IN THIS WEEK’S FACTS BY EMAIL:
- CAPITAL GAINS TAX: THE ELEPHANT IN YOUR BASEMENT SUITE
Tax lawyers warning on principal residence rentals
- MESSY BC ELECTION COULD BE GOOD OR BAD NEWS FOR REAL ESTATE INVESTORS
- STRUGGLING OFFICES SWITCH TO HOTELS, RENTAL SUITES
- HOUSING START SLUMP A MYSTERY IN METRO
Is there a condo cartel at play in Canada’s hottest market?
- LANTZVILLE: WHO KNEW?
- IS PORTLAND THE NEW PHOENIX?
- QUESTIONS, QUESTIONS
- EYEBROW OPENER
- RESPECTING DEMOCRACY?
So many questions on ‘whither the market’ in the next 3 months. Here is some Oracle WISDOM:
WARREN BUFFET: “I can tell that the market will be higher in 10 years, 20 years and 30 years again, but have no idea what the market will do this year.” That’s how I feel about the current real estate market.
1. The election outcome is in doubt.
2. Last year’s high in single family sales and prices came in April/May. See below.
3. The world’s uncertainty will continue to drive more money here.
4. The Federal Government contemplates sweeping changes to Capital Gains taxes and is seriously analyzing Britain’s ‘stamp duty’ progressive tax on ALL home buyers – foreign or not.
MAJOR POINT: I said last February at the Landrush conference that to have some cash could be a good thing! How much cash? 40% or so. In any case: Sell your losers now. Don’t buy one house before you sold your house. Do inspections! Do not be pushed into buying. Take a deep breath. Remember: All booms are followed by busts.
SELL IN MAY AND GO AWAY?
Q: In the past you often advised to listen to the adage “sell in May and go away”. Are you still saying that?
A: First, I am not a market advisor, nor am I invested in stocks. Second, Yes!
Q: Last year, the single family home markets saw the start of a sharp decline in single family home sales in April. Do you expect the same this year?
A: Not only in sales but also the peak in prices was achieved in all sub-trading areas between April and June last year. After that, market sales and prices started to climb down from their peak – May, June, July. After the foreign tax announcement – declines in sales and prices accelerated further – culminating in this January’s 20% decline in the average price and a decline in sales between 35% and 50%. Since January, the SF average price is recovering to where it is down only by about 4% over last year. Volume is still lagging at 35% plus.
Q: The new videos that you do, when are they published?
A: Yes, we said we will try and do some podcasts from Europe – which you will find at www.youtube.com/jurockvideo (push the ‘subscribe’ button). However, since I am on a ship there have been no new ones posted yet in May. We will do a series when in Prague (May 17-20).
• International •
I’ll be in Europe with my Clan for the next few weeks and will report back to you some of the real estate values of London, Stockholm, Copenhagen, St. Petersburg, Hamburg, Berlin, Dresden and other major cities. We also keep an eye on BC and Canadian issues while away.
THE FRENCH VOTE
Traveling in Europe, the headlines and dinner table talk all centered on the French election and you could feel the collective sigh of relief shooting to the sky on Sunday night, when the expected winner – Macron actually DID win.
The election did prove that when pushed the silent majority will hold their collective noses and vote away from the extremists but it also proved that there is a democratic change sweeping Europe. The middle class stuck in 0 percent wage increases and ever-rising living costs cried out and now MUST be heard. You think 36% for the far right is nothing to worry about, but remember it is 36% for THE WAY OUT THERE FAR RIGHT!!! And the national assembly votes in the summer are still pending. When euphoria subsides, other European countries – notably Germany and Italy whose elections are pending – will try to get off their fat “the establishment first – view and take note of the collective pain that is expressed in these elections from the US to Europe.
Major Point: Macron is a relaxed provincial Frenchman who likes long walks with his dog and long leaisurely luncheons. Hmm, my kind of guy … there is hope…
CHINA APPPOINTS NEW WATCH DOG
There is a new Sheriff in town and he has the power of letting the ‘currency control guns blazing’. Banks will be forced to reign in lending. As we have written before, China is deadly concerned about its enormous capital outflow. Since autumn 2014 $1.3trn of capital has flowed out of China. Now, that is slowing down, even the ‘bitcoin’ loophole has been visibly closed.
Major Point: Money will keep coming from the 185,000 or so Hong Kong Chinese Canadians and a thousand family formation ad well as 35,000 or so International immigrants.
EYE OPENER – THOUGHTS!
Australia’s mortgage debt to GDP was 19 percent until the late nineties. Now it stands at 137 percent. Scaaaary! This kind of debt cannot be sustained by Aussie banks … tightening is seriously in the wind! Now off to find out Canadian ratios.
LONDON UP OR DOWN? (STAMP DUTY, EH?)
The Economist, the Surveyors Association and others are telling of a sharp decline in sales and forecasting price slowdowns. Real Estate companies talk about declining ‘segments’ (homes over 1.5 million in particular) and some areas. Whoever is right, the villain likely is the new Stamp Duty. In fact values reportedly declined by over 11% after the intro of the tax initially. What is Stamp Duty?
Stamp Duty Land Tax (SDLT) is a progressive tax paid when purchasing a freehold, leasehold or shared ownership residential property over £125,000 in England, Northern Ireland and Wales (separate Land and Buildings Transaction Tax in Scotland). New SDLT rates were introduced in 2014’s Autumn Statement, introducing a sliding system based on thresholds and dependent on a property price.
So, if you bought a property for £850,000 you would you pay no stamp duty on the first £125,000, then 2% on £125,000 to £250,000 and 5% above £250,000 (eg: £800,000 – £250,000 = £600,000 x 0.05 = £30,000 + £2,500 = £32,500). As the property price increases the rate of pay increases within a certain tax bracket with percentages rising when a higher price threshold is reached. Under the new SDLT property over £925,000 – £1.5m will be taxed at a rate of 10% compared with 5% in 2014.
The BIG KICKER? The intro of a ‘buy-to-let second home Stamp Duty 2917. From April 2016, property buyers in England and Wales paid an additional stamp duty:
Buy-to-let and second home Stamp Duty tax bands
second home rate
|Up to £125,000||0%||3%|
|£125,001 – £250,000||2%||5%|
|£250,001 – £925,000||5%||8%|
|£925,001 – £1.5m||10%||13%|
Major Point: Two taxes! Stamp Duty is paid by everyone purchasing a property in England, Northern Ireland and Wales above £125,000, including overseas buyers. Now all provincial and Federal Governments are drooling on the prospect!
Is Portland The New Phoenix?
Portland was one of our top 5 US city’s recommendation for 2016 and 2017. (revisit your Outlook issue of January 8 and January 10 respectively). Now, a multi-family investor we know – who has been quite successful in Phoenix – has been spending time lately in Portland, Oregon. “Just checking things out,” he said.
For good reason, it turns out. Despite its wild differences from the Arizona city – Portland is wetter and much more left-leaning in its politics – Portland has a lot of reasons to attract residential investors, especially from high-priced Vancouver.
First, Portland has about 620,000 residents, similar to Vancouver and is also a waterfront city with a booming high-tech sector. More than 2 million people live in the Greater Portland region.
But, second, unlike Vancouver, Portland has almost 400 homes in pre-foreclosure or the bank-owned stage of foreclosure.
Portland’s median detached house sales price in March was US$390,000 and the typical condo sells for US$289 per square foot., both about a third the cost of Vancouver. Yet Portland’s median rent is US$1,995 per month, which is even higher than Vancouver.
Major Point: Portland is worth a visit, the craft beer is plentiful, the climate is mild, and the young population makes it ideal for rental investors.
• Canada •
Capital Gains Tax: The Elephant In Your Basement Suite
Lawyers warning on principal residence rentals
As we have noted (AND WARNED ABOUT!) previously, a push from municipal governments has convinced many homeowners to take advantage of zoning changes to add rental suites and laneway houses to their detached house lots. In some municipalities, such as Vancouver and North Vancouver, allowed rentals can total more floor space than a principal residence.
But the rental properties – unlike home offices – are an income generator that can threaten the principal residence exemption for capital gains taxation. This is of concern now because last October, for the first time, Canada Revenue requires that the sale of a principal residence must be reported.
What would the capital gains tax be on a $1 million residential property sale if it was not a principal residence?
“If we assume the taxpayer is at the top marginal rates payable in B.C. of $200,001 and over, the marginal tax rate will be 23.85% – so the taxes would be $238,500 on a $1,000,000 capital gain,” explained Bill Coopers, a tax lawyer with Boughton Law in Vancouver.
Here is Coopers explanation of how the principal residency exemption works and why Canada Revenue appears to be cracking down.
“The PRE (Principal Residence Exemption) is one of the biggest tax loopholes in the history of the Canadian Income Tax Act. It has likely resulted in billions of dollars in lost tax revenues. Not because of the PRE itself, but because ordinary taxpayers played fast and loose with the reporting of taxable gains on the sale of their residences.”
Indeed, no reporting of a disposition of a principal residence (PR) was required by the Canada Revenue Agency (CRA) until the changes were announced in October 2016. While this change may have been justified on the grounds of abuse of the PRE by foreigners, the real problem was with house flippers, estates, and rental properties owned by everyday Canadians that did not fully qualify for the PRE and were never reported.
Starting with dispositions of residences in 2016, a new form T2091 must be completed that specifically calculates the gain on a PR and determines the amount of available PRE. It should be noted that the PRE is no longer available unless the PR disposition is reported on a taxpayer’s return although late filings with penalties may be permitted.
The new reporting formula allows taxpayers to take advantage of the “one plus rule”. When determining the formula percentage of the exempt taxable gain, if one has lived in a house for the same number of years they owned it, they should claim PR status for one less year than the years of ownership. The PRE exemption is an annual qualification test and the portion of the gain subject to the PRE is determined at the time of disposition as a percentage arrived at by dividing the number of years in which one “ordinarily inhabited” the residence and designated it as their PR plus one, by the number of years they owned it. This allows for the overlap of ownership when one changes homes during a year. You must be a resident of Canada to claim the exemption in any one year.
Of perhaps even greater significance, is a suspension of the normal limitation period (a new dirty rule!) for the CRA to reassess virtually any taxpayer who fails to report a real estate sale or other disposition where the real estate is held as capital property at the time of disposition.
While the main focus of the legislation was purportedly to limit the ability of foreigners to claim the PRE and trusts to designate a PRE, the suspension of the limitation period applies to all taxpayers with sales of real estate that is capital property(!). 9As we predicted: Under the banner of the bad foreigners…IT IS CANADIANS THEY ARE AFTER!)
It should be noted that the definition of “principal residence” in the Tax Act deems it to include the land upon which the housing unit stands and any portion of the adjoining land that can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence. Where the total area of the land upon which a housing unit is situated exceeds one half hectare, the excess land is deemed not to have contributed to the use and enjoyment of the housing unit as a residence and thus will not qualify as part of a principal residence, except to the extent that the taxpayer establishes that it was “necessary for such use and enjoyment”. The excess land must clearly be necessary for the housing unit to properly fulfill its function as a residence and not simply be desirable.
So what does all this mean for tax paying Canadians? Well, it is clear that we will all have to be far more diligent in reporting the sale of our PRs. The PRE is not at all straight forward and requires a year by year analysis of eligibility. Of particular importance is the portion of the value of the PRE that can be considered to contribute to the value of the PR.
NOTE: (AS WE CONTINUE TO WARN OF THE LIBERAL’S INTENT!)
Consider for example that a portion of a house may be used for office space or a rental unit. Also consider the use of the underlying property for a laneway house or the fact that the property sits on an “acreage” that was once a mandatory minimum, say five acres, that the local municipality has reduced to a city lot size. Changes in zoning status will require a year by year analysis of PR qualification (!) but the new form does not provide for such complexities.
Major Point: Some homeowners, especially those in higher tax brackets, will have to work out whether rental income is worth the potential tax hit if the rental portion of a principal residence is subject to a much more rigid tax enforcement. As for home offices, they are (so far) still less concerns as CRA normally considers “any gain. is usually eliminated or reduced by the principal residence exemption.” But I recommend having your accountant read CRA’s Tax Folio S1-F3-C2 –pa. 2.57 to make sure. Assume the worst!
Struggling Offices Switch To Hotels, Rental Suites
A glut of office space in Edmonton has convinced the owners of an older office building to convert the space to residential apartment rentals, while a white elephant 31-storey new office tower in Vancouver is bidding to convert 10 floors into a new hotel.
In Edmonton, Calgary-based Strategic Group wants to transform an older 15-storey office tower on Edmonton’s 111th Street into 177 rental suites, aimed primarily at student housing. The renovation is expected to cost about $40 million. The 40-yer old office tower currently has a 14% vacancy rate, which is average for Edmonton’s downtown office buildings.
Residential rentals are far from a safe bet in Edmonton, however.
According to Canada Mortgage and Housing Corp., the apartment vacancy rate is 7.1%, the highest level in 20 years. Some landlords say vacancies are even higher if secondary rentals are included.
In Vancouver, the Switzerland-based owners of the Exchange office tower, which completes this year, have requested rezoning to create a 202-room hotel on the Howe Street site.
The Vancouver hotel market is volatile right now as hotels are being sold for redevelopment at stunning prices. This month one major hotel deal collapsed after a trio of Hong Kong investors failed to close on their purchase of the Rosewood Georgia Hotel. If the $145 million deal had gone through, it would have set an all-time Canada high of more than $930,000 for each hotel room. Currently, the Vancouver “per-key” price for a hotel is north of $230,000.
Major Point: Office markets are cyclical but are traditionally steady compared to the hotel and purpose-built rental markets. I would advise office landlords to think long and hard before changing their building to another use.
• Canada •
Messy BC Election Could Be Good Or Bad News For Real Estate Investors
The May 9 B.C. election results may not be known until May 24 after all the outstanding votes are counted. As of today, B.C. has a minority Liberal government with the NDP opposition within two seats and the Green Party playing kingmaker with its tiny three seats, just enough to tip either the Liberals or the NDP to a majority.
Messy for sure, but it may actually prove good for B.C. residential real estate investors, according to some. The thinking is that, to appease its left-leaning opposition, the governing Liberals may bend on spending more on transit, which would create more rental and condominium investment opportunities and higher residential construction close to transit stations.
Of course, both opposition parties want to increase taxes on both domestic and foreign real estate speculators, which could prove a detriment to real estate investors if the Liberals want to win their support.
Major Point 1: All the speculation aside, the most important aspect is that, as of now, the political party that is backing new pipelines, an $8.8 billion dam project and has delivered a balanced budget and the highest job creation in the country over the past few years, is still in power in B.C.. A strong economy, not tweaking the supply, is the best opportunity for residential real estate investors.
Major Point 2: If the likely minority Liberal government holds … study the GREEN platform! They may put the squash on some of the Liberals cherished objectives … including pipelines…!
Lantzville: Who Knew?
Tiny Lantzville, a waterfront community north of Victoria and close to Nanaimo, is feeling the heat of the capital region’s hot housing market. Good news for Lone Tree Properties which bought 1,838 acres in Lantzville back in 2012. Lone Tree, a subsidiary of Calgary-based Storm Mountain Development Corp., then launched a new residential development called the Foothills.
Last week, Foothills sold 60 of the 71 home lots in the first phase in the first day they were offered. Total sales were $20 million and 98% of the buyers were from Vancouver Island, according to Lone Tree.
The home lots are priced at between $250,000 and $500,000. They range in size from 0.25 of an acre to two acres and have ocean views.
• Vancouver •
Housing Start Slump A Mystery In Metro
Is there a condo cartel at play in Canada’s hottest market?
There is something very strange happening in Metro Vancouver’s new condominium market and it may be more than the charges that pre-sale condominiums are a developer-controlled “Ponzi scheme” as a whistle-blowing Vancouver realtor said here two weeks ago.
Here is the mystery. According to Urban Analytics, which usually has the most solid data on the new condo market, there were only 15 newly completed and unsold condominiums and only 16 new and unsold townhouses in all of Metro Vancouver as of the end of March 2017.
But total housing starts during the first four months of this year have fallen by nearly 20%, according to Canada Mortgage and Housing Corp.
This year not a single new condominium project has been launched in Burnaby or New Westminster. In the City of Vancouver, starts of multi-family units (and this includes purpose-built rentals) have plunged to 854 units, down from more than 3,000 at the same time last year.
Yet, condominium developers should be rushing to build.
Urban Analytics reports that new concrete condominium prices have increased 40% in the past year and prices for low-rise condos have jumped 23%. It is not uncommon to see new concrete condos north of $1.200 per square foot.
The research firm estimates that there is less than a two-month supply of strata units across all of Metro Vancouver.
We asked around as to why strata developers are not building more product, considering the white-hot sales conditions. The answers are kind of wishy-washy. One developer said it was just a seasonal blip and starts would increase this summer. But that doesn’t commute, because pre-sales don’t depend on a construction schedule. Launches of new condo projects are now 11% lower than in 2016 and 38% lower than in 2016. A spokesman for the Greater Vancouver Home Builders’ Association blamed the uncertainty over the 15% foreign-buyer tax, which he said convinced some developers to pull back. But that doesn’t make sense either, because pre-sale condo transactions are not subject to the foreign-buyer tax until the project completes.
We suspect, and please give evidence if we are wrong, that the large developers who control a prominent share of the strata market, especially high-rise condos, have agreed to hold off on construction to keep prices high. A condo cartel, if you will! (I’ll get in trouble for this)
Major Point: Where are the condo/townhouse shortages looming? Vancouver, Burnaby, East Vancouver (only 49 unsold units in 10 pre-selling projects); Langley, which has no new townhouse projects underway despite “endless demand” according to realtors; and South Surrey and White Rock, which together have only two new townhouse projects with a total of just 76 units. Only 6 multi-family units have started construction in White Rock so far this year.
Tesla sells 86,000 cars and is worth more than General Motors which sells 2.3 million cars. NUTS! The company may rarely be profitable, and it is yet to sell enough electric vehicles to trigger the end of its federal tax incentive, but according to Wall Street, it’s the most valuable car maker in the Estela overtook first Ford and then General Motors as its share price edged above $300 a share. At the time of writing, Tesla’s stock price was $311.5, which means the company is worth $51.4 billion. By contrast, General Motors—which sold roughly 20 times the number of vehicles during Q1 2017—is worth a mere $50.3 billion. Ford, which also delivered more than half a million vehicles in Q1, is worth just $45 billion. If that sounds bonkers, you haven’t heard anything yet. NUTS!
RESPECTING DEMOCRACY? ATTACKING TRUMP…
Bill Maher and Steven Colbert constant never ending jabs at Trump are part of many a late show hosts stock in trade: Knock the presidency. But lately their jokes cease to be funny. Making disgusting sexual jokes about the president’s daughter. If they had made these jokes against Obama’s daughter, there would be a national outrage.
So, if you don’t like the outcome of an election, you are free to incite hate? I say NOT! What is being destroyed here is image of the office of the president the United States. Worse, attacking the man’s family in this vile manner is unforgivable. Attacking his daughter in this fifthly way leaves me bewildered. Vile and vicious – attacking the family even the 10 year old son…unbelievable and unacceptable.
MORE WORDS (AND PHRASES) I HATE
- Trust me… I don’t trust people that tell me I should trust them.
- You must agree, that…I must do no such thing. If you feel that I must agree before we talk what’s the point of having an intelligent exchange of ideas?
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