Hopium

“I am stunned by the number of agents who think things will return to normal by year end,” says a grizzled old GTA realtor who risks it all by reading this blog. “Condo rentals are everywhere. Some estimates as high as 10,000 for the entire GTA. Needless to say rents are dropping.”

Buyers in retreat. Airbnb collapsed. Covid cooties lurking in elevators. Lenders tightening credit. The jobless rate at 13%. CMHC in a funk. Eight million on the dole. A million mortgage deferrals. How can we be surprised?

“The real estate board has a massive online meeting Thursday,” he continues. “They will vote to defer the annual dues from June 30 until September 30. The brokers are worried many agents will not renew their membership.” By the way, there are 56,000 realtors in Toronto, representing 70% of that entire species in Ontario.

Meanwhile the latest official Frankenumber stats from the nation’s largest house-flogging organization are just peachy. Pandemic? What damn pandemic? “On a month-over-month basis, actual and seasonally adjusted May sales were up substantially compared to April,” says the real estate board. “Actual May 2020 sales increased by 55.2% compared to April 2020.” And here’s the report on values: “The average selling price for all home types combined was up by three per cent compared to May 2019 to $863,599. On a seasonally adjusted basis, the average selling price was up by 4.6% month-over-month compared April 2020.”

There you go. Sales up 55%. Prices up 4.6%. The market’s torrid, baby! And look, the media just fell for it…

Now the facts. Last month 4,606 sales took place in the GTA. This time last year there were 9,042. Hmm. That appears to be a decline of 4,436, or 49%. As for prices, it’s worth remembering the average detached house in 416 – now worth $1.42 million – is selling for $149,000 less than it was three years ago. In fact when you add land transfer cost to the price of a house purchase, then deduct the standard realtor commission for selling, the loss on a SFH in urban Toronto comes to $280, 400, or 17%, over a three-year ownership period. If you bought with 10% down in 2017, then sold in 2020, you’d have to bring a cheque on closing day.

Oh, and add in the property taxes, maintenance, financing charges, insurance and reno bills along the way. Clearly owning a home in Toronto – the premier real estate market in this house-lusty land – was a losing proposition over the last few years, compared to renting. In contrast, a balanced financial portfolio has gained (even with the virus attack and the late-2018 market plop) 16% since 2017. Hmm.

But enough of the immediate past. What about the future? The next year or two? Are all those realtors correct in thinking things will be normal by Christmas? Or are they stoned on hopium?

Economists worried about real estate values have been lining up for a few weeks. This week RBC’s Robert Hogue joined CIBC, Moody’s, CMHC, Scotia and others in forecasting a tough autumn for house values. Benny Tal at the Commerce says the unemployment rate will be at “recessionary levels” for years. In fact, watch the stats on Friday when US jobless numbers could reach for 20%. We will follow.

Additionally, remember the deferral cliff that federal housing boss Evan Siddall is vexing over. About a million Canadians stopped making payments on $180 billion in residential mortgages in the last 60 days. How are they going to resume when many lack stable income? When the CERB’s gone? Meantime CMHC is lobbying the Trudeau cabinet to double the minimum down payment for insured financing to 10%. Imagine the impact.

So here’s the prediction: as the lockdown loosens and life creeps back to normal sales volumes will increase. Given low inventory, this will raise prices in June, July and August. The real estate board will have an orgasm, media will trumpet a new housing boom and industry pundits will label Evan Siddall bilious. But it won’t last. The Main Street economy’s just too hobbled for a sustained real estate recovery to take place.

Too many jobs have been lost. Too many families owe too much with too little in reserve. Too many small businesses have been hollowed. In our post-pandemic world credit will be harder to get, borrowers more scrutinized and lending requirements more stringent. Down payments will likely increase, and so will property taxes and transaction costs. Now that the banks have seen almost a fifth of their borrowers opt out of payments after only two months of income stress, you can be sure lessons were learned.

Of course, that won’t stop people from being idiots. But if it did, this blog would end.

The inevitable

A year ago it looked like the guys running Canada would spend $20 billion more than they raised. Not good. Now that’s $252 billion more. Ooops, wait. We forgot the emergency money to cities, off-reservation native folks, pregnant women and… well… you know. Plus what happens when the CERB ends and a few million people are jobless but can’t live on their EI?

Odds are the deficit will be $300 billion, or six times the worst Harper year. That would increase the federal debt by half. In one year. A record. And still there’ll be an army of unemployed and many shuttered businesses. Revenues will fall. Social spending will rise. If the Trudeau gang decides we need a UBI, it all gets a lot worse. Meanwhile – OMG, Becky – look at this…

Where does it end?

With taxes, of course. The need for cash will be insatiable. And enduring. Some believe we’ve crossed the Rubicon, thanks to this virus. Now we all get a pony.

Well, this is a profound problem. These days four in ten households pay no net federal income tax, thanks to benefits like the cash-for-kids program. That leaves the other six to fund it all. But most of them (90%) earn less than $81,000. Hmm, so the top 10% of us – anybody earning $96,000 or more – currently bring in a little more than a third of all the income but already pay 54% of all the taxes.

Let me repeat. Ten per cent of Canadians pay 54% of the income tax. Of those, just a sliver are ‘rich’. The top 1% (earning $235,000 or more) number only 271,000. (Of those, 120,000 live in Ontario.)

This is why ‘taxing the rich’ won’t work. We don’t have enough to milk. Already the top tax bracket is 54% in a majority of provinces, while the few uber-wealthy families with billions have most of that money invested in businesses employing hundreds of thousands.

However most little beavers don’t know this. Or believe it. And now that the government just found $250 billion under the couch to give away during a crisis, there’s a giant expectation income support programs should stay in place, and ‘the working wealthy’ should finance them. In order to retain power, the prime minister (inheritor of a trust fund) and the finance guy (inheritor of a family business) plus his wife (inheritor of a food empire) agree. So bend over.

If you’re unfortunate enough to earn a few hundred thousand or have a couple of million in assets there will be an illicit group hug behind my bank building at four. Be there. Be strong. In the meantime, and in anticipation of what the next budget may well bring, consider this…

Capital gains. If there was ever an excuse for the feds to goose the inclusion rate, it came with the virus. Currently half the profit made on investment assets (properties as well as ETFs or stocks etc.) is taxed as income. That reduces the maximum capital gains tax to about 26%. T2 may give in to yet another NDP demand, and increase inclusion to 75%. The effective tax rate would be 40% – a huge jump.

Solution: you might wish to crystalize some accrued cap gains this year. Before the deluge.

Retained earnings. Despite all the yadda-yadda, we-love-small-biz talk from the feds, they actually hate you. Especially those entrepreneurs and professionals using corporations to earn income, distribute dividends and retain earnings in a lower-taxed environment. Two years ago Bill Morneau launched an attack on PCs, backed off under negative pressure, but is likely to reengage.  So expect the threshold to fall on the amount of passive income a corp can earn before hitting the tax wall.

Solution: take salary, not dividends to max out RRSP contribution room. Repay after-tax shareholder loans, borrow money from the corporation, use the funds to expand or find other means to drain capital before fed fingers filch it.

New tax bracket: Remember when Trudeau created a special hoovering for people earning over $220,000? He said the money would pay for a middle-class tax cut equaling $8 per family (on average). It didn’t. But he will try again. Accountants that I skydive and luge with tell me they expect yet another bracket to emerge from the budget – somewhere around the $650,000 mark, which is what 0.01%ers average. Unfortunately there are only 27,000 of them, and they all read this blog.

Solution: Time to look at establishing a family trust and shifting investment income to less-taxed offspring. Also consider a hefty spousal loan, moving capital into the hands of a less-taxed partner so s/he can earn investment returns that won’t be attributed to you (plus deductible interest). Proper estate planning is a must, with secondary and tertiary wills if you have multiple assets (and your province permits them), proper beneficiary and successor-holder designations, a trust structure and an institutional executor.

Or, the Libs could just be fair about things and increase the GST. Tax spending rather than gutting income. Combine that with a flat tax and give everyone a condo. How is any of that hard?