How capital gains is affected in a falling real estate market

October 14th, 2016

When property prices are rising, even just a little, there is almost no better place to keep your money than invested in your own home.

Monthly real estate numbers released Friday show the price of the average Canadian home rose again in September, up almost 10 per cent in the past year. But if and when that trend reverses and prices turn flat or start to fall, the investment advantages of owning a home can take a dramatic turn for the worse. The reason is tax.

At various times in the past, different governments have decided that having citizens own their own homes was a good thing, worth encouraging with tax breaks.

In the U.S., the government decided the way to encourage and reward home ownership was to sweeten the pot by allowing buyers to deduct their interest costs from their taxable income.

That effectively means lower costs in the early stages of home ownership when interest costs are high. In fact, one U.S. home ownership strategy is to pay off a house very slowly, since the interest costs are subsidized by government.

In Canada, the federal government chose a different policy tool to accomplish a similar result.

Instead of giving you a deduction for your payments, the Canadian tax department saves up the entire tax break for when you sell your family home. If during the years you own the property, the value increases, that gain is tax-free.

Earlier this month, Finance Minister Bill Morneau announced changes in the law to try to deny foreign buyers the tax break. Under the old rule, when you sold your principal residence you didn’t even have to mention it to the tax department.

Just as U.S. interest tax deductions affect how people buy and pay off their houses, the Canadian policy has its own consequences.

When property prices are on the way up, rising more than 20 per cent in a year as they have in Toronto and Vancouver, for tax purposes, there is almost no better place to keep your money.

In fact, a good tax strategy might be to buy a house with the biggest mortgage you can afford the payments on. The law can also make it a good strategy to up-size when you can afford it.

The math is clear. If you put down $100,000 on a million-dollar home, and get a $900,000 mortgage for the rest, you own 10 per cent of the house while the bank owns 90 per cent. But if that $1 million home goes up in value by 20 per cent, the bank doesn’t get a share of that increase — all of the capital gains are yours.

Sell, and you’ve just turned a $100,000 investment into $300,000, tax-free.

That’s also why there are so many contractors who buy a house and keep it for a year while they fix it up for resale. Not only do they get the standard capital gains that other sellers get, if they do a good job on the renovation, they get an added premium, and by claiming the house as a principal residence, all the money they earn is free of tax.

The capital gains tax also affects elderly homeowners. While house prices are rising, retired people, especially the well-heeled, have little reason to sell their houses and downsize. Capital gains on their houses are tax-free, but the income from the proceeds of selling a house that are invested outside tax shelters (such as retirement savings plans, tax-free savings accounts and registered retirement income funds) is fully taxable.

Canadian house prices have continued to increase over the very long term. With population continuing to rise strongly, that’s unlikely to change over the long term.

That means people who buy a house with the intent of raising a family will very likely be able to take advantage of the federal capital gains break on principal residences even if real estate goes off the boil for a few years.

As I’ve mentioned in the past, when my family came back to Canada at the end of the 1990s, we visited friends who told us their home had just climbed back to the value they had purchased it for 13 years before.

If you own a home, declining house prices are bad for your finances in any case. But the capital gains tax break makes it even worse.

For some potential homebuyers, the effect of a medium-term slide in property prices and its impact on the capital gains advantage could alter the calculus for thinking of a home as an investment.
In such a case, potential short-term buyers might be wiser to rent. Flippers will have to recalculate their profit margins. Up-sizing may lose its advantage. Retired people might be better off selling and investing the cash, because income taxed is better than no income at all.

And unlike other investments that can be claimed as a loss when they fall in value, a house cannot. In other words, capital gains on your principal residence are sheltered from tax. But so is a capital loss.

It’s hard to be sure to exactly what degree capital gains tax breaks affect people’s decision to use their principal residence as an investment. But it would seem that during a period of declining prices, that tax break would have the effect of further reducing demand for houses.

Source: Don Pittis, CBC News

Vancouver home sales dropped 26% in wake of foreign-buyers tax

September 2nd, 2016

Sales fell 26 per cent last month in Greater Vancouver’s real estate market while prices hit new highs or stayed near records in the wake of a new tax on foreign buyers in the region.

There were 2,489 detached houses, condos and town homes in the region that sold in August, compared with 3,362 properties in the same month of 2015, the Real Estate Board of Greater Vancouver said Friday.

Industry observers had predicted a slowdown in transactions after the introduction of a new 15-per-cent tax on foreign buyers that took effect on Aug. 2 for purchases registered with the province’s land title office. The B.C. government announced the change on July 25 to the province’s property transfer tax, affecting foreign buyers who acquire homes in the political entity known as Metro Vancouver.

In Greater Vancouver, which covers a large portion of Metro Vancouver, the benchmark price of detached houses, condos and town homes reached a record $933,100, up 31.4 per cent from a year earlier and an increase of 0.3 per cent from July.

The benchmark price is a representation of the typical property sold in an area, excluding the most expensive transactions on the Multiple Listing Service.

Home sales in the region were already beginning to slow this summer after a record-breaking spring.

Sales of detached houses, condos and town homes in Greater Vancouver fell 18.9 per cent in July from a year earlier. The drop was concentrated among sales of detached properties, which declined 30.9 per cent from July last year, following an 18.6 per cent annualized drop in June.

March, April and May are traditionally the busiest months for sales of existing properties, with activity slowing from June until mid-September.

The number of new listings has been on the rise since February, although the market has remained tight because of strong sales activity.

While the focus has been on an influx of buyers from China into several neighbourhoods on Vancouver’s west side, some industry observers say there are other contributing factors such as low interest rates, population growth and limited housing supply.

Source: Brent Jang and Tamsin McMahon, Globe and Mail

Canadian real estate prices forecast to see largest annual increase this century

July 13th, 2016

Housing price appreciation across the country will be more than it has been in the last 16 years, according to a new forecast from one of the country’s largest real estate companies.

Royal LePage, in a report out Wednesday, says economic uncertainty around the globe and low interest rates continue to fuel the Canadian existing-home market, adding that prices will rise by 12.4 per cent in 2016 from 2015 to an average of $563,000.

The real estate company predicts greater Vancouver will lead the way with prices rising 27 per cent this year to an average of $1.206 million, while greater Toronto prices will rise 14.9 per cent to and average of $718,000 during the period.

LePage says its previous forecasts didn’t account for an extended period of low mortgage rates which continue to fuel the housing market. says the best fixed rate on a five-year mortgage is now 2.18 per cent, close to a record low.

“Our forecasting models, which pointed to a slowing housing market as the year progressed, included a modest increase in the cost of borrowing,” said Phil Soper, chief executive of LePage. “Economic and social disruptions have rocked the world once again, introducing new risks and making it very likely that the Bank of Canada will leave interest rates as-is for now. Few industries are as rate sensitive as real estate. We don’t see even a mild correction for either the Toronto or pistol-hot Vancouver markets in 2016.”

Despite citing the Brexit vote as increasing uncertainty in the market, LePage says foreign money tied to Europe will flow into Canadian commercial real estate as opposed to the residential market.

LePage’s own internal surveys do say foreign markets are impacting Toronto and Vancouver real estate, but the money is coming from beyond the European Union.

Its surveys of agents in the second quarter found 71 per cent in the GTA and 74 per cent in Greater Vancouver reported an increase in activity from foreign investors who were defined as having lived outside Canada for the last six months. LePage said 35 per cent of agents in the GTA and 37 per cent in Greater Vancouver believe foreign ownership accounts for less than 10 per cent of sales.

Government continues to consider measures to deal with the impact of foreign owners and the federal finance minister has promised to create a working group of provincial and municipal counterparts to consider the issue in Toronto and Vancouver. On Monday, British Columbia agreed to grant Vancouver the right to tax owners of vacant property — a move seen as being at least partially aimed at foreign investors.

Soper cautioned against government getting too involved in the housing market.

“We remain convinced that heavy-handed use of tax policy in an effort to artificially influence asset values in an open-market economy like ours is fraught with peril, particularly in a cyclical industry like housing.”

Still, he left no doubt his industry has some concerns about the fast-paced nature of the market and some of the impact it has on prices. Soper even issued a warning to speculators.

“At Royal LePage, we see residential real estate as a long-term investment supporting family life. A home is ill-suited as a buy-and-flip investment. People that engage in this kind of activity are inevitably burned when a market slows and the time it takes to sell the property increases substantially,” he said.

Source: Garry Marr, Financial Post

Nine out of 10 Vancouver houses are now worth more than $1 million

June 18th, 2016

More than 90 per cent of all detached homes in Vancouver are now worth more than $1 million, up from just 19 per cent a decade ago, a new study by a local urban planner has found, showing how rapidly housing prices have escalated in the Canadian city.

The biggest jump came in the last two years, with the proportion of million-dollar homes in the city climbing to 91 per cent in 2016 from just 59 per cent in 2014, according to the study by Andy Yan, acting director of Simon Fraser University’s City Program.

“This shows how what used to be the earnest product of a lifetime of local work is perhaps quickly becoming a leveraged and luxurious global commodity,” said Yan.

The median household income in Vancouver, meanwhile, rose just 8.6 per cent between 2009 to 2013, according to the most recent data from Statistics Canada. Adjusted for inflation, it would be about $77,000 a year in 2016.

That puts typical incomes well below the threshold needed to purchase million-dollar homes, said Yan, noting other factors must be driving the sharp increase in home values in Vancouver.

“It’s global cash, meeting cheap money, meeting limited supply,” he said, adding that all three factors are working to “magnify each other” and drive further speculation.

Foreign investment has long been blamed for soaring housing prices in Vancouver, with the most recent wave of offshore cash coming mostly from mainland China.

A widespread corruption crackdown launched by Chinese president Xi Jinping in late 2012 has led to massive currency outflows, which have coincided with a sharp jump in housing prices in Vancouver’s prime neighborhoods.

The new data comes as Canadian Prime Minister Justin Trudeau is in Vancouver for a two-day visit. Trudeau on Thursday said that his government needs to take measures to ensure residents of cities like Vancouver and Toronto can afford housing.

Yan’s study looked at provincial assessment data, which lags sales data by several months, and was focused exclusively on the roughly 67,000 detached homes in the City of Vancouver. All values were adjusted for inflation.

Region-wide, the price of a detached home soared 130 per cent over the last 10 years to hit $1.5 million in May, according to the local real estate board. Adding in apartments and townhomes, the typical home in Greater Vancouver now costs $889,100.

Source: Julie Gordon, Reuters

Greater Vancouver home sales and prices set to soar in 2016

June 3rd, 2016

Home sales in Greater Vancouver are on a hot streak, and the professional association representing all the real estate boards in the province is bumping up its forecast for 2016, predicting escalating prices and a jump in the number of homes sold.

The British Columbia Real Estate Association forecasts unit sales in the Greater Vancouver region will increase 8.9% in 2016, from 43,145 homes sold in 2015 to 47,000 this year.

For B.C. as a whole, unit sales are forecast to increase 12.3% to 115,200 units, breaking the previous record of 106,310 units sold in 2005.

“Robust employment growth and a marked increase in migration from other provinces is buoying consumer confidence and housing demand in most regions of the province,” said BCREA chief economist Cameron Muir.

“Record housing demand has depleted inventories in many urban areas, and the resulting imbalance between supply and demand has pushed home prices considerably higher.”

The average sales price for homes in Greater Vancouver is expected to reach $1.125 million this year, up 24.6% from $902,801 in 2015. Across the province, the average price is forecast to increase 20.4% this year, from $636,600 last year to $766,600 in 2016.

This latest forecast is in sharp contrast to the BCREA’s previous release, in which it had predicted an 8.2% drop in unit sales across Greater Vancouver and a 6.2% decline across the province as a whole.

The BCREA had previously said home sales would fall because of a lack of supply. It now says a jump in new home construction is set to help meet demand.

“Waning inventories of newly completed and unoccupied units are being offset by a market increase in the number of homes under construction,” the BCREA said in a news release.

“Total housing starts in the province are forecast to climb 20% to 37,800 units this year, before edging back to 34,200 units in 2017.”

Source: Emma Crawford Hampel, Business in Vancouver

See how Vancouver’s real estate prices have outperformed global cities

May 19th, 2016

Real estate prices in key global cities are rising at a slow, moderate pace, particularly in Europe.

According to new research published by international real estate consultant Knight Frank, 35 of the world’s most important cities saw an average price increase of 3.6% in the year to March 2016.

“Since 2014 the index has consistently seen annual growth of 3-4%, with no city recording double-digit annual price declines since the second quarter of 2015,” notes Kate Everett-Allen of Knight Frank, who carried out the study.

However, Everett-Allen found some notable differences both between regions and within them. In North America, for example, New York, Miami and Los Angeles grew by 2.3%, 3.8% and 5.1% respectively but Vancouver saw a spectacular 26% rise in real estate prices — despite a 1% increase in land transfer tax on purchases above CAD2M.

Australasia was more homogeneous, with both Sydney and Melbourne posting a 12% rise. The two African hubs were also in positive territory, albeit with some difference between the two—Cape Town went up 6.9% and Nairobi up 3.3%. Asia was rather more of a mixed bill, with excellent growth in Shanghai (to the tune of 20%) but sizeable drops in Hong Kong and Taipei (down 6.4% and 7.6% respectively.

In Europe, real estate growth was modest and fairly consistent across the majority of cities, with prices either remaining flat or recording small rises of less than 3%. Only Moscow, Paris, Milan and Monaco bucked the trend. The first three saw dips (of 5.9%, 2.7% and 1.2% respectively) while Monaco recorded a 4.9% rise.

However, says Everett-Allen, some of these numbers need to be analysed in the context of past performance. Prices in London, for example, only grew by 0.8% in the year to March, the lowest figure since October 2009
 — but the British capital had experienced a period of exceptional growth in earlier years so a slowdown was natural.

Interestingly, the Knight Frank study also showed that, across the world, the impact of new transparency rules, new taxes or fees for foreign buyers—all of which are seeing a surge in global hubs—varies hugely depending on the pre-existing fundamentals and market cycles.

Thus, the land transfer tax rise had no depressive effect in Vancouver, nor did new transparency rules for cash buyers affect the New York and Miami markets. In London, by contrast, a series of changes to stamp duty land tax and to purchases by non-domiciled residents, have amplified the market cycle and helped slow down price growth.

Source: Carla Passino, Forbes

Vancouver area benchmark house price up 30% in 1 year

May 3rd, 2016

The insanity, it seems, is not over.

Despite ongoing warnings from the CMHC that the Vancouver housing prices are overvalued and have outpaced the economic fundamentals in the city, they keep climbing.

In the past year, the benchmark price for a detached home in the region — not just the City of Vancouver itself — has climbed 30.1 per cent, to $1.4-million, according to new numbers from the Real Estate Board of Greater Vancouver.

The “benchmark” price is a measure used by the board to describe what it calls a “typical property” in the market, taking into account bedrooms, lot size, and other factors, and is not an average or median price.

To put that in context, the median family income in the Vancouver metropolitan area is $73,390 — lower than the Canadian average, according to the latest census numbers available.

The highest benchmark price for a detached home is still Vancouver’s west side, at $3.2-million, which is up 172 per cent over ten years, and 28.4 per cent in the past year.

But the largest increases in house prices in the past year are outside Vancouver:

Tsawwassen up 41 per cent to $1.16-million.
Richmond up 36.5 per cent to $1.5-million.
Ladner up 35 per cent to $971,500.

Apartment and townhouse listings went up 20.6 and 22.1 per cent, respectively, in the past year in Greater Vancouver.

The Real Estate Board of Greater Vancouver covers Vancouver, Burnaby, New Westminster, Richmond, Port Moody, Port Coquitlam, Coquitlam, North Vancouver, West Vancouver, Squamish, Whistler, Sunshine Coast, Pitt Meadows, Maple Ridge, and South Delta.

The benchmark detached home price in the Fraser Valley also rose 30 per cent over the last year, to $776,500, according to the Fraser Valley Real Estate Board.

That area includes Surrey, White Rock, Langley, North Delta, Abbotsford and Mission.

The price increases are, not surprisingly, driven by a strong demand with not much supply.

There was a slight increase in residential listings last month, but not enough to keep up, said Greater Vancouver Real Estate Board president Dan Morrison in a release.

“While we’re seeing more homes listed for sale in recent months, supply is still chasing this unprecedented surge of demand in our marketplace,” he said.

In April 2016, sales of all properties (not just detached homes) in Metro Vancouver were 41.7 per cent above the 10-year sales average for the month.

Meanwhile, the total number of properties currently listed in Metro Vancouver is down 38.3 per cent from last year.

That means the sales-to-active listings ratio — a measure analysts use take the temperature of a market — was 63 per cent in April 2016, the sign of a seller’s market.

Home prices tend to experience upward pressure when that ratio is just 20 or 22 per cent, according to the board.

Source: CBC News

B.C. real estate sales break another record as demand soars

April 18th, 2016

A total of 12,560 homes were sold across the province in March, up 38 per cent year-over-year, according to British Columbia Real Estate Association data released April 15.

This figure shatters the previous record, which was set in May 2007 when 11,683 units were sold in B.C.

“Housing demand has never been stronger in the province,” said BCREA chief economist Cameron Muir. “Most large population centres of the province are now experiencing record levels of housing demand.”

Muir credits strong employment growth, increasing wages and growing inter-provincial migration into B.C. for the increase.

Demand is so high, inventory levels are now a decade-lows in some areas across the province.

In Vancouver alone, sales increased 28.3 per cent to 5,301 units, compared with 4,132 units last year. The benchmark price increased 22.6 per cent to $1,093,267, compared with $891,652 last year.

“Supply [in Vancouver] simply can’t keep up with demand, be it domestic or foreign, and the sales-to-new listings ratio remains a sky-high 86 per cent,” said BMO Financial Group senior economist Robert Kavcic.

“In other words, almost every new listing is getting absorbed within the month.”

Kavcic points out that even condo prices—up 19 per cent year-over-year—are increasing at a rate similar to those for detached homes.

Across Canada, home sales increased 12.2 per cent in the 12 months to March and prices were up 15.7 per cent. This growth is due almost entirely to the market strength in Toronto, where prices increased 12.1 per cent and sales grew 15.5 per cent, and Vancouver.

“With supply in the two hot markets extremely tight, prices are likely to push even higher through the always-important spring selling season,” Kavcic said.

“The question is, will policymakers in B.C. and Ontario do anything to quell the fires?”

Kavcic said the data from these two cities is making up for losses in centres in oil-dependent Alberta, most notably Calgary, where home sales fell 11.7 per cent. That city was the only one in Canada to see a drop in prices over the period, although the decrease was small (down 0.5 per cent).

Teranet also released its Home Price Index April 15. This measure showed price increases of 17.3 per cent over the year in Vancouver and 7 per cent across the country. Teranet uses statistics compiled from public land registries using a repeat-sales methodology; this means it looks at sales of homes that have been sold at least twice since 1990.

Source: Emma Crawford Hampel, Business in Vancouver

How can you win a real estate bidding war in Metro Vancouver?

March 5th, 2016

In a red-hot real estate market where inventory is low, prices are high and competition is fierce, the seller holds exponentially much more power than the buyer.

Multiple offers have become the new normal in the Vancouver market, with many properties selling for hundreds of thousands of dollars over the asking price.

Those bidding wars have buyers going to extraordinary lengths just to get a chance at getting into a market that’s really out of control.

CTV Vancouver has compiled a list of expert tips to help you get the property you want, if you’re faced with a multiple offer situation.

1. Unconditional offer

Gone are the days where offers can be subject to financing, inspection or lengthy waiting periods. The key to winning a bid now is going in with zero conditions attached. That means having your financing in place well ahead of even going to see properties. It can also mean having a bank draft deposit in hand to present to the realtor and homeowners.

Realtor Gary Serra says it can also help to make sure that deposit is bigger than your competitor’s.

“I think in some cases people are coming in with a higher deposit because, again, if you want to stand out compared to other offers – obviously people will notice that,” he told CTV Vancouver.

2. Do your home inspection early

It used to be that you could include a home inspection in a conditional offer, but that practice all but gone by the wayside in this frantic market. Many potential homeowners are now opting to take their home inspector with them to open houses, where dozens of other buyers are doing the same thing.

“It’s really crazy,” said home inspector Shawn Anderson. “I was just in one recently where it was so packed it was like they were giving away free wine.”

With some people putting in bids on multiple properties before actually winning a bidding war, this can add up to thousands of dollars in extra costs during house hunting.

3. Write a personal letter

Although it’s far from a requirement to pen a magnum opus to the current owner of the home, Metro Vancouver realtors say it’s worth the effort in a bid to make a personal connection to the seller.

Serra said explaining why you want the home can give interested parties an advantage over others.

“We want to appeal to the seller and make sure our offer stands out over someone else’s,” he said.

In its tips for writing a letter, says homebuyers should use flattery whenever possible, and compliment the current owner on the condition or décor of their home. In a market like Vancouver, where many heritage homes are torn down to make way for newer buildings, it can help to mention if you’re planning to keep the home intact.

4. Appeal to the seller’s timeline

Your needs should come last when it comes to the real estate sale, says Serra. Home sellers don’t want to be bogged down while interested parties secure a mortgage or sell their current home, so try to make things work in the timeline they want. They may have purchased another property and don’t want to wait around to get out of their current residence.

New buyer Kyle Gould says he’ll take any advice he can get. Just moving to B.C. from Ontario, Gould says he has been hit by “sticker shock” and a big reality check about the market.

“It kind of smacked me in the face that it’s a wild game out here,” he said.

Source: CTV Vancouver

Average Metro Vancouver home price climbs 20% in January

February 22nd, 2016

Vancouver’s hot real estate market isn’t showing signs of slowing. January saw year-over-year growth of more than 20 per cent for the Metro region, according to the Canadian Real Estate Association.

That brings the average price of a home in Metro Vancouver to $775,300.

Thanks to hot markets in B.C. and Ontario, the national average home price grew a staggering 17 per cent to $470,297 – but without those two provinces, there would have been a decline of 0.3 per cent to $286,911.

“January 2016 picked up where 2015 left off, with single family homes in the GTA and Greater Vancouver in short supply amid strong demand standing in contrast to sidelined home buyers and ample supply in a number of Alberta housing markets,” said Gregory Klump, CREA’s Chief Economist in a statement.

“Tighter mortgage regulations that take effect in February may shrink the pool of prospective home buyers who qualify for mortgage financing and cause national sales activity to ease in the months ahead.”

New rules for mortgage rates took effect on Tuesday. Canadians are now required to put down a minimum of 5 per cent for the first $500,000 and 10 per cent for every dollar amount after that.

Two-storey single family homes posted the largest year-over-year gains nationally of nearly 10 per cent, followed by one-storey homes at 6.9 per cent, townhouses at 6.5 per cent and apartments at 5.2 per cent.

In stark contrast to Vancouver and Toronto’s housing markets, average home prices in Calgary saw a decline of three per cent year-over-year.

Nationally, the number of newly listed homes in January fell five per cent compared to December, and Canada’s largest housing markets such as Vancouver, Toronto, Montreal, Calgary, and Edmonton were to blame.

Source: Lauren Sundstrom, Vancity Buzz

Real Estate Blogs