Facts By Email #29 – Leaked CRA Document Reveals Few Surprises

To all who filled out our survey a BIG THANK YOU! We had the biggest response EVER to one of our surveys! Results summarized next week. Winner of books will be announced as well.

IN THIS WEEK’S FACTS BY EMAIL:

• QUESTIONS, QUESTIONS:
• LEAKED CRA DOCUMENT REVEALS FEW SURPRISES
• “CRAZY MARKET”: RENT: $1650; PRICE: $750,000; CAP 2.1%
• RUMOURS SWIRL AROUND OAKRIDGE TRANSIT SITE SALE
• WHISTLER REBOUND GAINS TRACTION. TOLD YOU SO
• WHERE PRICES ARE RISING FASTEST IN OUTLIER BC
• 6 TIPS WHEN BUILDING A RENTAL PROJECT
• YOUR NEXT TENANT WILL LIKELY BE OVER AGE 55
• EDMONTON MARKET IS REMARKABLY STABLE
• HOME PRICE FOR MOST CANADIANS: LESS THAN $375,000

Questions, Questions

Q: Read your FBE July 11 with great interest, as I do with all your FBEs. Been a subscriber now for almost 15 years. Read few of your insightful books and am always amazed with the extent of knowledge and information you have! Happy to be your subscriber. I have a question:

When a new bull cycle commences after a prolonged decline I know prices of detached homes are the first to rise, followed by townhouses and then finally condos. But when the reversal commences, at the top of the cycle, which type of homes are the first to commence the decline and in what order? Thx.

A: Thanks for kind words. In our Insider Newsletter in the nineties and thereafter we expressed the view that values rise higher faster in SF homes, townhouses second and condos third. We felt there was – at least in the past – a direct relationship between homeowners wanting a ‘piece of grass’ to put that barbeque, (i.e. SF homes and to a lesser degree townhouses) and that relationship expressed itself in the marketplace. SF homes (because of a lot more interest) rose faster and higher and represented more than 65% of transactions. When condos became very popular to where now sales are represented to well over 50% of all products that changed somewhat. Foreign investors – particularly from China – having very little opportunity for the “piece of grass” at home piled into SF homes and aggravated that price appreciation much further resulting in massive ‘runaway type’ inflation in house prices first.

It’s an interesting question. I can’t find any direct relationship between the real estate market and a bull market in real estate rising and declining in a certain sequence of different products. When real estate markets change, it is usually a result of overbuilding (simply too many condos unsold and more coming in). Look up the ‘Cycle’ piece in our Outlook issue of January 2016.

Q: There are a lot of articles out this week ABOUT A COMING CRASH. The voices are getting louder. You say that markets become the stories people talk about. Your thoughts?

A: Indeed. I counted 11 with a ‘crash’ headline! The one I have received the most questions on is the “Get out” piece (blog) by Garth Turner. All of these voices will be right eventually. All booms are followed by busts. And Vancouver is in a boom. As we reported to you, changes are underway right now. Far fewer SF home sales, still offset by higher condo sales … but fewer. We may well be in for a change. The problem with all of these voices is this: They have argued this for 4 and 5 years! And in a most compelling fashion. We featured Mr. Turner’s forecast (about a collapse), Harry Dent’s tsunami of a crash and Canadian bestsellers here several times. FOR YEARS! Had you listened to them, you would have missed the biggest bull market in real estate EVER!

Our thoughts?

Homeowner? If you are a homeowner, buy what you like to live in. It always has been and will be a better investment than renting, or even most stocks over time. Look at any chart of real estate values over the last 40 years. There have been times of reversal (81’-83’, 87’-88’, 98’-99’, etc.), there were also a hundred crisis: Russian, Mexican, currency, euro you name it. Yet, your home’s value rose relentlessly through all adversities. Just follow the principles. Low vacancy rates, good employment, good price to rental income ratio.

Investor: As an investor with cash flow (spells: smaller town) your tenant will still pay off your mortgage.

Flipper: As a flipper (and make no mistake – Vancouver real estate is now in flipper territory). The only upside is the potential increase in value. That upside will not come from a Vancouver buyer. It is a much bigger gamble now. Remember: big upside … big downside.

Major Point: All the negative forecasters have one thing in common: Everything is going bad! They rummage around in the past and predict an either/or scenario. Both telling you to run for the hills. We also are very cautious, but look at the future. A NEW future of higher ASSET prices, lower commodity prices and negative interest rates. Re-visit our piece on ‘runaway inflation and deflation’ at the same time. Read the ‘tax piece’ below. Finally, crazy times, some cash is a thing too! Listen to your Hotline on July 22.

Q: A lot of questions on negative interest rates: “Surely negative interest rates are a European thing. Won’t come here?” or “I just don’t get it: Why would anyone give the bank money and get back less?”

A: Well, no. Not just in Europe. The CIBC just sold $1.8 billion worth of bonds with a negative yield, and it had no problem selling the debt even though buyers are guaranteed to lose money if the debt is held to maturity!

(A six-year debt that yields minus 0.009 per cent. That means anyone who bought the debt paid $100.054 for the right to get $100 back from the bank in 2022.)

Why do people do it? They expect a lot of bad things to happen. Despite the poor return, the bank had no trouble selling the euro-denominated bonds on Monday. The bond sale was two times oversubscribed, which means there were people willing to buy twice as much debt as there was debt available for sale.

Think about it: According to Bloomberg data, there is almost $12 trillion US worth of negative-yielding debt in the world now, much of which has come from governments and central banks that have cut their interest rates to record lows in order to stimulate the economy.

Investors have an appetite for such debt because the forecast for other assets is even worse!
Now, think about that!

As to why anyone would do it:

Think about it this way: A bank borrows its funds from its Central bank at say 1% and lends it to you at 2%. It makes money. All is well.

Now let’s assume there are no borrowers willing to pay the 2%. No one invests in new plants and equipment, no mortgages etc. The bank will lose money.

Now Europe’s banks have to pay an interest rate to the central bank. (In Switzerland ALL interest rates for all terms are negative.) It loses money if it does not lend the money out. So it charges you a ‘storage fee’ for your money. Read our previous piece (use your search button) on why that will make banks more aggressive and will result in more bad loans.

That’s it. It is coming to Canada in a big way. It is a terrible new world. Awful for investors, retirees (who are carrying the economy on its back) and it is the most instructive way about what BIG MONEY THINKS is going to happen. Nothing good!

Leaked CRA Document Reveals Few Surprises But Note: It Shows A Wide Net About To Descend

We have had the now-infamous leaked Canada Revenue Agency real estate document in our hands for a few days now, courtesy of the South China Morning Post. A CRA employee leaked the seminar document.

Here is a link to a PDF of it, for anyone interested.

The classified document is from a June 2 Vancouver meeting “Real Estate Webinar – Pacific Region” and it is obviously a reaction to media reports on the roaring Vancouver housing market.

The first line in the document, under the headline “Issue”, is: “Significant media attention regarding the housing market in the Vancouver area and the effects of foreign investment on the availability of affordable housing.”

CRA’s solution, of course, is a call for more tax enforcement, but it will likely be local Canadians, not mysterious foreign investors who will face the most scrutiny. The taxman, after all, is going after vendors, not buyers.

As well, CRA has not had much success auditing foreign buyers. The document shows that only one successful audit of worldwide income was conducted in British Columbia in the past year, despite all the uproar about foreign buyers. That audit netted CRA about $26,000.

The leaked brief lists four areas that least 50 more CRA auditors will be digging into in B.C:

• unreported worldwide income
• property “flipping”,
• under-reporting of capital gains from home sales,
• under-reporting of Goods and Services Tax (GST) on sales of new homes.

We suspect the real focus will be on Metro Vancouver taxpayers, already on CRA records, who make a profit selling real estate.

More property owners who flip a home for profit (which is perfectly legal) will be audited to see if they qualify for the capital gains exemption on principal residences. No surprise there, CRA does this already.
According to the leaked document, here is what CRA flipper investigators will also be looking for:

• Builders who flip property frequently and do not report the corresponding business income or capital gain;
• Unreported vacant land flips;
• Unreported assignment sales.

The focus on under reporting of GST on the sale of new homes is reference to a little-used loophole that allows someone to say they are building a house for themselves, but who then sells it shortly after completion. This is relatively small potatoes, but such deals are easy targets for the taxman.

The CRA document says that, along with the extra 50 income auditors, 20 GST auditors and 15 other staff will be deployed to B.C., all focused on real estate taxation.

All this extra manpower will generate a lot more paperwork and stress for those in the real estate market, but even CRA has no illusions about any effect it will have on housing prices or speculation. (According to even the low-ball estimates of foreign buyers by the BC Government, these account for $100 million every week in the Lower Mainland housing market!!!)

Notes the CRA document:

“CRA compliance work will increase visibility and lead to more tax compliance, but will not address the major concerns about affordability of real estate.”

Major Point: As we noted a month ago, the Metro Vancouver housing market is already correcting itself. As so often happens, big government moves to reign it in happens after the horse has already left the barn.

Detached housing sales on the bellwether Westside of Vancouver have been falling since March – the month when the average house price hit $4 million. Last month, Westside house sales plunged 41% from June 2015. Sales of all types of housing, except condominiums, are also tracking lower, and fast, in North Vancouver, Richmond and White Rock, the very markets that helped create Metro’s reputation as the least affordable place in the world. We are seeing price reductions and this will become more widespread. (see last FBE for further details. The shift is going from SF homes to condos. But the point is…by the time all the new CRA auditors get set up, quick flips may be a memory.

“Crazy Market”: Rent: $1650; Price $750,000; Cap 2.1% And An Old East Van Industrial Site For $18m An Acre

We have all heard the anecdotes about crazy Vancouver housing prices.

The $2.4 million Point Grey shack; the $6 million teardown etc. But we took a close look at two recent commercial deals that raise the bar for insane prices.

• The first is an old six-unit townhouse building on West Sixth Avenue in Kitsilano. It was built in 1947 and nothing much has been done to it since.
• The two-bedroom units rent for an average of $1,650 per month. It needs paint. There are no balconies or any yard. Zoned RM-4, there is no magical FSR up-zoning potential. Last July the building was assessed at $199,000 and the land at $2.7 million. Last week, after multiple bids, it sold for more than the list price, $4.5 million, or $750,000 for each of the tired old townhouses. The capitalization rate is 2.1%. Brandon Harding, the NAI Commercial agent who helped sell it, said the long-time owner didn’t believe the listing price and was amazed when it went for over asking – and that the buyer’s offer had no subjects. “This market is crazy,” Harding said.
• You may have driven past a nondescript old industrial building at 2288 Clarke Drive in Vancouver. It used to be a China-language newspaper plant. It is on 17,200 square foot lot. Last week it sold for $7.25 million. This pencils out to the equivalent of about $425 per square foot, or $18 million per acre. The industrial lease rate in East Vancouver is around $8 per square foot and there is apparently no indication the zoning on the site will change.

Major Point: What does this tell you? The Vancouver commercial market, like the housing market before it, has decoupled from normal pro forma reality. If you own an old apartment building or industrial building in the city, cash out now. There are many other areas in B.C. and Canada, where you can invest your money safely and more wisely.

Rumours Swirl Around Oakridge Transit Site Sale

We are hearing rumours that the near 14-acre Oakridge Transit Site on West 41^st Avenue has been sold. Cushman & Wakefield has been working with Translink on the sale of the property for some time, but a thick shroud of confidentially surrounds it. One C&W agent said they aren’t even allowed to talk about it in the office. We were stonewalled on any deal details by Tranlink, though a spokesman suggested a deal is done. The City of Vancouver played mute, even though the city published a 64-page planning guideline in December 2015 for what may be the biggest sale of public-owned land in the city’s history. The rumours are that the site sold for between $400 million and $435 million to a joint venture between a Beijing-based backer and a Vancouver developer. That price would be high (about $30 million an acre, but not unbelievable).

Major Point: The Oakridge Transit site redevelopment would be massive, based on city planning proposals. If you own property in the area, be advised that the project will create a high-density enclave with a mix of high-rise residential towers and townhouses, and retail, and push neighbouring land values even higher. (Already, residential lots in the area sell in the $3 million range.)

Whistler Rebound Gains Traction. Told You So

At last fall’s annual Jurock Real Estate Outlook conference, delegates were told to buy at Whistler, because the long-awaited recovery was coming. Turns out it was an astute observation, as Outlook recommendations often are.

As of June, year-to-date residential (Whistler and Pemberton) transactions have increased by 46% over the same period in 2015, totaling in excess of $1.3 billion in sales. In turn, average transaction values in the first two quarters rose by 9.6% in Whistler to $898,535. Overall YOY growth across all Whistler market segments has remained consistent; single-family detached houses increased by 13% to $2,042,000; townhome prices increased by 18% to $922,696; and condos increased by 11% to $437,518.

Major Point: Whistler was our top recommendation in January for 2016 – small town…Now, agents report that new listings are often selling in multiple offer situations.

Where Prices Are Rising Fastest In Outlier B.C.

OK, so you plan to cash out of your Metro Vancouver real estate and invest somewhere else in B.C. (which incidentally has the strongest economy, fastest job growth and best climate in the country).
Here are the B.C. outlier markets where prices are rising fastest, based on MLS sale prices from June of 2015 to last month:

• Chilliwack, where average home prices (combined) have increased 20.1% to $392,989. (Chilliwack also posted a province-leading 70% increase in sales, year-over-year.)
• Powell River, one of our favourites, with a 15.8% increase in the average home price, to $274,085. (Sales are up 30%.) NEWS FLASH! Medical Marijuana facility and product testing laboratory to be built in former Catalyst administration building. New jobs and local spending in Powell River are part of plan. The City of Powell River and True Health Company reported Health Canada had issued notification that they are preparing to request a pre-licence inspection of the Powell River site.  The inspection is the final stage in the approval process of the application for a license to become a licensed producer of medical marijuana. “We have been working with True Health Company for three years in support of their site selection and application for a license”, said Mayor Dave Formosa
• Kelowna, the largest city in the central Okanagan, where the average price is now $456,056, up 12.8% from last June. (Sales are up 26.8%)
• Vancouver Island (our pick is Nanaimo) where the overall home price average has increased 12.24% to $380,109. (Sales are up 36.6%.)
• Kimberley, Ozzie’s totally biased ski/retirement town, were $250,000 buys you a nice single family home. Sales are rising.

Also, revisit our 5 best town recommendation from January. Don’t know a good realtor in these areas…write to max@jurock.com or 604-683-1111.

Tool Box: 5 Tips When Building A Rental Project

There remains a lack of purpose-built rental projects right across Canada, but if you are planning to build such a project you should keep in mind that the market has changed and the planning and design must reflect that.

Here are some tips from pros at the recent North American New Apartment Construction and Mixed-Use Symposium and Expo held in Toronto:

• Buy in areas with a high population of those age 20-34 or seniors (age 55 or better).
• Buy B class land and try to keep the land values at a maximum of 15% of the total building costs.
• Take a cue from U.S. developers and add a rental office off the lobby.
• Include wider and easily accessible rear exit doors and at least one larger and more robust elevator (because tenant turnover rates remain 30% to 40%, much higher than in condo buildings).
• Include more bachelor suites and junior one-bedrooms, which reflects the fact of single occupants (which now make up about a third of big-city populations and an even higher percentage of renters).
• Provide less parking (the ratio should be no more than 0.58 per tenant in cities; 0.78 in smaller towns) and charge a premium for it. Don’t provide guest parking.

Your Next Tenant Will Likely Be Over Age 55

Being so close and comparable to the U.S. market is a wonderful learning tool. Demographic and real estate trends there are often a harbinger for Canada. And, based on a giant U.S. research study, your future tenants will likely be over the age of 55.

The first Freddie Mac survey of those born before 1961 shows that an estimated 6 million homeowners and nearly as many renters prefer to move again and rent at some point. Of those homeowners and renters, more than 5 million indicate they are likely to be renters by 2020.

Further, the majority of 55+ renters (79%) and homeowners (83%) who expect to rent their next home also predict it will cost the same or less than their current one.

Among those 55+ renters who plan to move again, 71% plan to rent their next home. Further, more than half (59%) think it makes financial sense for people their age to be renters. This view is held by 67% of renters.

Among the top “very important” factors influencing their next rental choice, respondents picked affordability (60%), amenities needed for retirement (47%), living in a community where they are no longer responsible for caring for the property (44%) and being in a walkable community (43%).

Major Point: Canada is aging faster than the U.S. and B.C.’s population is aging faster than any other province in Canada. There is a very good chance that your future tenants will be a senior, or close to it. You may want to consider accessible features and other modifications – such as ensuite washer and dryers – to make your builder friendlier for mature tenants, who are often the least trouble and the longest staying.

Edmonton Market Is Remarkably Stable

Amidst all the angst about the Alberta housing market, investors should be aware of how stable the residential scene STILL is in the capital city.

We looked at sales in Edmonton over the past four years, a period when oil prices soared to over $100 a barrel and then plunged to below $40 a barrel. These years also saw the long-standing Conservative government booted out and the first NDP government elected. We picked May as the bellwether month because traditionally it is the month with the strongest housing sales.

• We found that in May of 2012, a total of 1,877 home sales were reported, and 6,992 had sold year to date. In 2013, May sales were 1,848 and 6,954 year to date. After a blip higher in 2014 (to 7.994 sales year-to-date), sales in May 2015 were 1,983 and year-to-date sales were at 6,961. This year, May sales were 1,771 and YTD was 6,483, less than 500 units lower than in 2012 or 2013, which were both considered fairly robust markets.
• As well, the average sale price of an Edmonton home this May was $382,695, just $40,000 more than it was four years earlier and $10,000 higher than in the “boom year” of 2014. The average detached house price, at $440,375 this May, was $2,000 higher than in 2014 and the average condo apartment price, at $254,000, and has barely budged in two years.

Major Point: We still see tough times ahead for real estate in Alberta, but it is not nearly as bad as you may think. Edmonton has a diverse and government-anchored economy that makes it more resilient to resource price swings than Calgary or many other Alberta cites.

Home Price For Most Canadians: Less Than $375,000

While the federal government threatens to get tough on “soaring” house prices and the Office of the Superintendent of Financial Institutions sends stern warnings to the mortgage industry to cool the market, one fact should be kept in mind: For the vast majority of Canadians, housing is affordable.

According to the June data from the Canadian Real Estate Association, if pricey Vancouver and Toronto are taken out of the equation, the average home price in Canada is $374,760 and, in many cities, prices have not increased much in the past year. The reality though is the hysteria over higher prices and the subsequent government response will make it increasingly harder for the average Canadian to buy a home.

Lesson: “Just Because Your Bank Said No Doesn’t Mean There Aren’t Options!”

Although there seems to be a high likelihood of some new mortgage guidelines coming down the pipeline in the next few months, it’s important to highlight that a creative mortgage broker can still get deals done. We interview Kyle Green of Mortgage Alliance (604-229-5515, Kyle@GreenMortgageTeam.ca) for some insight on some of the more unique deals that he has been able to put together.

“Well, yes, although financing is a lot tougher than it used to be, we’re still able to surprise a lot of our clients by giving them options that their bank doesn’t have.

Here are some quick hits on what is still doable:

• As little as 5% down for principal residence or a 2^nd home for immediate family or personal use (5% down on first $500k and 10% down on the next $500k). You do not need to be a first time home buyer to take advantage of this.
• As little as 10% down for self-employed who do not claim enough income on their tax returns (called stated income).
• Up to 85% financing with “B” lenders for those who may not qualify with a traditional bank, including poor credit, lack of income verification, etc.
• No income required with 50% down (rate is surcharged .85%).
• Net worth programs requiring minimal income with 35% down. Must have 1.5 times the loan request in net worth (primarily in liquid net worth).
• I have a lender who can use business net income to determine your income. So if your business makes $200k/yr and you only draw $50k/yr home, I can use the $200k amount.
• Financing residentially for up to 10 properties or 16 doors at or near best rates.
• Financially commercially for real estate portfolios. Rates usually around 1% higher and fees usually apply of around 1 – 1.5% of loan amount.
• Home Equity Lines of Credit for up to 65% of the value of your home to use to invest.
• Private mortgages up to 90% financing (but it isn’t cheap to go to 90%).
• US Resident income used as if it was generated in Canada with one lender.
• Non-resident mortgages with 35% down
• New to Canada mortgages with 35% down”

Kyle cites some recent examples of what is possible. These are real deals done:

• 85% financing as a 75% 1st bundled with a 10% 2^nd for someone who was declined by all of the mortgage insurers
• Tough deal co-brokered to me from a colleague who was discharged from bankruptcy 2 years ago. The other broker had it approved for a first mortgage of 65% at 4.5%, and needed a 2^nd to 80% financing – client was willing to pay 13% for the 2^nd. Got approved with a bank at 2.74%.
• 35% down 4% rate for a realtor who had sold just 3 houses in 1 year (granted, those commissions totaled over $100k!)
• Private financing for a pre-sale with almost no money left in the deal. Value of property had risen $200k since they wrote the offer, and the private lender used the current appraised value not the purchase price to determine how much financing.
• Mortgage + Line of Credit for over $900k for a developer whose income was $0 last year but $1million the previous year (most banks will use $0, believe it or not).

HOT PROPERTY

Look up 3 new deals on your password protected website.

WE RESERVE THE RIGHT to accept or not to accept a specific deal. What makes it a deal? We look for: Low down payments, special discount, and owner carries mortgage, etc. Also note…we do not vet any deal, we just think it may be of interest. You MUST do your own due diligence. Please get contact info from your password-protected website or e-mail Max at max@jurock.com …and read the disclaimer!

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