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.

They’re coming

Trump punts Kim and tells the US military to “prepare.” Stocks sell off, bonds gain, yields fall as the Korean love-in fizzles. Trade war talk heats up again and even timid Canada gets into the act telling China it can’t buy construction giant Aecon. Washington gets all pissy saying it may impose a 25% tariff on maple-made cars. So much for NAFTA. Oil falls. So does 30 cm of snow in Newfoundland, a week before June starts. Climate change. Fishgate breaks out in Ottawa and in Ontario Tory leader Doug Ford is caught on tape breaking election laws, while the socialist hordes rise in the pre-election polls.

Most people are oblivious to this stuff, of course. They motor through life, want children and houses, hope for the best at work and figure they’re okay so long as they make more than they spend. It’s a shame, since so many will be surprised at the way risk can escalate. Never before have citizens been so over-extended in terms of debt, nor had so much net worth locked into a single asset.

Anyway, here are a few thoughts to frame your weekend.

Dippers on the bridge:
As mentioned this week, the unthinkable is drawing closer – Ontario voting in an NDP administration on June 7th. My freaking-out Con friends tell me the PC campaign is in tatters, with no cohesion, too little money and too much Ford. This is no longer an election about policy choices or economic vision, but simply a way for voters to punish the existing Liberal government by selecting the least-worst alternative. A carbon copy of what happened in BC – so if Ontarians want a glimpse into the future, look there. Carbon taxes. Higher income taxes. Stiffer business taxes. Speculation taxes. Luxury taxes. And inevitably, a wealth tax based on real estate.

The needy Million:
Apparently in the Toronto region alone there are one million Millennials still living with their parents – close to 20% of the entire GTA population. Never before in Canadian history have so many adults been so slow to begin independent living. They’re marrying later, having families later, staying in school longer and Hoovering up their parents’ retirement savings.

These are orange voters. A report this week estimates 700,000 of them will want to buy real estate, move to the suburbs, get minivans, shed their manbuns and, yes, grow up over the next decade. Of course, they can’t afford to. To buy the average house at the moment takes an income six times greater than the typical moister earns. Unless there’s a real estate crash, or incomes spiral higher, fuhgeddaboudit. So the answer for many of these kids (as was the case in BC) is an interventionist government using a tax hammer to beat the crap out of the market. Of course, the economy will go with it. So, prepare.

Say did you hear about the US couple (in New York) forced to go to court to evict their 30-year-old kid? I left home at 18. Laid rubber doing it, too.

Pray for the Drywallers:
It’s either a harbinger of what’s to come for the broader market, or the result of incompetence, but the new housing business is collapsing. In the massive GTA, homebuilders point the finger at government intervention, regulation, tariffs and levies that have restrict land development and jacked costs. Buyers have decided that prices are unjustified. And negative press about people who bought unbuilt houses a year ago suffering huge paper losses has been the kiss of death.

The number of new houses sold in April crashed 65% from the same month last year, with sales now running 70% below the 10-year average. You have to go back almost 25 years to find any period in which so few deals took place – and then the urban area was considerably smaller. As buyers walk away, detached house prices have fallen over the last 12 months, from $1.5 million to $1.2 million. More to come.

Hmm, so what are we to conclude?

Housing is a mess in most of the country. A patchwork of regulation, taxes, policies and emergency measures have so far done nothing to increase affordability. But more are coming. Voters demand it. Combined with rising US interest rates, a darkening trade picture and a big move left in Canadian politics, it’s not a great time to have the bulk of your net worth sitting visibly in one asset, on one street, in one city.

Look at the comments in this blog’s steerage section. So many Mills now equate wealth with real estate, and are happy to see “rentier” landlords hobbled, property taxes increased, second homes whacked and almost all housing investment labeled as corrupt. It’s easy to see a new, larger assault taking place on real estate equity, now that we’re running out of rich people to vacuum.

Remember the new mantra: get liquid, and live quietly among the masses.