January 15, 2021 | Pay Up

Insane. It’s the word du jour. This aptly describes real estate in cities like Toronto, Vancouver, Victoria and all of the bubbly burbs and hot hick towns in their watersheds. Prices are insane. Buyers are insane. Bidding wars insane. And, of course, mortgage rates are pure insanity.

As central banks have moved to save us from Covid with oodles of monetary stimulus, one result’s been an explosion in property values – fueled also by salaried WFH nesters floating on waves of hormones. Every single action governments have taken in recent years – shortening amortizations, increasing down payments, making mortgage insurance more costly, raising debt ratios, capping CMHC coverage, slapping foreigners – have failed. Prices have never been higher. Speculation never greater. Sales levels setting records.

As a result fewer people can afford a house. Family debt levels have hit historic highs. And meanwhile the virus has created the greatest river of red ink in government history. All levels of are hurtling headlong into debt we never before thought possible.

And is the virus situation any better?

Nah. Not happening yet. We apparently have a vax cock-up unfolding. Despite that, a soul-sucking row house in the GTA burbs is now a million bucks. Congratulations, policy-makers. Home run.

What next?

Some on this pathetic blog have speculated governments will have no viable alternative but to tax residential real estate. After all, allowing people to speculate and flip houses then claim the principal residence capital gains exemption to have a taxless profit is a bit rich. Annualized gains are now 50%, 60% or beyond – while the poor, diligent schmuck with a balanced portfolio making a decent 7% a year is taxed on all gains outside a registered account. How is that fair? Isn’t clinging to this outmoded, archaic house exemption only encouraging greed and bad behavior? How is it good for society when young families making average money will never, ever, ever be able to afford their own digs?

So, an enlightened society would tax houses just like equities. Half the gain you keep. Half you add to your income. The ACB (adjusted cost base) would reflect improvements and renos which added value. There could be a sliding scale reducing the tax for years of ownership. Whatever. Details. But the principle remains. Real estate should not get a free pass.

This seems inevitable, but not soon. It may take a new gen of politicians to make it so.

In the meantime existing governments will continue to nibble away at homeowners. Property taxes vary wildly across the country, but are definitely on the way higher for most. In Vancouver, for example, these levies will jump by 5% this year, which is five times inflation. In Toronto the added amount is just 2.2%. But while Van homebuyers pay $32,000 in transfer tax to buy a $1.7 million ‘average’ crappy house, in Toronto that bill amounts to a staggering $60,950. (By the way if you buy in Calgary the transfer tax.. doesn’t exist. Sweet.)

Buyers pay HST on a lot of closing costs, while sellers must fork the sales tax over on the entire amount of commission paid – almost $13,000 in HST alone on the average Toronto detached deal. Then there are vacancy taxes (in Vancouver and environs) and foreign buyer surcharges in BC, Ontario’s ‘golden horseshoe’ and maybe federally during 2021. The vacancy tax in Vancouver has rocketed to 3% of a property’s assessed value, and a similar shellacking will be in place in Toronto next year, likely starting at 1%.

BC’s socialist government, which never met a tax it did not love, also whacks anyone who is not a permanent resident with a ‘speculation’ tax, even when nothing remotely speculative has occurred. That skimmed about $90 million in 2019 and was designed to increase rental stock (didn’t happen) and depress house prices (definitely did not occur). That tax is blatantly racist, of course, sitting at 2% of a property’s value annually for non-residents of Canada (especially you-know-where), and 0.5% if you just happen to be an evil Albertan or Upper Canadian. You may have also heard Comrade Premier Horgan is trying to seal off BC from visitors anywhere in Canada because of the virus, raising the question of why anyone would want to invest there.

So, it’s not like residential real estate is untaxed. It is. The issue is profits from the sale of a property. These days most Canadians consider their house to be an investment vehicle, wealth creator and retirement strategy, not just a home. As stated above, one giant reason we have unaffordable accommodation is because of the PR exemption. This has encouraged families to roll the dice, load up on debt, buy an asset with 20x leverage, shun financial assets, be wholly undiversified, augment risk and take a moon shot.

The result? Read yesterday’s post. Tell me then why this should not change.

Garth Turner January 15th, 2021

Posted In: The Greater Fool

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