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

Aftermath

An election about nothing. What does it mean for investors in financial portfolios and real estate now that we have Socks3 supported by Mr. TikTok? Here are a few things to consider:

A bank tax
The Trudeau plan calls for more than $4 billion to be sucked out of bank profits with a corporate surcharge amounting to a 30%+ increase over current levels. It’s a shocking, negative, myopic tax because banks are among the most stable institutions in Canada, with tentacles everywhere. They’re harbingers of the economy, funders of small and large business, superb risk managers and provide seamless, efficient service to almost the entire population. Yeah, they make money. Gobs of it. This does not mean the government has a right to steal more.

The bank tax could come right out of dividends paid to shareholders, which include millions of people with RRSPs containing not only bank stocks but mutual funds and ETFs. The banks make up about a third of the TSX and therefore every security reflecting that index. This is a tax on retirement nest eggs at a time when most people don’t have enough saved. My suspender-snapping portfolio manager buddy Ryan said as much on BNN (which you should never watch).

A hit on REITs
The little brains in Ottawa have fallen for the meme that real estate investment trusts hoover up houses, punting moisters and renters to the curb, then rent them out with coal-black hearts. In the election Trudeau said: “We will undertake a review of the tax treatment of large corporate owners of residential properties such as Real Estate Investment Trusts (REITs) who are increasingly trying to amass large portfolios of Canadian rental housing, putting upward pressure on rents. We will put in place policies to curb excessive profits in this area, while protecting small independent landlords, and more broadly, we will review the downpayment requirements for investment properties. Homes should be to live in, not a financial asset for investment funds to speculate on.”

But major REITs don’t buy up single homes in Canada. They do not compete with ‘small landlords.’ It’s a lie. Meanwhile apartment REITs make thousands of professionally-run units available to a few million tenants. This policy plank is cringe-worthy.

Personal tax load
With Jag in the co-pilot’s seat and T2 not daring to call another early election – now dependent on NDP support – expect personal tax increases if you happen to be rich. By the way, ‘rich’ means an annual income of $300,000 or more, or investment assets in your portfolio which have earned capital gains. Such folks should plan on a new tax bracket being created and an increase in the capital gains inclusion rate. Those items are not in the platform but are likely in the economic statement slated for November, or the March budget.

More housing demand
Creation of the First Home Savings Account is a milestone. It’s Canada’s first ageist tax shelter, available only to those under 40. Never before have people been able to shelter up to $40,000, write the entire amount off their taxable income, collect the refund for doing so, then invest it all without paying tax in residential real estate the profits on which will be tax-free. It’s a massive gift to first-time buyers, effectively subsidizing downpayments with taxpayer dollars. Anyone who does not sign up (or any parent able to fund this yet refusing) is not paying attention.

As such, this could significantly increase available deposits, allow more young adults to buy and borrow, augment demand and jack prices as a result. Combined with the ability to use tax-free RRSP money and the Liberal pledge to issue tax credits to cover most closing costs, the election stands to make real estate considerably stupider than it was.

And it does not end there.
The Liberal plan is to run a deficit of $150 billion next year and there’s no commitment to bring the budget into balance. The Liberal plan details 102 new program spending initiatives adding $78 billion over the next five years. Revenue increases are pegged at $25 billion, about half of that coming from the banks. There is no provision in the budget for higher interest charges on $1.3 trillion in debt, which are a certainty by 2025. Deficits are now structural while routine spending (like $30 billion for subsidized child care) will never be rolled back. Meanwhile 40% of Canadian families pay no net income tax. How is this even remotely sustainable?

Meanwhile the crazed People’s Party polled 5% of the vote and a CBC analysis indicates this may have kept 24 ridings from going Conservative. So Trudeau won, and not a single PPC candidate was selected. Even Max failed – because the people where he lives know him best.

Hmm. Maybe this wasn’t an election about nothing, after all.

About the picture: “No doubt it was an exciting night for you with the election,” writes Ian. “Long time blog reader. With the election I got to thinking “Jasper”, our family Golden Retriever, loves to walk and run around Ottawa.  So with that here is a photo taken on one of our walks around Parliament Hill. A typical cold, crisp winter evening – the kind that has downtown Ottawa quiet, but otherwise peaceful and calm. We’ll get back there soon. “