Cold comfort

It may be no coincidence that Home Capital melted down on the stock market the same day Ontario was trying to hammer housing. Canada’s premier alt lender lost big – down as much as 14% in a single session – after regulators charged the company with fibbing to investors and breaking securities laws. You might recall Home Capital had to shed dozens of brokers who were falsifying mortgage docs, handing out billions to borrowers who didn’t qualify.

Well, the company may not survive. Ditto for a whole whack of small-time speculators who bought condos they plan to flip or rent. At first blush, it looks like the condo market was the big loser in Thursday’s political assault on the free market. Rent controls on new units will virtually guarantee consistent long-term negative cash-flow for investor-owned apartments. Ouch. And since half of recent condo sales have gone to investors, you can imagine the impact.

The condo trade also relies heavily on assignment clauses – allowing buyers to sell their interest in a unit prior to closing. Given the fact it can be three or four years between making a deposit on an unbuilt unit and actually seeing it registered, assignments make sense. There are whole brokerages dealing in nothing but. So now with intense scrutiny and the CRA involved, any gains are likely to end up being taxed as income. Double ouch.

In case you missed it, Ontario did about what was forecast here. A non-resident (foreign buyer) tax of 15% – or $240,000 on the average detached house. Rent controls on every unit, ensuring landlords cannot stay ahead of inflation. Letting cities tax under-used properties – about $1,400 a month on a 416 SFH. And nebulous new regulation for realtors, perhaps ending an agent’s ability to represent both buyer and seller.

So what happens as a result?

In Vancouver sales plunged after similar moves were made and the prices of high-end properties sunk. But residential values are sticky, and the consensus seems to be that none of it worked. Average houses remain unaffordable for average families, even after the Chinese dudes took a hike. But the GTA is not YVR. All markets are local. And Van was already rolling over when the province locked out foreign buyers and taxed empty houses.

It’s reasonable to assume the condo market will erode, since rent controls make investing in concrete boxes a losing prop. Controls also discourage purpose-built rental housing, so what the province has just done may actually limit the amount of new units coming to market. As far as the foreign buyer tax goes, realtor stats show only 4.9% of GTA deals were done by non-residents. So logic tells us the impact will half what it was in Van, where the city had a 9.9% non-resident penetration.

As stated here so often, real estate’s emotional. People get horny to have it (whatever the cost) when markets rise and run screaming from perceived risk when it falls. Rent controls, realtor handcuffs and a tax on foreign guys may not be enough to persuade house-lusty moisters that a slanty semi on a dodgy street isn’t the holy grail. Which is why we could use that tax on stupid.

If you ever need evidence it’s insatiable demand – fueled by the cheap money government has provided – and not greedy, tax-cheating, money-laundering, speculating foreigners, just look at this chart. Personal debt’s over $2 trillion. Two-thirds of it is mortgages. All those orange bars are going wild.

This still ends badly. They know that tonight at Home Capital.