A New Market Emerges

Several forces have recently emerged to re-shape what was the most dynamic seller’s market in the history of southern Ontario. The first was the arrival of the summer season and a vast torrent of new government rules, initiatives, intervention and the famous 15% foreign buyer’s tax. The tax has succeeded in dissuading new foreign entrants into the housing market and has helped to reduce demand.

The second force is a surge of new listings that have increased the supply of homes. This increase is helping alleviate one of the great historical shortages of supply in our market but is also contributing to the cooling of prices. The listings surge will continuum for the short to medium term as new construction units and houses reach the market.

The third force has been the recent increase in interest rates announced on July 12th by the Bank of Canada, with another interest rate hike likely in October of this year. The hike will increase borrowing costs for businesses and consumers and will immediately make mortgages more expensive. The real, full impact of higher rates will be felt in the coming years as mortgages are renewed.

Individually, these forces would have had important but not necessarily market shifting impacts. But as they have been combined and implemented in quick succession, the market has balanced itself away from sellers in favour of buyers who for years, had been squeezed out of securing a home by relentless bids, low supply, and very high prices and price growth.

Realtors across the GTA and southern Ontario are reporting lower demand, falling prices, a marked reduction in open house attendance, fewer bidding wars, and fewer foreign buyers. Attractive houses can still be found selling for above listed prices and overall demand and market health remains robust. The new vibe is one of balance between sellers and buyers.

The end of an interest rate era

On July 12th, the Bank of Canada confirmed what many had suspected for weeks; a 25 basis point increase in interest rates was confirmed, pulling the rate up to 0.75%. Weeks of pro-hike language and hinting gave the market plenty of time to anticipate and psychologically prepare for the increase. The immediate effect of the increase saw the Canadian dollar rise slightly, and the prime rates of Canada’s five major banks increase by 0.25 points as well. Tembo previously outlined that one of the reasons for a potential increase would be to ensure the value of the Canadian dollar remains stable as other central banks tighten their rates as well. (Higher rates at the Federal Reserve increase the value of the American dollar, putting downward pressure on the Canadian dollar and thus requiring our Central Bank to increase rates as well).

The increase was the first in over 7 years and brought an unprecedented period of rock bottom rates to an end. Throughout the early to mid 90s interest rates were in the double digits and averaged 3-5% in the early to mid 2000’s. Never in Canadian history had interest rates been so low for so long. With the increase, the Bank of Canada has followed its international counterparts in beginning the unwinding of easy money, reducing economic dependence on cheap debt, and preparing breathing space for lower rates in the future when the next economic headwinds arrive. The effect of the five big banks increasing their prime rates mean that variable rate mortgages will now be more expensive, making it slightly harder for first-time homebuyers to access credit.

Lines of credit, whether business or personal, will also be more expensive. Car lease rates will likely go up, and facility lines of credit will also go up. Commercial and business borrowing will be more expensive and this will have an impact on business bottom lines, hiring, long term spending plans, and investment strategies. Housing is just one piece of the borrowing picture. The positive aspect of the increase is that since the Bank began discussing the possibility of higher rates and now with the official announcement, the value of the Canadian dollar has recovered substantially. From a low point of 73 cents on the dollar in May, the dollar has risen to 78 cents recently. This will reduce pressure on prices, make imports cheaper, but will make exports more expensive for foreigners. Overall, it now appears that rates will likely return to more historical normal in the long term, the age of ultra low is now over.

Sold your house in 2016? Don’t forget to claim it on your taxes

Canadians didn’t used to report the sale of their home, but this has changed since the Liberal government introduced new federal mortgage rules back in October. If you fail to claim the sale of your primary residence, you could face up to $8,000 in penalties.

 “Starting this tax-filing season, a home sale that took place after January 1, 2016 needs to appear on your income tax return” Global News, Erica Alini 

 

 Here is what you need to know

 You still get the principal residence tax exemption
Although you will not have to pay a capital tax gains on the proceeds you made from the sale of your home, you will have to report the sale in order to claim the exemption.

Report the sale on schedule 3
You will have to provide information such as when you bought the home, when you sold it, how long you’ve been living there and how much you made off the sale. You will also have to include a general description of the home.

If you didn’t live in the house the entire time you owned it…
In that case, you will have to file Form T2091.

 If you rent part of your house or use it for business…
You might still be able to claim it as your primary residence. Read more about this here.

If you forget to report the sale this year…
You should file an amended return as soon as you can. The CRA can impose a penalty of $100 for every full month since the filing deadline, capped at $8,000. For the first year, the agency has said they will only apply the penalty “in the most excessive cases”. If you don’t file, you won’t be eligible for the capital gains tax exemption.

 

A foreign-buyer tax for Toronto?

In August of last year, the Government of British Columbia implemented a 15% property transfer tax on foreign buyers solely in the Greater Vancouver area. The tax was implemented to cool the Vancouver housing market, reduce speculative buying, and to de-incentivize foreign buyers from purchasing homes for the sake of investing and leaving them vacant.

Housing prices in Vancouver had been rising quickly for years and increased media coverage of ‘empty mansions’ owned by foreigners for investment purposes led to the BC government deciding to act.

The effect of the tax was real and raw. Royal LePage, a major real estate brokerage, expects prices in Vancouver to fall by 8.5% in 2017 after overall home sales fell by 40% since the tax was implemented. In Victoria, where no foreign buyer tax was implemented, prices continue to rise and sales are staying strong.

On March 9th, Ontario Finance Minister Charles Sousa said that the provincial government was “open” to the idea of imposing a BC style tax in the Greater Toronto Area. Sousa voiced concern about ongoing bidding wars, high housing prices, and families being priced out of the market. In response, Toronto Mayor John Tory said he needed to see “more data” before committing support or opposition to the tax.

What the experts say

Many real estate groups are firmly opposed to the province taxing foreign buyers. The Ontario Real Estate Association and the Toronto Real Estate Board both say that the number of foreign buyers is a tiny sliver of less than 5% of the overall number of people trying to buy a house in Toronto, and that a tax would not cool high prices or do enough to decrease demand. The number of foreign buyers in the Vancouver market was at least 15% before the tax was implemented, with many realtors suggesting the actual number was much higher.

Some of the country’s biggest banks, however, are open to the tax. RBC CEO Dave McKay has said that “we may need actions that are similar to Vancouver.” Also, the National Bank of Canada has publicly stated that it believes a broad “re-think” is needed for the market and voiced support for looking into the tax.

Have you sold your home, and now can use an advance on your equity before closing day, perhaps you need money for renovations?  Tembo Financial can help!  Tembo offers this unique service to homeowners in Ontario and the GTA. You could receive your money in as little as 48 hours with no credit check and no appraisal* for expenses that matter to you.  Don’t wait, start today!

*Subject to qualification.