IN THIS WEEK’S FACTS BY EMAIL:
- QUESTIONS, QUESTIONS
- INTEREST RATES, INTEREST RATES
- TORONTO CRACKING
- HOT PROPERTY
- LANEWAY CAPITAL GAIN SURPRISES
• Canada •
- Our forecast of our Finance Minister raising the overnight rate by .25% and the banks grabbing the whole increase came true into their prime rate (see below). That generated another slew of emails. I guess interest rates are really on the forefront on everyone’s mind. As always I am answering individual inquiries directly. I picked one (because I liked it):
- Q: My stockbroker, my mortgage broker – in fact everyone was wrong when rates went up this week. All thought they would go down or stay the same.
A: They were not the only one. Once you listened to Mr. Poloz’ speech in (only) April, you had to be convinced that they would stay low even go lower. The ‘about face’ is – if Mr. Poloz is to be believed – that our economy is improving, our ‘output gap‘ is shrinking and thus we can even go against the US. JREI says ‘Hogwash’. The reason is: The low interest rates – even negative rates – have NOT worked. Countries are trillions in debt, hard assets are soaring creating huge imbalances and distorting the world’s economies. In my (reasonably-based) personal view … this was a deal done between 5 or more major central banks that have common interests. The deal was to raise rates together (or understandably together) and bring the prime to at least 1.75%/2.00%. This rate is now believed to having to be in place to ‘manage the ups and downs’ of an economy. For us, as investors, this is an extremely crucial time!
- Q: I can’t understand how the banks get away with keeping part of the overnight rate reduction AND increase, without anyone complaining?
A: Oh, they are complaining alright. Vince Gaetano, a principal at mortgage broker monstermortgage.ca, says: “It’s quite simply greed. There is always a focus on profits and getting more money out of the pockets of Canadians. The last Bank of Canada decrease of 0.25 per cent only garnered a benefit of 0.15 per cent to Canadian borrowers. This happened the last two rate decreases.”
I remember, the late Jim Flaherty being upset at the banks continuously. He forced the BOM to increase its mortgage rate back over 3%, when it had lowered the 5 year rate to 2.99%. He felt, great man that he was, that too low rates would endanger Canadians. Boy, was he right. He also was annoyed at the banks when he cut the overnight right rate by 50 basis points only to see the banks agree to pass on only half the rate cut.
Well, RBC raised its rate to 2.95%, citing rising costs. The Toronto-Dominion Bank has always charged more to its customer. Last year it split off customers. The unwashed paid a prime of 2.85 per cent for variable rates and home equity lines of credit. The elite customers were paying only 2.7 per cent. Now, TD raised its mortgage prime rate to 3.1 per cent.
Major Point: The TD says that it does not take the adjusting of our rates lightly. Hmm, maybe, but it does take … and take … and take. We said last year that our Finance Minister handed the major banks an early Christmas present when new mortgage regulations shut out most secondary lenders. A new present?
- Q: You mention that you feel Trump is right in his view that globalization and climate change views are wrong. Why would he be the only one right and the rest of the world wrong?
A: I do not recall writing that (attributing globalization concerns to Trump), but may have verbally expressed some thoughts in this regard. What the President of the United States is saying is that globalization has worked, but over time has become distorted to where it is simply not working anymore or everywhere. He cites huge imbalances in trade deficits and trade surpluses and wants a discussion on this.
The question isn’t that Trump was elected but why. Just like Brexit raises the “why” question and that every traditional party was defeated in France. Why? Once you ask why you realize that the ‘intelligentsia’ is not congruent with the taxpayers or “us the people”. They tell us – the unwashed – that inflation is 2% and when we disagree they say we have the wrong way of measuring inflation… Well, you know my views on this. We can expand on that another time.
For us as investors, an even greater time of volatility is ahead. It will take just a ‘small black swan’ to tip us from uncertainty into much faster shifts. SEE YOUR MORTGAGE BROKER, TIE YOUR MORTGAGE UP (A 5 YEAR IS STILL AVAILBLE BELOW 3%. DO IT TODAY. Don’t have a great broker? In this environment you need one! Call me or write email@example.com)
- Q: Your ‘OSFI Proposes A New Stress Test’ is too early. It is a discussion paper only and not law. Aren’t you overreacting?
A: True, it is, but it shows their thinking. And they are in charge.
- Q: Roughly speaking…would a 1% increase on a $1 million mortgage with a 25 year amortization result in a monthly payment increase of approximately $3,750?
A: No, it does not work that way:
- To borrow 1 million at 1% would be $3,768.72 over 25 years
- To borrow 1 million at 3% the payment would be 4,742.11
- To borrow 1 million at 4% (1% increase) the payment would be 5,278.37So, the increase from 3% to 4% is only about $500 a month. Why? Says Dustan Woodhouse, Mortgage expert: “Because the amount of principal being paid drops, the interest is front end loaded. It is a trick of math and amortization.”
Toronto Update! It Will Crack!
Listings are soaring, sales slowing sharply. Our forecasted price decline of 20% may turn out to be low. More next week.
Canadian Real Estate Assoc. reports a 7% decline in sales in June
- National home sales dropped 6.7% from May to June.
- Actual (not seasonally adjusted) activity in June stood 11.4% below last June’s level.
- Sales in May were 46,500 , dropped sharply nationwide to $39,979 in June.
- The MLS® Home Price Index (HPI) was up 15.8% year-over-year (y-o-y) in June 2017.
- The national average sale price edged up just 0.4% y-o-y in June.
Major Point: The fine CREA report shows ‘seasonally adjusted sales and benchmark prices’. But do they really tell the story? Sales are down almost 12% over June (not seasonally adjusted) and average prices barely scraped out a half a percent gain. If you believed benchmark prices…everything is rosy and prices soared 16%! Nonsense. As we pointed out elsewhere in this issue – we are at a turning point. I salute CREA and the Fraser Valley Real Estate Board for reporting both!
Laneway Houses Watch It – Read And Weep – But Act!!!
One of the most clear thinking writers is Michael Geller, for whom I have the utmost admiration. In this week’s piece in the Courier, he alerts people (amongst other things) about the pitfalls (in taxation) on laneway housing.
I warned you, dear subscriber, about making the laneway house investment. One, I felt you should contemplate them only on a 50 foot lot (a 33 ft lot has no longer a back yard with a laneway house in it). Second, I felt that your residence capital gain would be in danger. Several readers felt I was too early, (like now, when I warn about the Federal Liberals plan to tax your home office)… but, writes the effervescent Geller: “However, owners of laneway houses and basement suites could soon be found to be inadvertently or deliberately evading taxes, due in part to the recent Canada Revenue Agency (CRA) decision requiring Canadians to report the sale of a principal residence on their income tax returns, starting in 2017”.
Most Vancouver residents who rent a laneway house or basement suite know they are required to report net income from rentals. However, few understand the GST implications of building these dwellings, or the income tax implications when the property is sold. The Real Estate Board of Greater Vancouver and CRA have prepared documents setting out these tax obligations. Many accounting firms, including Grant Thornton, have also prepared useful tax advice.
GST considerations related to laneway houses vary considerably depending on whether the house was built for long-term or short-term rentals, or a family member. (!)
Without going into all the details, if a property owner builds a laneway house to be rented to others, and is not registered for GST, he or she must self-assess GST on the fair market value of the laneway house and the land associated with it. Yes, that’s right. It is not just based on the cost of the laneway house. The valuation must include the associated land.(!)
Determination of land value could be difficult, especially since the laneway house cannot currently be sold. But if the CRA deems it to be say a quarter of the total lot value, even though the owner may be entitled to Input Tax Credits and certain tax rebates, the tax consequences could be significant.
These rules apply because the homeowner is considered the builder of the laneway house for GST purposes. This is not the case if he or she purchases a property that already includes a laneway house.
Ed.note: READ THIS!!! However, if the laneway house is built for a family member, the tax consequences are quite different; the owner may not be required to self-assess GST. (!!!)
But here is where it gets interesting. If that owner subsequently decides to rent the property, he or she will not have to self-assess the value of the laneway house and associated land because the status of the property will have changed to a “used residential complex.”
Consequently, first occupancy of a laneway house by a related person provides the best outcome for the owner in terms of GST liability.
From my discussions with homeowners who have built laneway houses and contractors, few appreciate these GST tax implications. More importantly, they are not aware of what will happen when the property is sold.
The principal residence rules are very complex, and most property owners should consult their accountants. But the key point is the laneway house is not eligible for the same principal residence tax exemptions as the balance of the property. Any deemed increases in value will be treated as taxable capital gains.
Michael Geller can be reached at firstname.lastname@example.org. He is a man of strong – well-reasoned opinions. His pieces on the dastardly vacant home tax are also a ‘must read’.
Major Point: With this little action, you can save yourself a lot of grief. It is a MUST DO!
- Victoria City: Least expensive house, 4 bedrooms /1 bathroom. Price: $524,900. Possible multi-family rezoning opportunity in the future (Victoria OCP); 2. Victoria, View Royal; Least expensive single family home, 3 bedroom / 2 bathroom. Price: $485,000. (We sent this to you already last Friday. But still available.)
Q: I do not understand how ‘Hot properties’ work. I thought it was for subscribers only?
A: That is a recurring question. I apologize for any confusion. Essentially our goal was to help subscribers to either sell or buy a property ‘from each other’. We used to call it “Plot of the week”, but the moniker “Hot Property” stuck.
Any subscriber, be they an owner or a realtor can send to me a property that THEY THINK is a Hot Property. If I agree, I post it in the Facts by Email (FBE) and put it on our password-protected website with the contact information. (We used to put the contact info in the FBE, but subscribers were overwhelmed by often non-subscribers.) Subscribers also simply can call the office or send an email to email@example.com.
I then present some of the best deals (in my opinion) to Michael Campbell and we’ll put it on the radio show. (This clearly helps all subscriber/owners/posters.) We endeavor to do that only after YOU have had the info for between 4 days and 2 weeks. So YOU always have a few days of taking a crack at it.
After the radio, we put it on the public site at www.jurock.com again under “Hot Property”. It is now considerably less “hot” , since you have had an opportunity for several days before that.
With so much interest we have brought back the ‘JREI dispatch” (from 1998) and we send the hot property out again to you – mostly BEFORE it goes on the radio. So:
- We try to put the Hot Property on the ‘dispatch’ and the FBE first. (If the FBE comes out Monday and we may get a fine deal Friday – we put it out on dispatch first.)
- The internal website third
- Then on the radio and on to the public at jurock.com
Finally, from time to time I still update the HOTLINE and also post videos on YOUTUBE. Actually most of the radio show videos are available on moneytalks.net and now YouTube under “youtube.com/jurockvideo”.
Major Point: Please keep sharing. We will eventually get it right.
Get ready for the annual Real Estate Outlook 2018 conference, held September 30 in Vancouver.
WONDERING ABOUT THE HOTLINE?
Hotline Text Alert System and Hotline Code Changed To get on the Hotline Text Alert System and receive a text update when the Hotline is ready, please text ‘Jurock‘ to the number ‘393939‘ and you will be added to the system. You will receive no more then one text a week.
To subscribe to Jurock’s Facts by Email call 1-800-691-1183 or 604-683-1111 or fax 604-683-1707. While the above information is compiled from sources believed to be reliable, its accuracy cannot be guaranteed. Any type of investing carries inherent risks; as such, JREI cannot assume responsibility for any subscriber’s actions.