Entries from October 2016 ↓

Jake & his squeeze bought a new 905 house from plans 18 months ago, and just learned it won’t be habitable until (maybe) mid-2017. Like most moisters, they have a burning question, and naturally come to this blog first, where we find young people highly amusing.

“We’re in our late 20s (recently married) with combined salaries of $170,000 (near equally split) and with modest bonuses should hit $200k,” he says. “Our assets include $70k in TFSAs (mostly liquid, $30K in bank stock and cash of $200k (yes shame on us).

“The reason we’ve been so liquid with our money was to put down a 20% down payment. From our perspective we can either continue renting until the house is ready (a lot can change in 9 months) or we cash out and do something with the gains. From what we’ve been told, the plans is now with between $600 and $650K. I’ve considered the tax implications of an assignment sale and would be curious as to your thoughts about the home and our general financial situation.”

This is easy. First, Jake has to read his APS carefully to see if he can even sell the place before he’s closed on it. In other words, does the sale agreement allow for an assignment? If it does, then the purchaser has the right to sell the paper to a new buyer for whatever price the two negotiate. They can establish a new closing date, Jake collects a deposit, and when the deal is done, he gets all the proceeds at (hopefully) the same time he must close with the builder.

But there’s risk. The second buyer can always choke and fail to close, for example, likely forfeiting the deposit. In that case Jake would have to honour the existing contract, or face the legal consequences. And, yup, there are also tax consequences. The young couple could try to claim the profit as a capital gain, and pay 50% of the profit at their marginal rate, but the CRA might think differently. An audit would reclassify that as income, meaning 100% would be subject to tax – added to existing income, bumping them close to the top tax bracket. Ouch.

So is it worth doing?

Nah. Probably not. Better to close on the house, occupy it for a brief period and then take it to market. While a capital gains tax exemption is unlikely in that instance (the general rule of thumb is a home must be occupied for two of the five years prior to a sale to be exempt), at least the profit won’t be taxed as income. And there’s nothing stopping Jake from marketing the house early, then arranging a long close.

Risk here too, however. The middle of next year is a long eight months away, and lots could happen. US interest rates are going up. So will bond yields and fixed-term mortgage rates. The American election’s an unknown, since Mr. Make-America-Great-Again may try to destroy it by not accepting the election results. Meanwhile the Canadian economy continues to sink, foreign buyers are being treated like barbarians at the gate, and Wild Bill’s mortgage mayhem has the potential to kick 20% of all buyers out.

In other words, do not assume the market next summer will be like the one last summer. I mean, just look at BC. What a mess. Sales are down 90% in some neighbourhoods and prices are crumbling from the top down. The locals think this was the result of the 15% Chinese Dudes tax, but in reality it’s what happens to a market when prices detach from the underlying economy. Things can function so long as people are willing to swallow massive debt, but when that ends, so does the boom.

By the way, housing analyst and rebel realtor Ross Kay points out the current stats showing a collapse in Chinese dudes buying in VYR since the tax was imposed in late July are meaningless. Why?

“Historically we know 80.3% of all sales reported from March through July will close between June 15th and September 30th, which coincidentally just happens to cover the CLOSING data released by the BC gov’t to date on foreign buyers,” he says. “The BC gov’t data shows that of the 59,616 Closings reported between June 10th and September 30th, 2016, only 3,015 or 5.06% were bought by foreigners.”

In other words, no more than 5% of all sales in BC in the months prior to the tax being imposed, he concludes, went to those evil offshore buys. “It appears that those that believed foreign buyers normally command 3% or less of the market were not far off when the maximum is finally revealed in BC.” So, yes, you can blame the politicians in Victoria for the crash now unfolding in Vancouver by imposing a discriminatory tax on a market they didn’t understand. It was always about optics.

So back to Jake.

You can concentrate almost all of your net worth into a single asset, and hope the market survives long enough to get out. You could also sell the paper now eliminating that risk, but be roundly taxed on your windfall profit. Or you could be like most people. Stop reading this pathetic blog, move into your new house, decorate it to impress your friends, let it Hoover up all your wealth (with no Plan B) and trust Justin will protect you.

That should work out well.

Hallowe’en is a mystery. Pagan, meaningless, pointless and expensive. But every year it gets bigger, apparently because people like dressing up and pretending they’re super heroes. Or fruits. In the US, for example, more citizens will celebrate this silly ritual than will vote. They’ll be spending $8.4 billion on a single night, turning their lawns into graves, gluing fake bats to their front doors, carving pumpkins to look like relatives and (at the extreme) renting costumes so adults can masquerade as a creepy clown, Beyoncé, Prince, a T2 voter or a deplorable.

This blog won’t be dressing up, since it’s plenty scary enough. But in the spirit of the moment, here are some relatively terrifying things to contemplate.

First, November the 8th. As you know, on Friday the meanies and poopers at the FBI informed lawmakers thy;re re-activating that probe into the Clintonian email disaster. The timing – nine days before the Presidential vote – could hardly have been worse, and the impact was immediate. Stocks dropped, currency markets reacted, ten million F150 owners went for a joyride and the election outcome odds abruptly changed.

The latest: Clinton has a 78% chance of winning vs Trump’s 21.4%. That’s still a decisive trouncing, of course, but it also means the goofy billionaire’s doubled his numbers in the last few months. Worse, Clinton shed ten points on Friday and now has negative momentum. This doesn’t man she won’t win (rational analysis says she will) but the election could end up being tighter than pundits expected, meaning the Trumpster may not consider it “a clear outcome” and decide to lead an armed rebellion (or at least Tweet a lot).

By the way, the Electoral College – not the popular vote totals – determines who gets to be supreme leader. Right now Clinton has 318 votes and Trump has 218, according to FiveThirtyEight.com. To win requires 270. As stated, this is getting ghoulish.

Now, here’s another blood-curdling thing, if you happen to own real estate in Vancouver. There’s hard proof now the Chinese Dudes tax has all but stopped the flow of foreign money into that market. The impact was sudden, dramatic, draconian, shocking and far-reaching. By announcing it without consultation or advance warning, and making the 15% levy almost immediate, the BC government scored political points with a confused electorate but sent out a harsh message to the world when it comes to investing in Canada, and especially delusional YVR.

From about 13% of sales, foreigners now account for  just 1%, and dropping. Of more than 12,000 trades in August and September, merely 150 were to non-Canadians. Realtor phones have gone silent. Audi dealerships are being swamped with early-lease returns. Open houses are funereal. Bidding wars have ended. In the past year the province not only took over the entire real estate industry regulatory function, but outlawed practices perfectly legal elsewhere in Canada, then dropped the hammer on one specific set of buyers. Meanwhile Ottawa raised down payment minimums, then imposed its MST, seriously restricted mortgage insurance and brought in a capital-gains-tax-exemption test.

This was layered over a market which we told you in May, June and July was already starting to roll over. Sales of detached homes were in freefall even before either of these governments decided to appease their electorates by overreaching on real estate reform. Now comes months of a market which will more resemble The Walking Dead than Love it or List It.

The inevitable result? Simple. Economic growth in Canada will be whacked, since housing-related stuff accounts for at least 15% of GDP. That could prompt the Bank of Canada to drop its rate a quarter point in the Spring (or sooner), cratering the dollar and increasing consumer prices. If we do slip into recession, our central bank will be almost out of bullets – and your ‘high interest’ savings account will be negative factoring in inflation.

More consequential, all those moisters hoping for lower house prices will get them. No, not enough to make real estate affordable in a country with a moribund economy, but enough to punish the homeowner class. Most at risk (as you have been warned in the past) are those with the least and the greatest equity. Young couples who bought in the last few years will see their paper gains evaporate, while their epic mortgages remain intact. The house-rich, cash-needy Boomers who resisted selling during the boom (‘But honey, where would we move?’) will see the greatest retirement windfall of their lives fade, never to return. Shudder.

Of course, no market is immune. From Ottawa to Victoria, the latest wild mortgage measures will have an impact, knocking out young buyers, killing sales and eventually dropping values. Markets will move from balanced to weak, to favouring buyers. Ironically this will happen when many buyers qualify to borrow less, face a weakening job market and cannot take the plunge.

Now, add in a NAFTA-shredding, Muslim-fearing, protectionist alt-POTUS after the 8th, and you’ll wish you’d read this pathetic blog more closely.