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Whither Real Estate – Forbes



There can be little doubt that for as long as the Federal Reserve (Fed) remains committed to its anti-inflation tightening policies, housing – sales, as well as construction and pricing – will continue to suffer from rising mortgage rates. But that is not the whole story. Crosscurrents will enter the housing equation as people come increasingly to see real estate as a way to protect their wealth from inflation’s ill effects on stocks, bonds, and other financial instruments.

So far, most of the pressure has leaned to the negative side of the real estate ledger. Since the Fed began to raise interest rates last March, the average rate on a 30-year fixed-rate mortgage has increased, albeit unevenly, from 2.8% to over 6.0%. Because this move has more than doubled the cost of supporting a mortgage, it is little wonder that buying has suffered. Sales of new homes, as tracked by the Commerce Department, have fallen 39% from highs last January to July, the most recent period for which data are available. Construction has followed. Starts of new homes nationally, have slipped 19% from their highs last February. Home prices, too, have softened. The median price of an existing home sold in the United States fell 2.2%, according to the National Association of Realtors (NAR), from $420,000 in June to $410,600 this past July, the most recent period for which the association offers a figure.

The Fed promises to increase this adverse pressure in coming months. Chairman Jerome Powell, understandably, has refused to say exactly how far and how fast he intends to raise interest rates, but he has committed to continuing such steps for as long as it takes to bring inflation under control. Unless the nation gets very lucky, and the inflation abates on its own, he will have to do a lot more than he has already. Consider that with inflation running at 7-8% and 1-year interest rates at 3-4%, borrowers repay a loan with dollars that have lost considerably more in real buying power than the interest they give the lender. That is hardly doing much to stem the flow of inflation-causing demands for credit.

But even as the Fed’s likely actions raise mortgage costs and accordingly intensify adverse influences on housing, the desire to hedge inflation with real estate will increasingly come into play. People will do what they can to buy, despite the rise in costs, because home ownership, whether outright or supported by a fixed-rate mortgage, will stabilize one important part of household budgets, a great lure in an environment when inflation is raising all other living costs. What is more, real estate will likely rise at least in tandem with the general rate of inflation, making it a more attractive store of wealth than say bonds, which will see their prices fall with each interest rate hike and stocks, which will suffer an adverse valuation calculation from rising interest rates as well as the inevitable uncertainties brough by general price pressures.

These forces certainly prevailed during the last great inflation in the 1970s and 1980s. Between 1970 and 1990, the consumer price index in this country rose 6.2 percent a year on average. Fixed mortgage rates rose from about 7.3 percent in 1970 to over 13 percent by 1985, raising the cost of supporting a mortgage almost 80 percent. For those who owned their houses outright or had their mortgage rates locked in, this meant nothing, but it mattered a lot to prospective buyers. Yet, despite the considerable headwind rising mortgage rates imposed on buying, the median price of a house sold in the United States rose during this time from $23,900 to $125,000 an increase of 8.6 percent a year and a return-on-investment 2.4 percentage points a year in excess of the inflation and better than most any other vehicles available to investors.

Of course, rising mortgage costs during this time constrained buyers seeking the real estate inflation hedge, and they will do so in the present environment. But rather than simply drive people away, history suggests that buyers will likely shift down on the price distribution. The budget constraint imposed by rising financing costs will impel people not to walk away but rather to settle for less of a house in perhaps a less lavish location. This effect is already evident in the Commerce Department data. Last December, when mortgage rates were still low and inflation concerns were just budding, a disproportionate number of sales occurred at the higher end of the price distribution. Though the median home price tracked by the NAR stood at some $360,000, fully one-third of home purchases nationwide occurred at over $500,000. Only 29% of national purchases occurred at prices near the median. With the rise in mortgage rates, a movement down the price distribution has occurred. As of July, some 83% of the purchases occurred at prices closely clustered around the median price.

This incipient pattern will likely become more extreme later this year and into 2023. It could extend for longer in the not unlikely event that inflation persists. Sales at the very top prices will no doubt hold up. Affordability means less to those buying in that range, while these same people have a powerful need to protect wealth from losses in financial markets and from the other ravages of inflation. Others who once could reach because of low mortgage rates will trade down closer toward the median price, while those who always had to buy at the lower end of the price distribution will be forced out of the market. The negative pressures will constrain sales and construction and hold back price gains, but less than might be suggested by a simplistic look at only the cost of financing.

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The Commercial Real Estate Market: Crash, Train Wreck, Or Apocalypse? – Forbes



Dire warnings about commercial real estate appear almost daily these days. While office markets are stressed due to increased working from home, some real estate professionals see an increasingly bifurcated market, divided “into haves and have-nots.” Investors, renters, and cities—especially those with older, declining buildings— will need to pay close attention in the coming months to see where they fall and how bad things might get.

Dramatic negative evaluations of commercial real estate are easily found. The San Francisco Standard foresees an “epic commercial real estate crash” looming over that city, comparing it to an approaching train with “the city, its budget, and its ability to provide services tied to the tracks.” Not to be outdone, Bloomberg tweeted “remote work is killing Manhattan’s commercial real estate market” with similar problems extending to other cities.

But even that language pales against what NYU professor Arpit Gupta and his colleagues are saying, predicting an “office real estate apocalypse.” Using New York City data, they estimate “a 45% decline in office values in 2020 and 39% in the longer run, the latter representing a $453 billion value deduction,” which could plunge the city into a “fiscal doom loop.” Similar damage could hit other cities, and by extension the national economy.

How then do we make sense of other bad—but not apocalyptic—data? CommercialEdge’s monthly “National Office Report” for September found stagnant average office listing rates, $38.70 per square foot, “down 0.1% year-over-year.” Bad, but not apocalyptic. And as I recently noted, some cities, especially in the Sunbelt or those with strong life sciences industries, are seeing strong rental markets.

What do other data tell us? Moody’s documented that securities backed by commercial mortgages saw “a huge spike in elevated delinquency rates” in the second quarter of 2020, right when the pandemic hit. But banks, life insurance investors, and others restructured loans and offered forbearance, lessening their delinquency rates. That strategy will be harder to follow if new pressure comes on the office market, especially with the Fed raising interest rates, making borrowing more costly across the board.

So far, at least commercial banks now seem to have their real estate loans under control. Their charge-off and delinquency rates hit 0.07% in the second quarter of 2020, the height of the pandemic. But in the first two quarters of 2022, the Fed reports those rates at zero, not a signal of dramatic falls in loan quality.

And even 2020’s bad numbers were nothing like the 2008 financial crisis. Between 2009 and 2010, commercial bank loan delinquencies were over 2% for seven consecutive quarters. Tighter regulation has since helped control loose bank lending, so thankfully we don’t have signs that commercial lending failures are pulling down the entire economy.

Going behind the aggregate numbers shows some positive signs in commercial real estate. In the past year, Sunbelt cities like Charlotte and Austin, or cities with concentrations of life sciences like Boston, saw double-digit increases in rents. Google
and other tech firms have been leasing large amounts of space in cities like New York and Chicago.

The biggest risk in commercial real estate is older, less desirable office space. The amount of that in any city is central to assessing its overall risk. A magazine roundtable from PERE, which tracks private equity real estate investing, found a “very challenged” but uncertain market, with risks ranging from inflation in construction and financing costs to a looming recession.

PERE’s experts see a “bifurcated” market, with more modern buildings (especially those that are ESG compliant) and some cities in good position to weather the crisis. The PERE investors see a “new normal” with less full-time office occupancy, but with offices still facing “unknown” overall demand from clients.

But these the views of real estate investors, who could be (as they say on the Street), “talking their book” and putting a positive spin on the numbers. In contrast, consider the “apocalypse” analysis from NYU and Columbia professors. By combining working from home data with financial information from real estate investment trusts (REITs) other financial information, they predict “long-run office valuations that are 39.18% below pre-pandemic levels” with “lower quality office stock…a more substantially stranded asset.”

If they are right, cities—and the economy—are in for a rough ride. Although some older buildings might be converted into housing, that’s not an easy or immediate process. Collapsing real estate values could lead to substantial fiscal problems for many cities, resulting in cuts to social services, education, public health, and other essential government functions. We aren’t in an apocalypse yet, but we all need to keep one eye on the possibility.

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Sale of real estate shares by non-Mexican residents – International Tax Review



According to the Mexican Income Tax Law (MITL), the transfer of shares by foreign residents triggers Mexican source income when more than 50% of their accounting value derives directly or indirectly from immovable property located in Mexico. These types of shares are commonly referred to as ‘real estate shares’.

This implies that from a domestic tax perspective, whenever a non-Mexican entity transfers shares issued by another non-Mexican resident which, in turn, holds assets or participation in a Mexican resident company, two concepts have to be taken into account to determine if there is taxation in Mexico: (i) the value of the shares that are being transferred; and (ii) the value of the immovable property located in Mexico.

Although in principle these calculations may seem simple to compute, there have been many doubts from a practical perspective that have led to different interpretations.

As it relates to the accounting value of the shares, neither the MITL nor any other legal provisions provide with a definition of such concept; nevertheless, pursuant to the Mexican Financial Reporting Standards, the accounting value could be interpreted as the value at which a right or obligation is recorded under accounting records (i.e., the ‘book value’). Accordingly, the book value of an entity is the stockholders’ equity, which is computed by subtracting total liabilities from total assets.

Article 13 of the Model Tax Convention on Income and on Capital of the Organisation for Economic Cooperation and Development (OECD Model Convention) does not make reference to the accounting value of the shares, but only to ‘the value’ of such goods. The same applies with Mexican double taxation treaties. This may lead to different interpretations regarding the value that should be used (i.e., the accounting value or the market value, both of which may vary considerably from one to another).

Additionally, the fact that the shares being transferred are not issued by a Mexican resident, the accounting principles applicable under the issuer’s jurisdiction may differ from the Mexican Financial Reporting Standards.

If the entity that is being transferred holds the Mexican assets directly, no distortion should exist as both the shares’ and immovable property’s accounting value would be registered under the same accounting principles.

Conversely, if the entity that is being sold holds shares or participation in a Mexican company, distortions may exist as the latter may be registering the immovable property under different accounting principles. The shares’ value of the company that is being transferred (as registered by the transferor) may not reflect the value of the immovable property in Mexico consistently.

In addition, if the entity that is being transferred directly or the Mexican entity indirectly has debt, the immovable property value could exceed the accounting value of the shares. To clarify this scenario, commentaries on Article 13 of the OECD Model Convention provide that the computation will be normally done by dividing the immovable property’s value (numerator) by the value of all assets owned by the entity (denominator) without taking into account debts or other liabilities.

As it relates to the ‘immovable property’s value’, the Mexican tax laws are silent; however, under the OECD Model Convention and its commentaries it could be interpreted that the ‘book value’ shall be applicable, as opposed to the fair market value or the actual value of the transaction.

If an entity that is being transferred holds a participation in different entities that are resident in different foreign countries, the determination of the immovable property’s value could be even more complex due to differences in domestic provisions (e.g. differences in depreciation rates).

In addition to the doubts that exist about the correct approach to determine these values, categorising an asset as immovable property is also a common issue that many taxpayers face on these types of transactions.

Under the OECD Model Convention, ‘immovable property’ has the meaning which it has under the law of the contracting state in which the property in question is situated. From a Mexican legal perspective, immovable assets are, among others, land and constructions attached to it; docks and constructions that, even when floating, are intended to remain at a fixed point of a river, lake or coast; as well as everything that is attached to an immovable asset in a way that it cannot be separated without deterioration (i.e., gas pipeline).

In terms of the MITL regulations, examples of assets that are considered to be ‘attached’ to the land, are houses, buildings, industrial and electrical plants, warehouses, highways, bridges, railways or dams.

In order to avoid some risks of possible conflicts between domestic law and a tax treaty, the OECD Model Convention also clarifies that the term ‘immovable property’ shall, in any case, include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply and usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources.

At the time of writing, there are no court precedents or guidance from Mexican or international tax authorities to clarify these issues. Thus, when transferring participation in a non-Mexican resident entity that owns directly or indirectly immovable property in Mexico, non-Mexican tax residents have to be careful in their analysis as to whether Mexican source income exists and have evidence on the computations and position taken.

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Priced out of Toronto's housing market? Alberta wants you to turn your eyes west –



If you’ve been priced out of Toronto’s real estate market, Alberta hopes its latest ploy will have you looking west to achieve your white-picket-fence dreams. 

In a move to lure fed-up prospective home buyers, the province has unveiled the second phase of its campaign dubbed “Alberta is Calling.” 

“We’ve got Canada’s lowest taxes and the lowest cost of living, plus the highest wages and incomes and lots of big opportunity,” Alberta Premier Jason Kenney said in a video on Twitter.

The campaign touts slightly higher weekly earnings in Alberta over those in Ontario, averaging $1,245 to $1,186, respectively.

While the average income is comparable, there’s a significant difference when it comes to real estate. According to Kenney, the average cost for a detached home is $490,000 in Edmonton and $700,000 in Calgary — in Toronto it’s $1.4 million. 

Figures like those are what enticed Yash Chauhan to uproot his life in Toronto.

“I moved to Canada three years ago, and given the extremely high rents in Toronto and then how real estate prices moved up during the pandemic — obviously everyone wants to own a house — Calgary seemed like a good idea,” he told CBC Toronto. 

In February, after pre-purchasing a home in Calgary, Chauhan packed up his Toronto apartment, put all his belongings into his car, and drove west. 

“Initially I moved here as an experiment,” he said. “It was an impulse move.” 

But after just a few days, Chauhan said he knew he wanted to stay. 

Ontario offers more job variety, experts say

In return for the “many cost-of-living, career and lifestyle advantages of life in Alberta,” the province hopes people like Chauhan will fill some of its 100,000 job vacancies — a shortage it says is restricting 78 per cent of Alberta businesses from meeting demand. 

Despite that shortage, the province says it has still seen the largest employment growth in the country so far in 2022. Between December 2021 and August 2022, employment in Alberta increased by 61,700 compared with an increase of 28,600 in Ontario, despite it having a larger population.

But some experts say finding work in lesser populated cities like Calgary and Edmonton isn’t so simple. 

In its campaign dubbed ‘Alberta is Calling,’ the province touts its high average wages, low taxes, ‘unprecedented economic growth,’ and affordable housing market. (Government of Alberta)

“Some of the other factors that are much bigger than the housing costs are job opportunities,” said Rotman School of Management professor emeritus Anil Verma. 

Verma argues that Alberta’s economy — and therefore job opportunities — is largely restricted to oil, gas and other extractive industries like mining. 

“Ontario has much of the same but it’s much more broad in scope,” she said.

“So for dual career couples or families, there’s a greater chance you’d find something in the GTA than in Alberta.” 

‘It’s just easier here’

As for Chauhan, his move out west has worked out so far. 

“It’s just easier here because I’m paying the same amount — my mortgage is basically the same as my rent in Toronto,” he said.

“So I’m building equity, I’m not just paying all that money in rent.” 

Alberta’s nature, Chauhan says, is just an added perk. 

“When I get out of my home … I can see the mountains in two minutes,” he said. 

“What I imagined — it turned out to be way more beautiful than that.” 

Located in Alberta, Peyto Lake is a glacier-fed lake in Banff National Park. Yash Chauhan says the province’s beautiful scenery helped him decide to pack up his Toronto apartment and move further west. (Submitted by Yash Chauhan )

He’s encouraging others to follow in his footsteps. 

“If you want to live a rich life and maybe die poor and if you want to live poor and die rich, you should probably stay in Toronto.” 

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