Canada Re-Elected Same Leaders, But Will Real Estate Be Affected?

But First, the new hair..

Yes, it’s about time for us professionals to do away with the lockdown hair-do, and revert back to a civilized look. After 18 months of cultivating the California Surfer Blond look, I am back to normal with the short cropped, gray style. Did you prefer the long blond or the new short gray? Drop me a line and let me know.

What will happen in the Real Estate Market after the election?

The Canadian election is over and our country’s leadership remains largely unchanged. However, a laundry list of election promises indicates citizens are concerned about the skyrocketing prices of real estate. However, most of the promised plan seeks to create more demand for housing, which increases prices. Expect more of the same, but with a revamped buying and selling process.

Increasing Demand Is The Primary Focus

What the parties don’t seem to understand is the affordable housing platform includes many demand inducement schemes. It was sold as an affordability measure, but these are also the same plans one would use to boost soft markets. A quick list of the big ones:

• Tax-Free First Home Savings Account

• First-Time Home Buyer Incentive

• First-Time Home Buyer Tax Credit

• Reduced Mortgage Insurance Fees

Each of the above programs do the same thing — gives home buyers more cash to buy and stimulates demand, often resulting in the extra cash being capitalized into prices. In other words, they help to boost prices, not make them affordable. This is what you could call, “offering a six for a nine.”

Foreign Buyers And Speculators Are Going To Be Targeted, But with no impact

The key to affordability is to slow demand, and Canada will see two demand curbing measures:

• ban on foreign buyers

• anti-flipping tax

The foreign buyer “ban” is more of a two-year moratorium on purchasing. But the issue is foreign capital. This is not a solution, just a distraction from truly addressing it. Foreign buyers have very clever ways of getting money into Canada to buy up the real estate.

The anti-flipping tax is an extra tax to be paid by sellers who own for less than 12 months. There are generous “change of circumstance” exclusions, so it won’t hit innocent bystanders. By this design, it also becomes completely ineffective.

Most countries with anti-flipping taxes taper them the longer a property is held. The capital gains would drop by each year, and takes 5 or so to be eliminated. Canada’s plan is a flat 12 months — a relatively short amount of time. If the cost holding is cheaper than the tax, sellers would most definitely just hold it longer. This results in reduced liquidity (aka less inventory), which ultimately produces higher prices.

Unclear If More Supply Will Come

To offset the demand they’re stimulating, there are some supply creation measures. Most of these focus on giving developers funds/grants/loans to create supply. But as experts say, this hasn’t created much supply before. Doubling down on this strategy will only take credit for the existing planned supply. On the upside, if you’re a developer, your margins might improve. Maybe Evergrande should roll into Canadian real estate?

As I’ve said thousands of times, the only way to reduce our prices is to increase Supply. In any sector, supply and demand determines prices. Apparently there is a plan to increase Canada’s supply by 1,000,000 new homes in 4 years. Yeah, good luck with that. The GTA can barely spit out 30,000 homes per year, and now they want to 8X that?

Changes To The Way People Buy And Sell Are Coming

One of the more ambitious proposals is changes to the regulatory process. These include:

• Blind bidding ban

• Legal rights to home inspection

• Price transparency

It’s hard to gauge if this will have any impact on home prices, but it will change how trade is done. Countries with blind bidding don’t necessarily see smaller, less frantic markets. However, it can save a bidder from overpaying thousands more than the next one. Having to guess what other people are willing to pay is tough, and people tend to just max out their budget. I for one am in favor of removal of the blind bidding process.

Ultimately the transparency measures need to be discussed with the real estate industry. Overstepping their boundaries into provincial regulation might work as a promise during elections. It might not practically happen, due to the industry consultation required. Most measures would likely be watered down by implementation.

This brings me to my last point — these are promises, not definitive plans. A lot can change between now and implementation, especially if home prices weaken. I wouldn’t bet on a foreign buyer ban sticking around if prices were falling.

The only thing I would bet on seeing is the demand inducement schemes. After all, the higher home prices are good for the economy. Why would any plan be implemented to improve affordability?