Canada

Canada Re-Elected The Same Leadership, But Real Estate Will Be Very Different

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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19 Comments

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  • Basil Al-Dajane 3 weeks ago

    I have 1 issue with your analysis Stephen – I don’t believe the Liberals will implement any of it (well maybe the demand side they’ll implement).

    • Van YIMBY 3 weeks ago

      Ha! This is true. Politicians failing to accomplish anything is the affordability measure we’re hoping for.

  • Van YIMBY 3 weeks ago

    High home prices are too big of a juicy tax haul. No one has a problem with paying $6k/year in property taxes if they think their home is worth $2 million. It costs the government nothing to push the cost of housing onto young people, and they make a buttload without people complaining.

    Then they give it to their friends, and repeat.

  • Trader Jim 3 weeks ago

    The bank tax might be the biggest affordability measure because and it’s accidental. Tax bank profits higher, and they’ll pass that onto consumers.

    • Jim 3 weeks ago

      Excuse my potential ignorance here, but how does that make housing more affordable? It just offloads costs onto consumers.

      • Mortgage Guy 3 weeks ago

        Banks will need to find more revenue streams, which means they need to not discount mortgages as deeply.

        • Mortgage Guy 3 weeks ago

          I should say this is mostly just a concern for uninsured mortgages. Insured mortgages basically have zero change, since they’re almost pure profit with almost no loss potential.

          • Axel McLion 3 weeks ago

            “Tax-Free First Home Savings Account” ought to encourage people to wait until age 40 to buy their first house. May boost prices in the long term but wouldn’t pull forward demand.

      • Kaliucla 3 weeks ago

        Step 1, tax the banks. Step 2………. Step 3, profit

    • Scott 2 weeks ago

      Or their shareholders…

  • Mortgage Guy 3 weeks ago

    Politicians can only make housing more affordable by bringing prices lower, by curbing demand. The industry will always spin this as “hurting equity” or “preventing people from buying.”

    It’s unfortunate, but Canada will ride housing until it blows up in some spectacular way. In the meantime, who’s got the guys to bet against the government? They elected a profession house flipper FFS.

  • expat 3 weeks ago

    They’ve had plenty of time to act on these things. Nothing changes.

    What a 600 million dollar joke.

  • Hank 3 weeks ago

    This country is a dumpster fire and now the imbecilic, delusional little potato puppet dictator will march on, fulfilling on his promise a fascist state.

  • Guro Maldova 3 weeks ago

    Prices MUST go up. It’s only fair to those who have already bought.

  • Simon Kronenfeld 2 weeks ago

    The prices will be slowly growing up. It is inevitable.

  • Mike Sergeev 2 weeks ago

    The rates are low, the affordability is average, the supply is limited.
    Everything stays the same and the prices will skyrocket again.

  • Chapan Koomar 2 weeks ago

    Nothing will change. Liberals will give little incentives to first-time buyers. The bubble will keep inflating. This bubble might last as long as interest rates stay so low. Supply will not increase meaningfully.
    The already owners will continue to vote the same.

  • Melissa Price 2 weeks ago

    Small business people likely will take a hit with another lock down . Looks like that day is coming again . Many Canadians are self employed. Buying and selling costs are not cheap . Inevitably something has to give . Good luck keeping this bubble afloat long term .

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