Budget real estate: Drugs that you take to solve one problem often cause others. The same thing applies in government policy and there are few places it is more obvious than in housing.
Just as with medication, the trick for both doctors and policy-makers is to try to figure out whether the overall benefits outweigh the negative side-effects.
And as with recent research on low-dose aspirin — up until last year, when the advice changed, it was widely recommended as a wonder drug to prevent heart attack and stroke — the fact is that the net benefit of any new policy is seldom known for certain until it is tried and the results are carefully examined.
At first glance, the First-Time Home Buyer Incentive sounds appealing to those who qualify. Some of the nitty-gritty details have yet to be revealed, but what we do know is that social housing groups, including Toronto-based non-profit Options for Homes, that have used similar schemes say it works.
The new policy is intended as a means-tested incentive to help people get a first step on the property ladder, allowing “first-time home buyers the ability to lower their borrowing cost by sharing the cost of buying a home with CMHC,” reads the government’s budget document. “No ongoing payments are required.”
In other words, the government will give you a top-up of up to 10 per cent of the value of your home. Eventually you have to pay it back, but not the interest. Effectively that interest that you save is free money.
But unintended consequences are common in public policy, according to Stephen McBride, Canada Research Chair in Public Policy and Globalization, with McMaster University. Government bailouts in 2008 saved the banks, for example, but may have convinced everyone that banks will be bailed out next time too, he says, making investors less cautious.
For Canadian housing, the most obvious chain of unintended consequence out of that period was the move by the U.S. central bank to cut interest rates — partly to rescue a crashing property market, but also to stimulate a post-crash economy with cheap borrowing.
Here in Canada, where house prices never crashed, the Bank of Canada was forced to follow the Federal Reserve in cutting rates. While it offered businesses cheap investment cash, it sent Canadian home prices into the stratosphere, making them an investment target, including for foreign buyers who only compounded the problem. And it left many Canadians mired in debt.
Leaks into the wider home market
This latest policy move offered in the budget is effectively a patch to fix that previous unintended consequence.
By limiting the total size of the mortgaged value of eligible houses and restricting the program to families earning less than $120,000 a year, the government is trying not to repeat the mistake. But as McBride notes, interfering even on the lower end may cause the stimulus to leak out into the wider housing market.
“These measures to make first houses more affordable could have the effect of enabling occupants of those houses to move up, … therefore pushing price increases up the scale,” said McBride. “Who knows if that will happen — but it’s a possible consequence and it would be unintended.”
Real estate specialists in Toronto and Vancouver have said the new incentive will have little effect on young people trying to get into those markets, where even most condos in desirable central areas will be out of reach of the incentive’s limits
In other places, including Hamilton, where demand is already strong at lower prices, it is quite possible that we will see a rise in the price of homes below the $400,000 to $500,000 range once people begin to take advantage of the scheme. In most economic cases, a windfall advantage of this kind is ultimately shared between the seller and the buyer in some proportion.
In places where there is no housing shortage, the advantage to sellers will likely be weaker.
That said, a simple market analysis would suggest the injection of more than a billion dollars in new spending into a narrow area of the market will lead to a small, relative increase in demand and push prices higher than they would have been otherwise.
“Since such programs enhance demand, and therefore lean a bit against house price declines, the real work to address affordability has to come on the supply side,” CIBC chief economist Avery Shenfeld said in his budget analysis.
In the tightest housing markets, the federal plan should also help stimulate supply. While new buyers only get an interest-free loan worth five per cent on resale homes, they get 10 per cent on new properties, offering real estate developers an advantage in the market and presumably encouraging builders to keep up supply.
As Shenfeld implies and many others have said, one of the best things for new buyers would be a general decline in Canadian home prices to levels where young people could afford decent housing without going into ruinous debt.
As of February, the average price of a home was down more than five per cent, although that differs regionally and by property type. If the decline continues, even with the new incentive, those who can might still be wisest to wait.
Home Sales Climbed Higher In July
Canadian home sale rose in July in broad gains as markets start to recover from the stress test tightening last year, though economists say global concerns raise some uncertainties for the future.
The Canadian Real Estate Association reported last week that home sales rose 12.6 per cent in July from a year earlier, and were up 3.5 per cent seasonally adjusted from June.
“Sales are starting to rebound in places where they dropped when the mortgage stress test took effect at the beginning of 2018, but activity there remains well below levels recorded prior to its introduction,” said CREA president Jason Stephen in the report.
“Sales activity is strong in New Brunswick where I do business, but it’s a very different story in B.C., Alberta and Saskatchewan. All real estate is local. Nobody knows that better than a professional [realtor], who is your best source for information and guidance when negotiating the sale or purchase of a home,” said Stephen.
The increase came as sales were up in markets like Moncton, B.C.’s Lower Mainland, Calgary, Edmonton, Greater Toronto Area, Hamilton−Burlington, Ottawa and Montreal. Sales were down in Regina, Saskatoon, and Windsor−Essex.
The broad rise in sales put them at their best level since the stress tests kicked on at the start of last year, said BMO chief economist Douglas Porter in a note.
“After a challenging 18 months, the Canadian housing market is showing widespread signs of, not just stabilizing, but firming again.”
The federal government updated mortgage qualification rules at the start of last year to require more would−be borrowers to prove they could manage if interest rates rose.
The national sales−to−new listings ratio tightened to 59.8 per cent last month from 57.6 per cent recorded in June to the upper end of what’s considered a balanced market, he said.
The rise in sales, which came as the number of newly listed homes edged back by 0.4 per cent in July, put some pressure on prices, said Porter.
“With sales regaining some momentum broadly, and the market tightening in many regions, it’s little surprise that prices are starting to turn the corner again.”
The national average price of a home sold in July was just under $499,000, up 3.9 per cent from the same month last year and a seasonally adjusted 2.6 per cent from June.
Double−digit price gains in several Ontario communities including Ottawa and Kitchener−Waterloo helped drive up the overall average, while cities in Western Canada generally saw prices drop.
Porter said global uncertainties are already driving borrowing costs lower, which could further boost the Canadian market, but if economic declines prove serious then interest rates will be secondary.
“The downside is that if “global uncertainties” morph into something much more serious for the domestic economy, interest rates will be playing a second fiddle.”
TD senior economist James Marple said the housing market looked robust for the month, supported by strong population growth, solid job growth and lower mortgage rates.
“This can only be described as a solid month for the Canadian housing market…with most markets in balanced territory or better, the immediate downside risk to home prices have diminished considerably.”
He said there is some uncertainty as to where rates will go, since domestically the economy looks strong while there are considerable international challenges as global economic growth looks even softer than previously thought.
Why you need to be on top of real estate Tax rules
Advisors have been urged to brush up on their real estate tax knowledge, with the CRA throwing more auditors at the issue.
Mariska Loeppky, director, tax and estate planning for IG Wealth Management, believes investors are often making innocent errors because of the relatively new adminstrative change to reporting your principal residence exemption disposition.
From the 2016 tax year, residents are required to report basic information, like date of acquisition, proceeds of disposition and description of the property, on income tax and benefit returns, when they sell their principal residence residence.
An example, explained Loeppky, could be when someone owns land and a few years later builds a house on it. She added: “You can’t claim a principal residence exemption for that property while it’s just land until you live in that home.
“So, when you go and report that disposition, you probably think, ‘that’s always been my house or I have always lived in that house’. But really, you owned that property for a few years before you could claim it as your principal residence.
“People don’t understand how that calculation works, and how that exemption works. Another example is that people are flipping properties and they’ve taken the position that they can claim their principal residence exemption.
“But the CRA says, ‘hey, you’ve actually sold quite a few homes in the last little while so you are in the business of flipping homes’. They would treat that as business income, not a capital gain.”
Some advisors, she added, have been caught out by clients gifting properties at less than the fair market value. You are, in fact, deemed to disposition the property at fair market value rather than gift it to avoid tax or probate fees upon death. Renting is another example and represents a change of use for the property, which should be reported to the CRA.
Loeppky said: “Advisors must make sure they know what the reporting obligations are. If you are in doubt, hire a professional accountant to help you with your tax return. Most of the tax preparers that I see packages from, they’re asking the questions: did you sell your home? Did you start renting it out?
“These could have tax implications. Just knowing that, while the principal residence exemption is there to protect you, you have to report it and there are significant penalties for not doing so. If you forget to disclose that you sold your home on your tax return, it’s a penalty of $100 a month, up to a maximum of $8,000.
“Even though you’ve got a tax free transaction, or what you think is a tax free transaction, not reporting it in theory could land you with an $8,000 penalty, which is pretty steep.”
There is also the issue of foreign property, with Canadians required to report their worldwide income, which includes gains on these sales. The CRA will likely find out where the proceeds are – and they need to be disclosed – whether they are sitting in a foreign bank account or a Canadian one.
She said: “There’s lots of ways for the CRA to find out that you sold something, so it’s a case of knowing that a transaction has to be reported. Renting out a foreign property also has to be reported on your Canadian return – and then knowing that you can claim a foreign tax credit to offset the double tax that you paid to the other country. These are things you need to navigate.”
Buying property from a non-resident raises the requirement of holding 25% of the proceeds unless there is documentation from the seller that this has been waived. If it’s not, it’s up to the non-resident to file a tax return to get some of that back.
Loeppky added: “Advisors should be aware of the rules when it comes to real estate transactions and knowing the principal residence exemption, how it works, and when you can claim it. It’s also about helping the client realize that you need to take advantage of that principal residence exemption to the best of their ability.
“Normally, they’d want to shelter that gain so helping clients make that determination is really important when they have a choice between two different properties that they could claim as a principal residence exemption.”
Appeal court withdraws real estate decision
Justice Richard Lococo’s decision in the Superior Court case, Hilson v. 1336365 Alberta Ltd., 2018 ONSC 1836, was appealed. But, a May 27 judgment on the appeal was released “in error,” the court now says.
After considering written submissions, Associate Chief Justice Alexandra Hoy and Justices Kathryn Feldman and Grant Huscroft wrote on Aug. 13 that a previously released May 27 decision” is not a judgment of the court” and “is of no force or effect.”
“One of the members of the panel that heard the appeal, Justice [Grant] Huscroft, was not provided with either the draft judgment for review or the final judgment for signature. The judgment was signed, in error, by another justice who was not a member of the panel that heard the appeal,” the judges wrote in Hilson v. 1336365 Alberta Ltd., 2019 ONCA 653, released Aug. 13.
Hoy, Feldman and Huscroft rejected a proposal that Huscroft review the May 27 judgment “and either assent to or dissent from a judgment that he had no role in making.”
“The panel of judges that rendered judgment was not the same panel that heard the appeal…. This cannot now be corrected,” they wrote. “The decision-making process has been compromised and this panel cannot render a judgment.”
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