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Cabin fevers

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By the end of the week realtors will have shocking stats from all major markets. They’re just so darn useful in making non-homeowners froth and convulse with FOMO. Combined with engineered bidding wars, hold-back offers, blind auctions and deliberate mispricing, agents are driving a stake through the beating heart of affordability. But the Audi payments are no sweat.

Take Covid-central, for example. Infections rage in Alberta and the beleaguered premier is bringing down da hammer. But in Calgary it’s real estate party time. April sales climbed more than 400%, listings increased 227% and average prices grew 20% in April. Unemployment is still in double-digits in Cowtown, while nationally it’s declined to 7.5%. Only poor Newfoundland is worse.

(By the way house sales on The Rock has doubled year/year – up 134% in St. John’s. But prices have barely budged.)

As we’ve reported for some time, the biggest jumps nationally have come in suburban, rural, cottage, hick city and bunny-habitat regions. Buyers there have generally been urban virus refugees and WFH warriors taking a gamble remote work will last forever. We fussed over that topic last week, and the next six months will deliver a verdict.

In the meantime, it’s spring. Rutting and bug season in this land of tundra and noxious weeds. So naturally people are now insatiably lusting for sub-standard housing known in Canada as ‘cottages.’ Like Tyler and his hubby Bruce – urbanites who identify as grizzled courriers de bois. Here’s the story, and the ask…

Myself and my husband rent in Toronto for $2,000 a month. Nice main floor bungalow close to the subway line and have a total household income of $150K…both of us are mid 30 and have no spawn. We bought a cottage for $325,000 east of Toronto (north of Kingston) 2 years ago. Our original plan was to buy and rent it out and we’ve been able to break even with all costs associated with the cottage. We also get to enjoy it between visitors. And, most importantly, we get to experience that joyful feeling of home ownership.

I’ve spoken to local realtors and they think we can sell turnkey for $600,000. Shocking that it’s almost doubled in two years. RBC said the mortgage penalty is $13,500 (ruthless). Lawyer fees of $1,500. And the 4% realtor commission, we should be left with $250,000 profit. We currently have combined savings of $70,000 in our TFSAs. We were thinking of topping both our TFSA and then repaying the RRSP that we used for the HBP. I’m assuming you’ll tell us not to pay back the HBP and do the minimum payments over the 15 year period. Once everything is topped up, what do people do when they max out their TFSA and RRSP contribution room? We can save $2,300 a month – combined; what other vehicles can we use for investments? And do you think we are making right choices? Now roast.

Lucky guys, of course, to have scored a purchase at just the right moment – pre-pandemic. Even distant Kingston is now a GTA suburb, which is completely weird. They’re wise to sell in the months before WFH starts to disintegrate causing thousands of recent buyers to ask, blankly, ‘what did we do?’

First, the windfall profit may well be taxable, unless the boys fight with the CRA and win. Yes, you can declare a cottage as a principal residence and be exempted from the capital gains tax. But not one which was used only occasionally and rented out (Airbnb) most of the time. Especially if they reduced taxable rental income with deductible expenses.

Next, what to do with the potential windfall?

No, don’t pay back the HBP loan in one chunk. Why would you? It’s costing nothing. Second, top up TFSAs for about eighty grand. This is particularly important if you guys have DB pensions from pubic sector jobs, since retirement income flowing from tax-free accounts is unrecorded and won’t kick you into a higher tax bracket, like RRSP/RRIF cash can.

Use up RRSP contribution room (again, if no DB plans), and ensure assets are properly housed – growth-oriented EFTs mostly in TFSAs and fixed-income ones in the retirement plans. If you’ve been a captive of [email protected], time to get serious about investing – open self-directed accounts with the bank’s online brokerage service, or equal. Or find an advisor. Make each other RRSP beneficiaries and TFSA successor holders. Then establish a non-registered account. Joint is best. Dump the rest of the money in there. Be balanced and diversified.

Now, park the FOMO. You rolled the dice on the Kingston cottage (remote location, sizeable debt, scant savings left) and through sheer luck, made money. Don’t expect a repeat, and thank the gods a pandemic saved your butts. Now you’ve got enough (over $300,000 combined) to start a serious portfolio for future freedom and choice. Chuck in the monthly savings, and it’ll be a beast.

Sell now, by the way, and avoid this…

Click to enlarge. Source: Province of Ontario, 2021 budget document

“I live in rural Ontario and my house assessment is $353K according to 2016 assessment,” says Bassam. “The last house sold in my area last week (same as my house) for over $800K. My yearly property tax is $3,400. Not sure for how long they keep misleading the new buyers, 95% of people in this province don’t know what’s coming.”

Bugs. Taxes. And soon a killer commute. Priceless.

About the picture: “This is Molly, an American Cocker Spaniel,” writes Satu. “She came to us as a give-away dog years ago. Turning 11 this year, Molly is still full of puppy energy and brings so much joy to us. One thing that hasn’t changed over the years, though, is her dislike of kids and other dogs. The neighbourhood hounds steer away from her. Thank you for your blog! From a long time reader.”


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