Archive for the ‘Toronto real estate’ Category

Bank of Canada holds interest rate steady but a rate cut could be possible

Wednesday, March 6th, 2019

Canada’s central bank has decided to keep its benchmark interest rate at 1.75 per cent, and says the timing of possible future hikes has become increasingly uncertain.

The Bank of Canada says the economic slowdown that began at the end of last year is a bit worse than it was expecting, including a sharper-than-anticipated slowdown in Canada’s oil patch. The bank also singled out softness in the housing market and consumer spending as reasons for a gloomier outlook.

“It is clear that global economic prospects would be buoyed by the resolution of trade conflicts,” the bank said.

“With increased uncertainty about the timing of future rate increases, [the bank] will be watching closely developments in household spending, oil markets, and global trade policy.”

The bank meets eight times a year to set its interest rate, which filters down into the rates that Canadians get on things like savings accounts and mortgages.

James Laird, co-founder of rate comparison website Ratehub Inc. and president of mortgage broker CanWise Financial, said that reading between the lines of the bank’s decision on Wednesday suggests their concern over the economy could temporarily override their desire to see higher interest rates.

“The softening rate outlook will put downward pressure on bond yields, causing fixed rates to drop as we enter the spring homebuying market,” Laird said.

“Overall, this announcement will be helpful to first-time homebuyers looking to enter the housing market this spring.”

TD Bank economist Brian DePratto has a similar view, suggesting the bank’s statement makes it clear that “unless we see a robust growth recovery mid-year … further rate hikes in 2019 are all but off the table.”

“The core message today appears to be that the economy requires more stimulus than previously thought,” DePratto said.

Royal Bank economist Dawn Desjardins said “the bank did not dispense with the prospect that interest rates will rise in the future,” noting that she thinks they could come once the temporary slowdown in energy has passed.

“[But] no rate increase is likely until the second half of the year,” she said.

Bank of Canada governor Stephen Poloz is next scheduled to meet with other members of the bank’s governing council and reveal their decision on where to set the bank’s interest rate on April 24, 2019.

The consensus among economists polled by Bloomberg is that the bank will stand pat again at that meeting, but trading in investments known as overnight index swaps suggests there’s about an eight per cent chance of the bank changing direction entirely and cutting its benchmark interest rate.

If it happens, it would be the first rate cut since 2015.

Currency traders also seem to think a rate cut is now on the table. 

The loonie lost about half a cent to 74.40 cents US when the decision came out. All things being equal, higher interest rates cause a country’s currency to increase in value, while lower interest rates cause the value to fall.

Source: Pete Evans, CBC News 

https://www.cbc.ca/news/business/bank-of-canada-rate-decision-1.5044828

What can we expect from the Canadian housing market in 2019

Sunday, November 25th, 2018

After a screeching halt sometimes comes a crash. This was the year when Canada’s housing market hit the brakes. So what will happen in 2019?

Predicting housing prices is famously difficult. And forecasting housing meltdowns like the one that nearly brought down the global financial system in 2008 may be downright impossible. For now, though, the way experts cautiously paint the future for next year is closer to the picture of a landing plane than that of a rocket ship plummeting earthward.

The Canadian Real Estate Association (CREA) sees home sales rebounding a little (2.1 per cent) next year, with home prices roughly keeping up with inflation (2.7 per cent). In Ontario, prices will likely climb a little faster (3.3 per cent) and in British Columbia, a bit more slowly.

Quebec, New Brunswick, Nova Scotia and Prince Edward Island can also expect modest price gains, while Saskatchewan and Newfoundland and Labrador will experience a small dipping. The forecast for Alberta was stable prices, although that predated the recent oil price plunge.

The big banks expect interest rates to continue to rise to between 2.25 per cent and 2.75 per cent by the end of 2019. And that will keep turning the screws on Canadians’ budgets, with more money going toward mortgage and other debt payments and less left as disposable income. Climbing rates will also continue to raise the bar for wannabe homeowners who to pass the federal mortgage stress test in order to qualify for a new mortgage.

Though a housing crisis next year isn’t impossible, U.S.-based investment giant Vanguard says the risk of a housing crisis — which they define as a severe drop in housing prices in the span of a year that could trigger a recession — continues to be low.

Canada, along with Australia, stands out both for its sky-high housing prices and its gargantuan household debt levels. Home prices have grown by 24 per cent since 1999, compared to 18 per cent in Australia, 13 per cent in the U.S. and 12 per cent in the U.K. The amount that Canadian families owe, meanwhile, is as big as this country’s GDP, a level surpassed only in Australia, where household debt is now larger the size of the economy.

But Todd Schlanger, senior investment strategist at Vanguard Investments Canada, says the Canadian economy will likely continue to grow in 2019, albeit at a slower pace than in 2018.

In Toronto, John Pasalis, president of Realosophy Realty, sees prices staying relatively flat next year.

“I don’t see a massive correction,” he told Global News.

That’s in part because the supply of new homes remains limited in the city.

“If you look at the crashes that happened in the U.S. [subprime mortgage crisis] — in Miami, Phoenix, Las Vegas — those cities were overbuilt, and that’s not what’s happening in Toronto right now.”

Rather than a housing collapse, a more likely scenario is one in which home prices stagnate as household incomes slowly catch up, Pasalis added.

Another factor that might help keep the market stable is that rents are sky-high. This could help sustain the demand from homebuyers.

“At the end of the day, people need a place to live,” he said. And, especially in the downtown core, “it ‘s not like renting is an affordable option.”

In Vancouver, realtor Steve Saretsky sees a “full-blown buyer’s market” with prices that will continue to trend lower for detached homes, condos and townhomes alike.

His advice to buyers is to be patient.

“If you’re buying a home, plan to live there or hold it for the long term,” Saretsky, of Sutton West Coast Realty, told Global News.

Real estate investors shouldn’t count on price gains to make up for negative cash flow, he added.

Home sellers should be realistic.

When sellers fixate on “old peak prices,” they usually end up having to “chase the market down,” watching their asking price gradually fall, he said.

“If you are actually keen on selling, you have to be ahead of the market,” and possibly anticipate future price declines, he added.

In general, Pasalis says it’s important to understand different neighbourhoods. When Toronto home prices started to cool off in 2017, he says he warned clients about buying in areas that had seen high rates of activity by real estate investors. His advice: Don’t buy there or offer 20 per cent less than what homes were selling for a month earlier.

Pasalis correctly predicted that neighbourhoods that had seen some of the sharpest prices increases due to speculative bets would also experience the steepest price drops.

“In a volatile market, this can be the [difference] between making a safe real estate purchase versus seeing the value of your home fall by over $200,000 in a matter of months,” he wrote in a recent blog post.

The risk of price collapses driven by investor pullback is now lower, Pasalis told Global News.

Still, neighbourhood-level dynamics remain key, Saretsky said.

Source: 

Will it crash? Here’s what to expect from the Canadian housing market in 2019

 








7 reasons why it’s hard to know whether your house will lose value

Friday, April 13th, 2018

In some ways it would be easier to plan if we really knew for sure whether Canadian home prices were about to fall off a cliff as so many people keep predicting.

But of course that’s not how markets work. A difference of opinion about the future is one of the reasons why there is always a buyer for something you are anxious to unload.
Decisions on where the market will go next depend on too many factors to include here.

But as Canadians wait for tomorrow’s latest data on house sales and pricing from the the Canadian Real Estate Association, here are some considerations people may use to gauge if or when house prices will tumble.

1. Interest rates

As usual, the biggest threat cited for home prices is how much we pay for the money we borrow.

In previous times a two percent increase from 8 to 10 percent would be painful but incremental. In the current market, a sudden rise in interest rates, say two or three percentage points, would double the cost of interest payments, popping a decade-long bubble blown up by the Bank of Canada’s artificially low rates.

A more moderate path would give the housing market a chance to adjust. Even if, as expected, our central bank follows the U.S. to higher rates, a lot of uncertainty remains over how fast North American rates will rise.

2. Inflation

The main reason rates could rise suddenly would be that central banks might feel compelled to quell a sudden burst of inflation. So far, inflation has been tame.

Historically, inflation rises and falls in a long cycle and while after the fact economists will tell you why it happened, there are wide differences in opinion over where the cycle is heading next.

While inflation could lead to higher rates, some homeowners may see Canadian property as a long-term inflation hedge.

3. Pent-up demand

In many parts of Canada, not just Vancouver and Toronto, following years of rising prices and bidding wars, housing demand remains strong.

Government policy, including a rule that new buyers must be able to handle interest rate increases, may mean a pent-up demand for housing, including by large numbers of new immigrants, will support prices if incomes begin to catch up.

Even if market conditions begin to change, it may mean house hunters — schooled in a market of ever-rising prices — will take time to adjust to the new reality, leading to a softer landing.

4. Rate of construction

Home building in Canada’s hottest markets remains strong. Toronto’s skyline is still a sea of cranes, and the ground is full of busy holes.

This week the Canada Mortgage and Housing Corp. revealed that housing starts slowed in March.

The ability of construction companies to keep pace with demand could affect the value of existing homes, with overbuilding leading to falling in prices.

If instead builders overreact to the fear of falling prices and produce too few,  that could have the opposite effect.

5. Investment properties

On my short Toronto block, two houses sit empty. In the bank of condos out the window by my desk, many balconies show little sign of life and the lights don’t go on at night.

Owning a condo in Vancouver or Toronto over the last decade has been a lucrative investment even without the bother of renting.

According to the CIBC that’s changing. As those stunning returns disappear, as author and financial adviser Hilliard MacBeth has said, people may decide to invest their money elsewhere, accelerating a downturn.

6. Economic health

Potential home buyers may be less inclined to go out on a limb if they think the economy is going bad.

Various economic commentators have warned that a pattern where short-term interest rates exceed long-term rates may be a signal that the current long period of economic growth is heading toward recession.

As with inflation, economies go through cycles. A moderate slowdown, however, could reduce the impact of inflation and thus the need to raise interest rates.

That said, strong economic growth creates jobs and increases the wealth of Canadians, making them better able to cover housing costs.

7. Local differences

Partly due to U.S. President Donald Trump’s sabre-rattling over Syria, oil prices seem to be on the way up.

An oil recovery could come to the rescue of home prices in oil-producing areas of Canada, languishing since the 2014 oil price slump.

Interest rates will have an effect on everyone, but whether the price of your house will rise or fall will also depend on where you live or where you want to buy.

Housing prices are regional, and homes in areas that are in demand because the economy is strong or because they are close to services are more likely to hold their value.

Source: Don Pittis, Business reporter, CBC

http://www.cbc.ca/news/business/canada-real-estate-home-prices-1.4613215








“Big Six” banks have raised mortgage rates as Bank of Canada decision looms tomorrow

Tuesday, January 16th, 2018

The “Big Six” Canadian banks have now all hiked mortgage rates ahead of a Bank of Canada policy announcement on Wednesday.

Canadian Imperial Bank of Commerce, Royal Bank of Canada and Toronto-Dominion Bank raised mortgage rates last week, citing “recent activity by competitors” and “Bank of Canada rate changes” as some of the factors that go into an increase.

Bank of Nova Scotia has now hiked as well, increasing its posted five-year fixed-rate mortgage rate to 5.14 per cent from 4.99 per cent. The lender also boosted its one-year, two-year, three-year, four-year, seven-year, and 10-year fixed-rate mortgages by 20 basis points.

“Our number one focus is providing value for our customers — we manage our pricing very actively to do just that,” said Scotiabank spokesman Lukas Gerber on Monday in an email. “We use a variety of market benchmarks to set rates.”

Bank of Montreal has likewise lifted rates, raising its posted five-year, fixed-rate mortgage to 5.14 per cent from 4.99 per cent, as well as hiking its posted four-year fixed-rate 55 basis points  to 4.79 per cent, among other adjustments.

National Bank Financial analyst Gabriel Dechaine said last week in a note on the banks that approximately 80 per cent of outstanding mortgage debt is made up of fixed-rate loans, “of which we believe the majority has five-year terms.”

Montreal-based National Bank of Canada, the sixth-largest bank in the country, has also increased its posted five-year fixed rate mortgage by 15 basis points to 5.14 per cent and bumped its four-year fixed loan to 4.59 per cent from 3.89 per cent.

Laurentian Bank of Canada’s five-year fixed mortgage is also up  15 basis points to 5.14 per cent.

“These changes reflect an increase in the cost of funds and are in line with the rates offered by the market,” said Laurentian spokesperson Benjamin Cerantola in an email.

The Bank of Canada is set to make its next policy announcement on Wednesday, with the potential for an interest rate hike having increased in recent weeks thanks to strong economic data. Another rate hike could provide a boost to bank margins, according to National Bank Financial’s Dechaine.

“2017 provided not only surprise rate increases from the Bank of Canada, but a steady increase in the key five-year benchmark bond yield,” he wrote. “Both trends have contributed to an early turnaround in the trend of shrinking bank margins.”

Source: Geoff Zochodne, Financial Post/Postmedia

http://business.financialpost.com/real-estate/mortgages/big-six-have-now-all-raised-mortgage-rates-as-bank-of-canada-decision-looms








Vancouver and Toronto house prices set for rise, says CIBC

Thursday, November 16th, 2017

The housing markets in Toronto and Vancouver could resume their previous upward trajectories amid conditions of tight supply and burgeoning demand, according to a new report from CIBC World Markets.

The Canadian housing market, in general, is in an important transition period — especially Vancouver and Toronto, economist Benjamin Tal said in the report, which was released Tuesday.

He said activity is likely to stabilize and perhaps soften in the coming quarters as markets adjust to recent and upcoming regulatory changes, including tougher rules for getting a mortgage.

“But when the fog clears it will become evident that the long-term trajectory of the market will show even tighter conditions,” Tal said. “The supply issues facing centres such as Toronto and Vancouver will worsen and demand is routinely understated.”

“Short of a significant change in housing policies and preferences, there is nothing in the pipeline to alleviate the pressure,’ he wrote.

As prices shot up dramatically in the Vancouver and Toronto areas, governments took steps to try to cool the markets.

Vancouver real estate

Vancouver saw the August 2016 introduction of a 15 per cent tax on purchases by foreign buyers. Tal pointed that following a period of adjustment, a recovery in the Vancouver market is now underway.

Toronto real estate

In Toronto, the market is already showing a rebound following a slowdown in the wake of the introduction of the Ontario government’s Fair Housing Plan. According to the Toronto Real Estate Board, 7,118 homes were sold in the area in October, up 12 per cent from September, but still down down 27 per cent from the same month last year.

In his report, Tal said the recently introduced tighter lending rules will only slow demand by five to seven per cent this year, owing to a combination of the “creative imagination” of borrowers, some exceptions to the rule and increased activity among alternative lenders.

At the same time, Tal said that actual demand in the housing market is stronger than official estimates. He pointed out that Canada’s annual immigration quota is slated to rise from 250,000 to 300,000, and eventually 450,000. That comes amid a current tight land supply based on rules that don’t capture the changes in the market, he said.

Also, official estimates of household formation in the Greater Toronto Area tend be 10,000 below the mark if adjustments are not made for immigrants and non-permanent residents, who Tal said tend to be younger than the general adult population.

“Actual demand is much stronger than official numbers often used to determine the extent to which we overbuild relative to household formation,” Tal said.

Finally, the growing percentage of young adults living at home translates into pent-up demand of roughly 9,000 household, including about 6,500 in the Greater Toronto Area.

“That army of potential buyers can be seen as an insurance against long-lasting significant price decline,” said Tal.

Source: CBC News
http://www.cbc.ca/news/business/housing-prices-cibc-tal-1.4401743








Vancouver home prices may have finally shaken off foreign buyers’ tax

Thursday, June 15th, 2017

It’s taken nine months, but the Vancouver housing market may have finally shaken off the foreign buyers tax, data from a home price index suggested on Wednesday.

The Teranet-National Bank of Canada House Price Index showed that Vancouver home prices grew by 8.2 per cent year-over-year in May, and 1.46 per cent month-over-month.

At 252.30, the index reached its highest level since September 2016, which was one month after a 15 per cent property transfer tax on foreign buyers came into effect in Metro Vancouver.

The index has fluctuated since then, hitting as low as 242.64 in December.

Meanwhile, data provided by the Canadian Real Estate Association (CREA) showed the composite home price for Vancouver hitting $941,100 in April, the highest it’s ever been.

The composite had dropped from $933,100 in August 2016, when the tax first came into effect, to $896,000 in January, but now it appears to have recovered.

House prices largely remained unchanged in the eight months following the tax’s introduction, as noted in a chart released by BMO economist Douglas Porter on Tuesday — a marked contrast with growth of 20 per cent in the months before it came into effect.

But the ninth month appears to have bucked the trend.

At 8.2 per cent, Teranet said Vancouver house price growth was strong, but it was still below the national average.

Toronto’s housing market saw the strongest price growth, jumping 3.6 per cent month over month and setting a “record for any month,” Teranet said.

Home prices there jumped by 28.73 per cent year over year, a rate that also topped all other cities.

Toronto’s home price growth is expected to take a breather with the implementation of the Fair Housing Plan, which includes a 15 per cent tax on non-resident speculators in the Greater Golden Horseshoe area, which includes Toronto, Niagara and Peterborough.

Like in Vancouver, experts expect the effects of the plan to be short-lived.

Source: Jesse Ferreras, Global News
http://globalnews.ca/news/3529481/vancouver-home-prices-foreign-buyers-tax/








After a lull, Vancouver housing prices are set for a rebound

Tuesday, April 18th, 2017

Prices of detached homes in Vancouver may have hit bottom in the first quarter of this year, but are poised for a rebound this spring as sales activity surges across the region, according to a Royal LePage survey.

The Royal LePage quarterly house price survey, released Tuesday, shows home prices in the Greater Vancouver region dropped 1.9 per cent in the quarter ended March 31 compared with the last quarter of 2016, driven by a decline in prices of detached homes. Two-storey houses were down 3.1 per cent in the quarter while bungalow prices fell 1 per cent.

The Vancouver market began softening last spring and the market cooled even more after the B.C. government imposed a 15-per-cent tax on foreign buyers in August. But sales activity has grown so far in each month of 2017, suggesting the market for detached homes in Vancouver could rebound even sooner than people expected, said Royal LePage chief executive officer Phil Soper.

Mr. Soper said the number of units sold in Greater Vancouver climbed more than 48 per cent in March compared with February this year, which is much stronger than seasonal norms. He predicts the slowdown caused by the introduction of the foreign-buyer’s tax could lead to “market whiplash” this summer as pent-up demand is unleashed in coming weeks, sending prices sharply higher again.

“Frankly, I thought the correction would be deeper and longer, but that unit-sales number says to me that there’s still a lot of demand in the region and people may not sit on the sidelines for as long as we thought they would,” he said in an interview.

On a national basis, home prices are a tale of two cities, with Vancouver slumping while the Toronto region sees soaring prices, marking the first period in years in which Vancouver and Toronto’s housing markets have headed in opposite directions.

The combination has driven the average price of a home in Canada up 12.6 per cent in the first quarter of 2017, compared with the same time last year. The average home sold for $574,575, according to sales data from 53 of Canada’s largest real estate markets.

Removing the hot Ontario market from the calculation shows a more modest national price increase of just 6.4 per cent in the first quarter this year.

Mr. Soper said growth in the rest of Canada outside of Vancouver and Southern Ontario is strong but sustainable, and higher prices in cities in Alberta and Quebec are particularly welcome news.

“Generally it is shaping up to be the best and healthiest year we’ve seen in Canadian real estate probably since before the global financial crisis,” he said.

Prices soared not only in the Greater Toronto Area, but also in other cities across Southern Ontario. Prices climbed 12.4 per cent in London, 9.9 per cent in Kingston and 8.5 per cent Windsor, all of which are two hours or farther from Toronto.

Mr. Soper said the growth well beyond the Toronto region is being fuelled by Ontario’s strong economic performance, with the province now leading Canada in economic growth.

Closer to Toronto, the city with the greatest year-over-year price gain was Richmond Hill, north of Toronto, where prices climbed by 31.5 per cent in the first quarter this year compared with the first quarter of 2016. Oshawa, which is east of Toronto, saw prices rise 28.2 per cent in the first quarter compared with the same period last year.

The price growth in suburban cities is being fuelled by single-family home buyers, who have concluded they can get more “bang for your buck” outside of central Toronto, Mr. Soper said.

He added he sees no sign that Toronto’s market is cooling yet, but believes a slowdown is coming soon as prices move too far out of balance.

“There is so much momentum in the market that it will carry through the spring market at full steam,” he said. “The earliest I believe we’ll see a slowdown in the GTA market will be this summer or fall. Save a really heavy-handed move by regulators, I don’t see anything slowing this market this spring.”

Source: Janet McFarland, The Globe and Mail
http://www.theglobeandmail.com/real-estate/the-market/vancouver-housing-market-poised-for-spring-rebound-royal-lepage/article34726396/








Vancouver has the least number of affordable homes in Canada

Friday, March 31st, 2017

The slowdown of Vancouver home sales has helped affordability a bit, but we’re still the country’s costliest market by far.

Royal Bank research shows “Housing affordability improved in the Vancouver area for the first time in almost three years” during the fourth quarter of 2016. It says the slowdown in home resales that began last spring had a “cooling effect” on prices for single-detached homes by late in the year. The bank’s economists say the affordability of houses improved the most since the first quarter of 2009 when Canada was in a recession due to the financial crisis.

Nonetheless, RBC says it takes 84.8 per cent of the median household income to pay the costs of owning the average detached bungalow in Vancouver.

Condos are a different story, with RBC saying “No such affordability relief took place.” Its measure of condo affordability worsened slightly for the seventh quarter in a row. Condos costs are at 46.1 per cent of household income.

RBC also says there are signs that “affordability stress” is spreading to regions near Vancouver and Toronto, including Victoria which the bank says “has experienced booming demand in the past year which has propelled prices significantly higher,” pushing its afforability measure “well above its long-term average.”

Source: Richard Dettman, News 1130
http://www.news1130.com/2017/03/30/vancouver-still-number-one-unaffordable-homes-rbc/








Vancouver home price gains still among world’s highest despite slowdown

Friday, January 6th, 2017

Metro Vancouver’s residential real estate story was a tale of two halves in 2016.

There were scorching sales leading into summer, a cooling off, and then a marked retreat after the province imposed a 15 per cent foreign buyers tax in August.

Many big-picture pundits say it will take another six months or more to fairly assess the impact of the tax. Others point to falling sales, and in some cases prices, as a small number of deals eke on.

Despite this, in 2016, Vancouver residential prices moved up 18 per cent, according to the Real Estate Board of Greater Vancouver’s composite benchmark price report released on Wednesday. Most of the gains were notched in the first half of the year, with the index moving back 2.2 per cent in the second half, according to the board’s report.

The number of sales — including detached houses, condos and townhomes — came in as the third-highest on record for Vancouver in 2016, falling 5.6 per cent from a record year in 2015.

Digging into the latest report, there are early signs of a bounce if you look at median prices. With so few listings, and as such, sales, some prefer to use this gauge, which means the “in the middle price” where half the homes sold went for above this mark and half for below as opposed to taking the average of only a handful of sales, where the result could be easily skewed by one very expensive or slumped sale.

For example, the median price for detached homes is steadying because it has been sitting in the $1.275 million to $1.3 million range for the last four months. Meanwhile, the median price for town homes, at $659,000, is now nearly at its June peak median price of $666,000. Condo median prices show an even stronger stride, hitting a new high of $495,000.

To put the slowdown into perspective, consider Knight Frank’s latest Prime Global Cities Index, which tracks the prices of the top five per cent of homes in metro areas of 35 cities around the world. Vancouver outstripped all other contenders in 2015 and in September 2016 it was still at the top, posting a 32 per cent change year-on-year.

Knight Frank’s Global Residential Cities Index — which more widely tracks “city house prices” in 150 locations — showed Vancouver was the highest ranking city outside of mainland China.

“Urbanization and rising household wealth are behind the surge in Chinese prices,” wrote Knight Frank researcher Kate Everett-Allen. “Vancouver, a longtime front-runner, slid down the rankings this quarter, from fifth to ninth position. This shift is not as a result of slowing prices, annual growth is much the same as in June, close to 24%, but due to the phenomenal ascent of the Chinese cities which have supplanted it.”

Overall, house prices increased in more than 75 per cent of the 150 cities surveyed, year-on-year, but only in 13 of them did the increase in prices exceed 20 per cent. Victoria, B.C. just missed being one of those cities on the list, coming in 15th on the list with an 18 per cent gain.

It’s an “interesting report. I really like the global comparison that it facilitates,” said Andrey Pavlov, who specializes in real estate finance at Simon Fraser University’s Beedie School of Business. However, he cautioned that: “First, the data is as of end of September, 2016. This was still very close to the peak, which occurred around June or July. Second, the report uses year-over-year increases, and all of the Vancouver increases occurred earlier in 2016, and some in 2015. With this in mind, the report captures historical trends, but does not really address the recent developments in our market.”

Source: Joanne Lee-Young at Postmedia
http://www.theprovince.com/business/real-estate/vancouver+home+price+gains+still+among+world+highest/12645598/story.html








How capital gains is affected in a falling real estate market

Friday, 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
http://www.cbc.ca/news/business/crea-house-prices-capital-gains-1.3801499









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