Wednesday, February 22, 2017

2017 Real Estate Trends: Reporting The Sale of Your Principal Residence

It's hard to believe, but it is almost tax time ladies and gents.  In preparation for that, we are going to touch on a new subject to consider, starting with your tax filing this year.  Trivia question: Do you have to report the sale of your personal residence on your tax return (even though any gain from the sale of your personal residence is tax free)?  If you answered yes, you would be right!  Prior to this year you didn’t need to report this but going forward you will.  Today we are going to talk about this subject so you will understand when your accountant brings it up.

What Do I Need to Know About This Rule Change?
As of January 1, 2016, if you sold your principal residence during the tax year, the sale must be reported on the T1 of your income tax return.  Because there is a principle residence exemption in Canada, there is still no tax payable on any capital gain on the sale of your home.  So in most cases it will not affect you.

Why Is CRA Doing This?
They want to improve compliance and administration of the tax system.  Prior to this there were no records of buying and selling of personal residence homes in Canada for its citizens.  This will allow CRA to keep track.

Who Are They Targeting With This Change?
It’s safe to say a lot of people have created wealth by owning real estate in Canada in the last 20 years.  And a lot of that wealth has been created tax free.  Its also safe to say a lot of people have abused the principle residence exemption during this period to make tax free gains.  House flippers, home builders and international investors, to name a few, are the targets of this change.  For example, in the past, a house flipper could purchase a property, live in it for a short period of time (or just claim to live there), renovate, and then sell it for a profit, tax free.  They could repeat this process over and over.  With the reporting of principle residences going forward, this will raise red flags at CRA and this person more than likely will not be able to do this.  They are essentially trying to protect against people making “income” tax free, using the principle residence exemption.

Is There Anything Else I Should Know?
Yes.  There is something called a “deemed disposition” where you don’t actually sell the property but it stops being your principle residence.  Take for example, you lived in a condo as your first home and when you go to upsize to a single family house down the road, you decide to keep the condo and rent it as in investment property.  When you move out of the condo, you have deemed disposition of the condo.  You’ve essentially sold it at market value and bought it back at the same price.  Your principle residence exemption stops on your condo after the deemed disposition and now it applies to your new single family home.  This concept can get confusing sometimes.

As always, since this is a tax matter you should contact your accountant with any questions you may have.  Did you sell your principle residence in 2016?  We’d like to hear how your filing goes with you taxes this year.

Tuesday, February 14, 2017

2017 Real Estate Trends: Sky High Hydro Costs In Ontario

Have you looked at your hydro bill lately?  Did you have sticker shock?  This is a topic that everyone is talking about in Ontario and it doesn’t look like relief will be coming anytime soon.  Naturally, the effects of this rising expense are felt throughout the economy, including the real estate sector.  Today we are going to look at some of the ramifications from a real estate perspective.

Reduced Disposable Income
All things being equal, this increase in utility costs equates to a lower disposable income for workers in the local economy.  This will affect retail sales, which will lower economic growth.  Potential home buyer’s budgets will be more stretched and therefore will lower the amount of money they have available to service mortgage debt, either reducing the value of homes they can afford or completely taking some buyers out of the market.  Therefore, demand will suffer.

More Efficient Homes Becoming Important
The stakes are high in Ontario these days when it comes to energy efficiency.  It is more important and economical to live in an efficient space than ever.  Some of the large, older homes have inherent difficulties in energy efficiency and the costs for utilities in these homes are becoming prohibitive.  Because of this we see a shift to more demand for newer constructed homes that are more energy efficient.  We also see a shift to people building smaller and smartly designed homes to be able to fit in everything they want in less sq ft.  Homeowners with 3,000-4000’+ homes are routinely getting $1000+ utilities bills. With utility rates projected to increase significantly from here, demand for operating these homes could slow as a result.

Renewable Energy Becomes More Economical, Technology Becomes Important
As prices of hydro continue to rise, the economics of the payback on renewable energy get more attractive.  Things like solar energy will look more attractive on a micro basis for consumers.  Technology like smart thermostats and appliances will also be important to conserve energy for the consumer.  Do your research!  As these alternatives become more widely adapted they should also come down in cost.

Increasing Costs to Businesses
As a large input cost to many businesses, hydro is getting to a tipping point in Ontario.  These could affect the future of many businesses in our Province and could lead them to turning to lower cost jurisdictions.  One would also assume the consumer will see prices increase as businesses pass on the additional costs.  This would result in an inflationary period where the consumer consistently get sticker shock.  Time will tell how this all plays out but its safe to say it won’t be positive for the real estate market!

Those are some of the effects we are seeing from rising hydro costs.  What are you seeing?

Monday, February 6, 2017

2017 Real Estate Trends: Government Intervention In The Housing/Mortgage Market

Have you noticed your local real estate market seems to get more attention than it used to?  Whether it be an article in your local newspaper or a conversation at a local dinner party, real estate really seems to be a hot topic.  And why wouldn’t it be?  In many markets, housing prices are at all time highs, inventory is low, and bidding wars are commonplace.  The government and the governing bodies of the real estate market have surely taken note.  Today we are going to talk about some of the policies they have undertaken that could affect the market in 2017.

Foreign Buyer’s Tax
In Vancouver, the city has imposed a foreign buyer’s tax of 15% on foreign buyers of real estate.  This has happened due to complaints of foreign buyers being the majority factor in driving local housing prices into the stratosphere.  This tax has resulted in a slow down in foreign purchases and in the market overall.  Time will tell how these policies play out long term and if they will spread to other cities.

CMHC Increasing Mortgage Insurance Premiums
CMHC is once again increasing the mortgage insurance premiums on buyers with less than 20% down payments.  These increases will take effect in March 2017 and will add (marginally) to the monthly payments of borrowers, decreasing their initial equity in the property.  This type of policy adversely affects the first time home buyer who already has the odds stacked against them in high priced markets.

Government Stress Testing of Mortgage Rates
Last year, the federal government imposed new rules on mortgage qualifications for insured borrowers.  Essentially, any insured borrower must qualify for their mortgage at the banks posted rates.  For those of you that don’t know, posted rates are inflated mortgage interest rates that are advertised at the banks.  For example, at the current time in our market you can easily get a 5 year fixed mortgage rate at 2.5-2.6%, but the bank’s current posted rate is more in the 4.6-4.7% range.  So as a borrower, you need to qualify for your mortgage at the inflated 4.6-4.7% range, which all else equal, means you will qualify for significantly less house than you would’ve otherwise.  The government hopes to slow down the housing market by knocking some buyers out of the market, at least until they have 20%+ down to qualify for non-insured financing.  This policy again will hurt the first time home buyer more than anyone else.

Zoning Regulations Limiting Residential Development
As the first three items try to address the demand side of the housing market, zoning affects the supply of housing.  You can only lower the demand for so long.  As cities grow and expand, housing supply needs to keep pace to allow for a balanced housing market.  Many cities in Canada haven’t been able to add supply to keep up with demand and the supply side of the equation has been a large reason for the increasing prices in many markets.  Red tape, drawn out environmental studies, expensive soft costs for developers and investors have all had negative impacts on new housing development.  This has been spoken about by different levels of governments as an issue that needs to be addressed.  Here’s to hoping.

Those are some of the ways government intervention will affect the market in 2017.  Have any of these changes affected you?