The guardian

Are the bankers worried?

One of them – a big poohbah at the nation’s largest lender – says it’s time to reconsider tax-free house gains. Gulp. Heresy. The country’s dominant real estate board has reacted in unvarnished disgust. And from the trenches, here’s the report of one of our own – slogging daily to hand out fresh loans, many in refinancing as people use their homes like ATMs (to buy more real estate).

I watch this and am shocked.  Like some mindless stampede.  Why this would happen during such a time of pandemic, virus and uncertainty is a puzzle, or perhaps not.  This smells a lot like some kind of societal breakdown, when I just know looking at these applications that there will be jobs lost and reversals galore. You have said, ‘This won’t end well’.  It won’t.  Best to stay lean, mean, with dry powder and a low profile.

Hmm. As noted there’s a budget coming down in Ottawa in three weeks. The first one since before the pandemic hit, when we entered the housing maelstrom. Once the March stats are published it will be evident the country has lost its mind. Our housing bubble is the biggest on the planet. Canadians devote more household income to paying off debt than any other G7 country. We fork over 65% more than American families for shelter. In the GTA there are almost 60,000 realtors and fewer than 10,000 listings. Unemployment last year was over 10% yet we borrowed $120 billion more. Two-thirds of people say the highest prices ever will only go up.

Does any of this sound, er, dangerous to you?

The International Monetary Fund says Canada’s at risk of having housing “destabilize” the whole economy. It’s calling for lenders to turn off the spigots and the country to slap on a speculation tax. Meanwhile even the Bank of Canada (as noted here yesterday) admits concern over the flipping in places like steamy Brampton, plus the FOMO seeping into the hick cities, burbs and backwoods where people used to live less stressful lives.

And did you catch the vibe at RBC? No flies on chief economist Robert Hogue. The bank is practically telling T2 the property bonfire must be doused.

“It’s overheating… Making matters worse: buyers and sellers expect prices to continue to escalate. Until recently, Canadian housing-market worries mostly reflected conditions in Toronto and Vancouver. Now, it’s a national concern.”

Should the feds act? “Yes,” it answers. And as this pathetic (but chiseled) blog had laid out, the reasons are obvious. First, real estate will correct. Inevitable. Nothing rises forever. And the bigger we let it get, the more guts will fly. Second, 60,000 realtors in one city show how we’re turning Canada into a house-horny economy, selling each other real estate instead of building stuff to sell the world. And housing inflation, FOMO and speculation are creating two classes – owners and serfs. The wealth divide grows daily. The kids can’t buy. Rotten social policy.

So, what to do?

Maybe whack investors, the bank says, by not letting owners of investment properties deduct financing costs (like in NZ). Ouch (half the condos in Toronto are investor-owned). Plus, FOMO has got to end. Canadians need to know prices will not rise forever.

“Policymakers should put everything on the table, including sacred cows like the principal residence exemption from capital gains tax. These considerations will be complex, controversial and no doubt fraught with unintended side-effects. Yet this support was largely designed during times when interest rates were much higher, and in some cases to counter the effect of high rates.”

To the Realtor Industrial Complex, them are fighting words. Lisa Patel, boss over at the Toronto Regional Real Estate Board, is aghast.

“Piling on a capital gains tax would mean homeowners get dinged when they buy (land transfer tax), every year while they own (property taxes), and when they sell (capital gains tax). Enough is enough,” she says. Of course, folks with financial portfolios are taxed every year on income received, pay HST on fees and capital gains tax on dispositions.

Lisa also claims this is an ugly idea because, “homeownership is the cornerstone of retirement planning for many people.” True enough, but this may flow from the abnormal tax break on house sale proceeds, coaxing people to have a risky one-asset strategy.

And this concern: “Many younger homeowners and buyers already feel like they have greater challenges than previous generations to become a homeowner, and now this would penalize them on the back end when they sell, something that previous generations were not subject to.” Again, true. But today’s buyers have 2% mortgages – a massive discount from the historic norm – plus 5% down payments (thanks to CMHC) along with tax-free RRSP deposits, a shared-equity mortgage and first-timer tax breaks. The hurdle is price. And prices might be a lot lower if residential real estate were not the only asset in the nation allowed taxless profits.

What next?

Don’t expect a capital gains tax on houses on the 19th. Not happening. Too rad. But I hear a national speculation tax based on length of ownership is in play. That might be enough.

Remember the 2017 dominoes? Everybody who buys in bubble must sell. When you can’t close because the guy you sold to can’t close because the guy he sold to couldn’t close because… well… FOMO ends in a hurry.

Will Justin man up?

About the picture: Madison, a shepherd-mix, waited in the ruins of her family’s burned-out home in California for an entre month until her owners returned. Rescue workers fed and watered the pooch, who refused to leave her station.