The unforgiven

Dave runs an independent real estate brokerage northwest of the Big Smoke. “More blog fodder for you to consider,” he wrote yesterday, “not that you are short on topics.” Got that right.

“I just connected with someone looking to sell their assignment in Rockwood.  A bit worried at the prospect of owning 2 homes – I could hear it in their voice.” That place contains about 12,000 people, lies between Brampton and Guelph and is one of those glorified crossroads that morphed from sleepy agrarian hamlet to bedroom commuter town stuffed with people who moved there only because newly-built houses cost less than down the road. Yes. Lost its soul. Now a worse fate.

“This got me looking at what’s for sale,” Dave says, “and it seems that about 30% of the inventory there is either brand new or listings being sold by assignment. I won’t bore you with all the links to all the listings etc – but approximately 12 of 40 active listings on the market in Rockwood are either “brand new/never lived in”, or assignments. Lots of these listings are out of town agents – likely with speculating “investors” hoping to cash in as the market went up forever.

“I have my popcorn ready.”

This is an interesting, hayseed microcosm of what’s happening in both the GTA and the LM. Two and three years ago, back when everyone was house horny, mortgages were 2% and Justin Bieber was entering puberty, homebuilders were deluged with business. Houses planned for farmers’ fields sold from plans for big bucks to people convinced they could flip them for a massive profit, or that this was their last chance to own property.

Both assumptions, we know now (and this pathetic blog warned), were bunk. FOMO was a false emotion. And real estate values were destined to correct when rates rose, regs changed and prices breached sanity. While politicians and media were blaming guys from China for the house lust around us, the real drivers were ‘average’ confused families shoveling their whole net worth into houses they couldn’t actually afford.

So here’s a result – a third of the listings in one place, all newly-built, being panic-sold. Soon Rockwood could be renamed Vultchville. Great bargains if you commuting. And sheep.

A year ago assignment sales were the rage, especially with condo units in Toronto, Vancouver, Victoria, Ottawa or Montreal. The idea was simple – line up for a pre-construction unit, make the minimum down payment, ensure there was an assignment clause in the offer to purchase, wait two years until the building was erected, then sell the paper for a fat profit to a new fool who would actually go on to close the transaction. Tax? Not a chance.

Assignments are perfectly legal in most places, but caused a furor in BC, where they were darkly labelled “shadow flipping.” Homeowners selling for outrageous profits were horrified to learn their contracts were resold prior to closing to another party, who actually paid more. Being greedy and shallow, they felt the additional profit should be theirs, not the middleman who brokered the assignment (and took the risk). Incredibly, the government agreed.

Well, the practice is backfiring, as Dave attests. Thousands and thousands of assignments are for sale, with thousands more to come. Lots of condo buyers who thought they could rent out new units while reaping gains from escalating prices now face multiple obstacles. Prices have stalled and will likely decline. Rents often don’t cover even basic ownership costs (four in ten amateur landlords in the GTA are in negative cash flow). And rent regs are ridiculous. Even if a tenant’s lease ends you cannot toss them out – despite the fact you’re moving in – without paying them money or finding them new digs.

Now, what about tax?

Odds are all of those Rockwoodian speckers and flippers, if they do sell and make some money, will be unhappy at what happens next. Any profit must be added to their salary, wages or business payments and be 100% taxed as income. They may have bought the property as an investment, but the reduced capital gains scenario will not apply to a house (or condo) that generated no rental income. And even if they move in for a year and try to sell it as a principal residence – no tax – the CRA will squish them. The general rule of thumb is five years of ownership with at least 24 months of personal occupancy. But Ottawa can do what it wants.

Now just imagine if Jagmeet is the next prime minister.