Andrew's Musings - December 2022
Wednesday Dec 28th, 2022
Merry Christmas, Happy Chanukah, and Happy New Year!
The month welcomes a joyful period of family, fun, and revelry. Christmas parties, retain for me, all the splendor of the past, and now enriched with a greater sense of gratitude, and appreciation for how precious these moments of celebration should be regarded. Two years of lockdowns and mask mandates tends to elicit enthusiastic, thirsty crowds.
In heavier tones, things seem particularly volatile and toxic of late, perhaps as an inevitable consequence of the 24-hour news cycle, and our need to remain twitter-current. We seem inundated by a constant drum beat of negativity, and erroneous conflation; a perpetual need to create news from what was once the trivial, now whips us all into a frenzy of panic, feeling ever tense and edgy, jerked from one conflict to another.
As evidenced by recent news, real estate reports have not escaped the same formulaic, sensationalist, unnuanced diatribes. Canadians are enthralled with residential home prices, making us particularly vulnerable to the over-dramatization and manipulation. My guess is that like most downturns, the next 18 months will indeed be painful for some, and fortuitous for others, but on balance, likely not that bad, and not that long.
Housing affordability has been the battle cry du jour for the past several years, so let’s discuss a few recent changes which were announced quietly over the past several months. Let’s also keep in mind that rising home prices means increases in wealth for those prudent enough to own property, rewarded for many years of servicing their mortgages dutifully, however arduous. The punctuated efforts to drive home prices down, are also attacks on wealth, penalize these years of sacrifice, and exemplify yet another accommodation for new arrivals.
The first, already in effect is a vacancy tax in Toronto. It imposes a whopping 1% tax on the Current Value Assessment of a property vacant more than six months over a calendar year. There are of course exemptions, and please review details with your attorney. It sounds like a good idea to increase housing supply, and so affordability, but alas the unintended consequences become obvious fast. They have been running this scheme in Vancouver for the past year or so, and so far, the revenues accrued have been far less than projected, and perhaps not worth the squeeze. What’s worse is that the inevitable monitoring and auditing processes may quickly become Draconian. For example, the CRA will have a defensible rationale to monitor our hydro and water consumption over the course of the year to ensure that it’s a smooth curve; pair this with the overarching goals of the climate change agenda, and we have a recipe for disaster, perhaps the rationing of power consumption, talk about erosion of private property rights.
Another group of ugly ducklings are the new restrictions to preconstruction condo assignments, which will now all be subject to HST on sale. Assignment sales are thought to drive prices up, because investors seek an arbitrage opportunity in purchasing these contracts years before construction is completed, looking to resell the contracts just prior to completion for a higher price. Yes, this will drive down prices, all else equal, but it’s never equal, the action also reduces liquidity for developers in the several years pre-completion, resulting in higher financing costs, and ultimately less incentive to invest in building more housing, which means less supply and higher prices in the end. If you want less of something, tax it, whether directly or indirectly, it doesn’t matter, the results to the consumer are the same.
It would be far more expedient to address the outrageously lopsided landlord tenant laws, which make it nearly impossible to remove bad tenants. This is the real reason investors are inclined to leave places empty rather than risk fighting the tribunal system for a year to evict dead beats, floating the unpaid rent and legal fees throughout. Alas, there are many more voting renters than landlords, so no matter how hard the landlords lobby, their campaigns fall of deaf ears.
We saw the perfect storm play-out already in Toronto this week, driving many to engage in protests downtown. The picketers claimed to be the bearers of these preconstruction condo contracts, which are now worth 30% less than when they purchased them earlier this year. Banks provide mortgages only for what they’re worth, not what the purchaser paid, so now upon or approaching closing, they are on the hook to find 30% more in cash to bridge the divide, resulting in financial ruin for many. Here is where the investors step back in, buy them at a discount only to resell them as before, leaving the little guys burned, only far worse than before; talk about ugly unintended consequences, and so plainly foreseeable. Again, please consult your lawyer about all these matters, this is purely for discussion.
The Silver Lining
The Toronto real estate market is subject to ups and downs, but it will always win the end. Trudeau is now targeting 500k new immigrants every year, and the balance are free to settle in one of the major cities, and most do. The province now has ambitious, high-level plans to build 250k more (small) houses over the next ten years, but this won’t make a dent in the requirements, and we’ll still have a massive dearth of supply. In the end, so long as the zero capital gains tax policy remains on primary residences, and some other structural incentives to buy residential property, prices will continue to soar long into the future, again not necessarily a bad thing, it’s our primary earner of wealth after all. Not to mention a primary driver for nearly 10% of our economy when you add up all the externalities, such as construction, and renovations etc.
Despite the gloomy rhetoric and economic headwinds, there are growing pools of buyers circling for deals, and waiting for interest rate stability. These buyers won’t wait forever, and it’s clear that demand is building. In addition to rising rental prices, an important leading indicator is the number of property showings, which we track each month. Showings are back on the rise, and now almost in line with last year’s feeding frenzy. Although sales and offers remain down 50%, strong showings demonstrate that consumers remain eager to purchase, and likely will pull the trigger when rates stabilize, we just can’t budget for the unknown.
Like most downturns, the impacts will be unequal, maybe unfair, but opportunities beckon, so please stay in the loop and get in touch anytime for frank, friendly discussion, always happy to help navigate.
Merry Christmas, Happy Chanukah, and Happy New Year!