caught off guard when the 2018 tax filing season rolls around.

Opinions expressed by Entrepreneur contributors are their own.

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Ottawa real estate firm Minto looks to create real estate trust




One of Ottawa's biggest landlords is looking to convert to a real estate investment trust, a move that would allow investors to cash in on the rent it charges for suites across the city.

Minto Properties announced Wednesday it's seeking to create the trust, which will include 22 properties across the country, including 14 here in Ottawa.

Other properties are in Toronto, Calgary and Edmonton.

Real estate trusts allow investors to essentially buy shares in residential properties, giving them a cut of the rent payments the company receives from tenants.

Carleton business professor Ian Lee said this is a chance for Minto to take the buildings, which are valuable assets, and get some money to potentially move in another direction.

"It appears they have decided to focus on a different part of the real estate market," he said. 

"Usually, when you're selling off your entire portfolio, as they announced they are today, that suggests a change in strategic direction."

No changes likely for renters

In their prospectus to investors, Minto claims its properties are 98 per cent occupied and charge an average monthly rent of $1,358.

Lee said this isn't really going to change anything for renters.

"It's just as if the name of the company collecting your rental cheque every month has changed and you're indifferent," he said.

The move still has to be approved by regulators, but in a release Minto said it could eventually add more units to the 4,279 included in the initial offering.

CBC reached out to Minto CEO Michael Waters, but he declined to comment as the process unfolds.

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Toronto Real Estate Leads The Country In Average Price Declines, Saint John Pops Higher




The average sale price of Canadian real estate is falling, and fast. Canadian Real Estate Association (CREA) numbers show the average price of a home is down 11.3% in April 2018. Most of the declines are being attributed to the country’s largest and fastest falling real estate market – Toronto. Yeah, I haven’t heard of it either.

Average Prices

The rumors are true, average prices aren’t great for determining how much you’ll pay for a home. When the range of distribution for sales is normal, the average price is a very effective measure. However, when the range of distribution is wide, it will tend to skew higher and lower, depending on extremes. That is, extremes to the high and low of prices can skew the number in either direction. It’s still a useful indicator if you know what you’re looking for.

The average price can be a useful proxy for dollar volume, and upgrade flow. After all, CREA only deals with resales. Usually people that sell will be upgrading, buying a more expensive home as well. This typically sends the average higher. If people are selling, but have no plans on buying again in this market, you’ll see the average slide. Who sells and doesn’t plan on buying again you might be asking? At least a quarter of people planning to sell in Toronto this year.

Vancouver Has The Highest Average Sale Price In Canada

Vancouver, Toronto, and Fraser Valley are still the priciest markets in the country. Vancouver has the highest average sale price at $1,067,266. Toronto comes in second with an average sale price of $804,584. Fraser Valley is in third with an average sale price of $780,736. These markets have remained in the same order for quite some time.

Average Sale Price of Canadian Real Estate (April)

The average sale price of all homes in Canada by major CREA regions. In Canadian dollars.

Source: CREA. Better Dwelling.

Toronto Has The Fastest Dropping Average Sale Price

Saint John, Saguenay, and Victoria had the fastest rising average sale prices compared to last year. Saint John had an average sale price of $199,136, an increase of 22.9%. Saguenay had an average sale price of $202,729, a 15.8% increase. Victoria had an average sale price of $703,592, an 11.9% increase. The first two cities are seeing huge growth, but are still cheaper than the national average. Victoria has been on a tear, but it also has one of the biggest drop in sales-to-new listings in the country.

Toronto, Thunder Bay, and Hamilton regions are the fastest falling compared to last year. Toronto saw the average sale price drop to $804,584, a 12.6% decline. Thunder Bay had an average sale price of $217,745, an 11.9% decline. Hamilton – Burlington saw the average sale price drop to $569,490, an 11.3% decline. Toronto and Hamilton-Burlington saw huge gains last year, so a drop was expected.

Canadian Real Estate ASP Percent Change (April)

The percent change of the average sale price (ASP) of all homes in Canada by major CREA regions.

Source: CREA. Better Dwelling.

The average decline in prices across the country is being attributed to B-20 Guidelines. The Guidelines subject uninsured mortgage borrowers to undergo a stress test. This reduced the maximum size of a mortgage people could borrow. Some have claimed the stress will have minimal impact on borrowers. However, the Bank of Canada estimates over 81,000 buyers last year would have been impacted by the new rules.

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