The opposite

E-day plus two. Yesterday we looked at some tax consequences of the new Liberal mandate. The bank tax. The Capital gains issue. Another hit on high incomes. A federal assault on REITs. The weird new FHSA. And the long-term implications of neverending deficits.

Now, what about real estate?

As you know, the words “housing crisis” rolled off the lips of Trudeau, O’Toole and Singh at most campaign stops. All the parties put measures to make property more affordable at the heart of their campaigns. It’s hard to know what the worst voter turnout in Canadians history means, however. Were people afraid of the virus? Did Elections Canada really screw up the process that badly? Was the election an unwanted summer distraction? Do people just not believe the promises anymore?

Well, the Libs won. So now we know what to expect. Maybe. And if you’ve been waiting for cheaper listings, the news is not good. Here are some reasons why the 2021 election outcome will (a) increase demand for residential real estate, (b) inflate this asset class further and (c) make personal finances worse by augmenting mortgage debt, which is already epic.

First, loans are about to get bigger. The T2 gang has pledged to change the CMHC mortgage insurance ceiling. Currently anyone buying a property for $1 million or more cannot sign up for this insurance, which means they must have 20% down to qualify for financing. But the Libs say that will increase by 25%, to a cap pf $1.25 million. Not only does this mean the kids can buy a more expensive property with the same downpayment, they can soon purchase a seven-figure property with as little as 5% down and 20x leverage. More demand, bigger borrowings, higher prices. If you’re selling a property listed at $995,000, wait. Soon you can ask $1,245,000.

Now, there’s more. The very cost of mortgage insurance will be slashed by 25%. This is significant since everybody adds CMHC premiums to the mortgage principal, which are then amortized, amplifying the impact. The Libs say this will save buyers amount 4% of the cost of a home – which means they can spend 4% more. In the GTA that’s about $40,000 tacked on to the average price.

Third, the federal government wants to finance your closing costs. The First-Time Home Buyer Tax Credit is doubling, to $10,000. This is money that can be used to pay for land transfer tax, legal fees, your mover or a new fridge and “make a home purchase a little bit easier.” More demand.

As detailed yesterday, the jewel in the crown of property pumping is the First Home Savings Account. For those under 40, it means forty grand can be contributed, used to reduce income taxes, grown tax-free in a shelter then withdrawn – also without tax – to buy a home, with no payback of refunds received. It’s an RRSP and a TFSA and Elon rocket fuel for the market, all combined. More demand.

The Libs will change the shared-equity mortgage, wherein Ottawa carries part of the debt for homeowners, allowing people to keep all the property appreciation. A new rent-to-own program will be enacted using $1 billion in taxpayer money “to help make it easier for renters to get on the path to home ownership.” Then there’s the Multigenerational Home Reno Tax Credit which will dole out more tax money in the form of credits to finance up to $50,000 in renovation and construction costs so a secondary or rental unit can be added to a house. And if you can’t pay your mortgage because of a financial reversal, the government will ensure that forbearance is guaranteed.

Well, there is more. You get the drift. This is a formula for increased residential real estate activity at precisely the wrong moment.

Snapshot of a sick market: the GTA

Source: Stephen Glaysher

Why are prices stupid high and affordability so low? Simple. Too much demand, too little supply. The combination of emergency interest rates, generous pandemic income support measures, urban flight because of the virus, WFH, demographics and the resultant FOMO have created a housing feeding frenzy. High prices have frozen supply since sellers can’t afford to move and owners watch their equity rise weekly.

For example, in the first eight months of 2020 almost a quarter of all sales in the GTA were properties under $600,000. In the same period this year that fell to 15%. The average property price crossed $1 million for the first time in 2021 and in both Toronto and Vancouver $2 million is the new norm for an average, not-too-crappy, detached house. But incomes have barely moved. And we still have Covid. Meanwhile listings have dropped to the lowest level in a decade.

Hot demand and scant supply.

So what’s the outcome of this election? Yup, more demand. No more supply. The opposite of what we need. Erstwhile, pledges to spank flippers and ban foreign buyers are but salves to the uneducated and emotional, since neither explain prices that currently engulf our citizens in debt.

While political leaders decry the ‘financialization of housing’ they actively politicize it. Way worse. The risk grows.

About the picture: “Here’s one for you next “sitting pretty” post (which could be a while, as so few seem to be!),” writes Jay. “This is Hemi, a rescue we got just before Covid hit. We call this his throne, he won’t let anyone else sit on it lol. Keep up the good words!” Have a pooch to share with us? Send me a pic: [email protected]. – Garth