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April 11, 2017 | Agony

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Jeremy called today. He’s listing on Thursday for $1.8 million. The latest in a string of people in my circle who have decided to bail while the bailing’s good. “If I get it,” he asks, “then how in conscience could I possibly turn it down? That’s a half-million gain in eleven months.”

Indeed. He’s a genius. By our reckoning it would take him eleven years of current after-tax income to equal that amount, and more than twice that time to save it. This is a windfall. Like some demented TV or radio game show – take the prize now, or roll the dice and gamble it’ll be bigger after the next throw, or maybe disappear.

Word is one of the options being presented to the Ontario premier is a new capital gains tax on residential real estate for her upcoming budget. We already know universal rent controls are coming (she told us) which could have a devastating impact on condo sales and values since over 50% of buyers are speculators, investors and amateur landlords. The cap gains levy would be aimed at everyone else – a sliding scale of agony, based on how long someone actually owns a property.

If you want a preview, check out a column in the Globe this week by that little rascal Rhys Kesselman, of Simon Fraser U. It perfectly reflects the thinking of the lefties who now lead so many governments in this enlightened nation of ours.

  • All forms of income, including gains from every other asset that goes up in value are taxed (outside of registered plans like TFSAs). So why are houses exempted?
  • This distorts the economy, and diverts massive amounts of money into a single asset class, turns people into house-lusty automatons and creates real estate bubbles.
  • As prices rise, every buyer becomes a speculator, since they’re entering the market at ever-higher levels with escalating debt and clearly expect more growth.
  • Rivers of cash end up pushing house values higher and indebting all of society, instead of being channeled into more productive areas, creating jobs.
  • Exempting residential real estate gains from the tax system bestows a huge benefit and advantage on one segment of society, which tend to be the old farts all we hip, vaping, Snapchatters hate. How is that fair?

This is a view widely shared by our political class. Whether any government has the stones to act upon it remains to be seen, but now that the Mills statistically outnumber the wrinklies, it’s only a matter of time before it happens. So, what would this tax look like?

Simple. You flip, you pay. If you live in a house and reno it to sell, you pay. If you’re a temporary owner, like Jeremy, you pay. Kesselman reflects the view that the tax on profits should be in excess of 50% for real estate occupied two years or less, declining to maybe 20% or so after a dozen years in the same place. The adjusted cost base could take into consideration inflation and renovations, with (perhaps) a lifetime limit on taxless gains. Plus, the cap gains tax could replace land transfer taxes – so people get dinged when they sell, instead of when they buy.

Yes, there’s logic here. The more unevenly tax is applied, the greater the economic distortions which result. And, yes, it would be the kiss of death for real estate speculation. Yes, the moisters would love it. And, you know, it’s probably out there. Maybe not this time, but later. Govern yourself accordingly. Like Jeremy.

Meanwhile, more evidence the whole market is tilting towards the ditch. Yesterday CIBC gave us a data dump showing, most notably, that eight in ten newbie buyers plan on selling, with the majority saying they wish Mom had never talked them into that mother of a mortgage.

Now the Royal has a new poll which is realtor-cringeworthy. Only a quarter of people plan on buying a house in the next two years, down from a third – and this is why: almost 60% expect prices to fall, while half don’t trust the economy and 38% think they can’t afford real estate any more. Which they probably can’t. Worse, a third say they’d freak out if their mortgage payments went up by just 10%. That, of course, is an eventual certainty. Now combine it with CIBC’s data showing 61% of owners won’t sell because they can’t afford to buy again, and you can see this market is pooched.

Last call.

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April 11th, 2017

Posted In: The Greater Fool

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