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April 6, 2018 | Flowing Red

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.

Turns out it wasn’t Chinese guys in Lambos. Or even a phalanx of musty millennials. Instead it was speculators – of the kind who’ll pack Toronto’s big conference centre on Saturday for the ‘Real Estate & Bitcoin Pitbull-Rocky Orgy’ – who goosed the prices.

Of the roughly twenty thousand fresh new condos that were bought last year in the massive GTA market, a stunning 48% were purchased by speculators. Investors. Amateur investors. Disciples in the service of our lordly Condo King, Brad Lamb. This supports other evidence that local T.O. families (and the same likely holds true in Van) are at the heart of a run-up in real estate values that foreign buyers have taken the rap for. It’s estimated that 14% of all GTA households now own multiple properties – mostly condos financed with HELOCs on principal residences.

In terms of capital value, condo buyers have done largely okay. Per-foot values have shot higher along with demand over the last five years, yielding a nice profit. But there are two problems with this ‘easy money’ strategy that so many people have walked into.

First, tax. Speckers and part-time landlords buying a unit to lease don’t get to sell and enjoy a tax-free return. In fact, they might not even qualify to enjoy the low (50%) capital gains inclusion rate. The CRA has one of its infamous ‘projects’ in place and is busy telling people who bought, owned for a while then sold that their gains will be considered to be business income. Yeah, baby, 100% tax. That means all the appreciation collected at closing must be declared as earned income in that year. If you were making, say, $80,000 from your job with a 31% marginal tax, then pocketed $100,000 on a condo deal, your rate would jump to 48%. Ouch.

Second, negative cash flow. While renters moan and bitch about the cost of accommodation, the gamblers buying those units are the ones bleeding. At least a lot of them. A new study by CIBC and Urbanation finds an incredible 44% of the speckers are losing money – more than a third of them are throwing away at least a grand every 30 days subsidizing their tenants.

This reported negative cash flow, by the way, is only the shortfall between the actual mortgage payment plus monthly condo fees and the rent collected. It does not take into consideration the cost of insurance, vacancies, property tax, repairs or ascribe any value to the lost utility of the downpayment. Nor does it include closing costs such as land transfer taxes. Factor those things in – plus Ontario’s new universal rent controls – and you suddenly wonder what Mr. Lamb has been smoking telling investors then can earn 15%-20% per year snapping up units in his buildings.

Now, without a doubt, condos are hot. The moisters are increasingly joining the speckers in both Toronto and YVR. As mentioned here the other day, last month in Vancouver just 14% of the detacheds on the market found owners. More than 61% of available condos sold. Prices in Toronto have increased more than 25% in a year – about the same as the plop in McMansion values in the northern burbs.

But the problems with condo ownership are legion, as detailed here days ago. Monthly charges are always the lowest when a building is first occupied, then inevitably rise with time. Special assessments are common, expensive, and can prevent you from selling a unit. Resale values are set by the building, not your property, shackling you to conditions you cannot control. And, at the end of the day, it’s just an apartment. If a dork moves in next door (or above) you’re stuck. But if you rent, you can move.

Now, combine those ownership negatives with the fact that half of all tenants (says the study) are being subsidized by their landlords, and it begs the question… why would anyone buy when they can live in the same unit as a tenant for less? And no risk. No downpayment. No mortgage debt. Huh?

Beats me. And as the bank points out, there are currently 60,000 condos under construction in the GTA, with the pipeline stuffed for at least three years. That could pose too much supply for the demand. Combined with rising mortgage rates (look at Friday’s job stats) plus B20 (and Comrade Horgan in BC) there’s no guarantee prices will continue to swell.

But the landlord blood will keep flowing.

Rent, save and invest, kids. Then buy dirt.

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April 6th, 2018

Posted In: The Greater Fool

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