The Canadian election is over and the country’s leadership remains largely unchanged. However, a laundry list of election promises mean big changes to real estate are coming. Most of the promised plan seeks to create more demand for housing, which softens price drops. Expect more of the same currently being done, but with a revamped buying and selling process.
Increasing Demand Is The Primary Focus of The Platform
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 biggest 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. This stimulates demand, often resulting in the extra cash being capitalized into prices. In other words, they help to boost prices, not make them affordable. Economists warned about this before the election.
Foreign Buyers and Speculators Are Going To Be Targeted, But It’s Likely To Have A Limited 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. It sounds like it would do more than it does, since foreign buying was a problem. These days it’s less so, and the issue that remains is foreign capital. The latter doesn’t have a solution, only various distractions from discussing it publicly.
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 inclusion rate would drop by the 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 Market
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. As the non-partisan parliamentary budget officer (PBO) wrote, 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 pivot to Canadian real estate?
Changes To The Way People Buy and Sell Real Estate 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
- Disclosure of all parties in a transaction
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.
Most of these measures are also regulated at the provincial level currently. For example, the industry is super duper upset about a ban on blind bidding proposed. The implementation at the federal level would require criminalizing the process. Regardless of whether you’re in favor of the ban or not, going over provincial territory isn’t easy. It also means it can disappear as quickly as the next government.
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 us to our 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 perspective is higher home prices are good for the economy. Why would any plan be implemented to improve affordability? Millennials be damned.
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