Toronto Income Property Newsletter - November 2007

Here’s some good news after the approval of the new Toronto Land Transfer Tax in October. According to the National Post, the Canada Mortgage & Housing Corp. (CMHC) has decided to let Canadians buy investment properties with no down payment. Apparently they have quietly introduced changes that lower the down-payment threshold for an investment property. Canadians who qualify will be able to purchase an income property and or several more with no money down. The mortgage insurance for the new product is 7.25% of the total amount of the loan.

“These enhancements will ensure continued supply of affordable rental accommodation across Canada,” said Pierre Serre, vice-president of insurance products with CMHC.

I haven’t been able to find out too much more information so far. Their website isn’t reporting anything on this yet but obviously I will be watching this very closely.

The reaction to the newly imposed Toronto Land Transfer Tax has been mixed. The Toronto Real Estate Board worked very hard to oppose this tax as did many local real estate agents. TREB took a strong position to oppose this tax as unfair in principle and refused to compromise. As a direct result of this strong position they feel that City Council was forced to make a number of amendments to the City’s original proposal, including rebates for first-time buyers, a reduced rate, and grandfathering for existing transactions.

On the other hand, some folks feel that the market can absorb this tax and it will ultimately help in the City’s current cash shortfall. There are others who claim that despite how much realtors may have opposed the tax, aren’t we often indirectly responsible for driving up the prices of homes through things like blind multiple offers or camping out at new condo developments to make a quick commission?

Since I sell income properties I have to look at this tax in terms of adding to the overall cost of the building at closing, thereby reducing my anticipated returns. Will this tax stop people from purchasing duplexes or triplexes for investment? I think if your margin is so tight that this new tax (which at most will be 2%) makes the difference then it probably isn’t too great an investment to begin with.

For those of you who are unfamiliar with how the new Toronto Land Transfer tax will work, it is like this:

There will be a second land transfer tax, on top of the provincial land transfer tax, at the following rates:

For residential homes there is an easy-to-use residential calculator is available at www.NoHomeBuyingTax.com): The rates are as follows:

0.5% of the amount of the purchase price up to and including $55,000
1% of the amount of the purchase price between $55,000 and $400,000
2% of the amount of the purchase price above $400,000

For commercial and industrial properties the rates are:

0.5% of the amount of the purchase price up to and including $55,000
1% of the amount of the purchase price between $55,000 and $400,000
1.5% of the amount between $400,000 and $40 million
1% of the amount above $40 million

First time home buyers of new and re-sale homes will receive a rebate of the Toronto land transfer tax of up to $3,725 (this equals a 100% rebate on homes purchased for up to $400,000). Teranet will be collecting the Toronto land transfer tax for the City of Toronto. Once the City’s first-time buyer policy is reflected in Teranet’s collection system, first-time buyer transactions will be exempt from the Toronto land transfer tax at the time of registration. Until that time, first-time buyer transactions will be charged the Toronto land transfer tax, which will then be rebated by the City of Toronto. The City has indicated that the necessary changes to Teranet’s system will be implemented in the “spring of 2008”.

This all goes into effect February 1st next year.

I read a story the other day that stated that construction projects in downtown Toronto are at the highest rate ever! Think about that for a second. When you are constantly hearing about the dollar and real estate issues in the U.S., you have to wonder if this city can ultimately sustain all this development and leave all the participatory investors unscathed. There are now four high-end hotels going up (the Ritz, Trump, Four Seasons & Shangri-la). It seems like a bit of a glut of top-notch accommodation to me – especially when we’ve gone this long without any. There are a lot of condo projects going up in the core as well but so long as they’re hitting their pre-sale numbers, I suppose the developers are happy and will continue to seek out new locales.

That’s it for now. We’re now less than two months to Christmas and wrapping up another year. Boy, does time fly fast. I look forward to putting out my Live for Free book (see cover below) and getting into the world of self-publishing in 2008. It will also definitely be another interesting year for real estate in Toronto.

See you next month.

P.A.

Monthly Newsletter: October 2007

Last month I addressed the mortgage crisis in the U.S. and how it may ultimately affect our real estate market.  I made the point that although certain American cities have been experiencing serious downtowns, up here in Toronto we are still seeing record-breaking months.  In September I was involved in six multiple offer situations which suggests that demand is still very strong for quality properties.  Income properties in the central core that show well and are in desirable locations are still trading at a steady clip and at all-time high prices.
 
I don’t want to sound like a broken record coming back to you each month posing the question how long can this continue?  Interest rates are staying put and in fact during the month of September the Fed actually lowered them a touch.  This led to a whole lot of speculation as to whether the same would happen in Canada.  Many financial analysts have gone on record saying that the Toronto market is unique and has the ability to continue on this trajectory for quite some time.  But does everyone think that this is the case.
 
A friend of mine sent me this article from the Globe’s Report on Business that I’d like to highlight since the thoughts are from Bank of Canada Governor David Dodge.  Have a look as to what the person with the most power to influence lending rates has to say:

OTTAWA AND VANCOUVER — Bank of Canada Governor David Dodge is raising a red flag about housing prices in Canada, saying that increasingly loose lending rules may be helping overheat the country's real estate market.

While Mr. Dodge did not draw any direct parallels with the subprime mortgage crisis that has gripped the economy of the United States and sparked a credit crunch around the world, he signalled that his long-standing concerns about mortgages with increasingly easy terms have not been addressed.

“One worries about the structure of the mortgage market, that we may be actually aiding, facilitating a rise in the price of houses that is really not warranted,” he told reporters after a speech in Vancouver.

In his comments to reporters Tuesday, Mr. Dodge further warned that housing prices outside of the fast-growing cities of Western Canada may be rising too quickly.  Housing prices in Vancouver, Edmonton, Calgary and Regina have soared, but that growth is to be expected from an expanding economy and population. More troubling is the picture elsewhere, Mr. Dodge said.

“But I guess what has worried us a little bit more, is that even if you extract from those centres, what we're seeing is house prices rising faster, probably at up to twice as fast as the rate of inflation,” Mr. Dodge said.
“We're worried about that, and we'll continue to worry about that.”

Mr. Dodge did not name any housing markets, but the most recent figures from the Statistics Canada new housing price index indicate a number of markets are in the range of growth he pegged as problematic: Halifax, with a 6.8-per-cent increase; Hamilton, 4.3 per cent; London, 5 per cent; Greater Sudbury and Thunder Bay, 4.5 per cent; Winnipeg 15.7 per cent.

Last year, Mr. Dodge met with executives from Canadian Mortgage and Housing Corp. (CMHC) to complain about new incentives by the housing agency to encourage interest-only mortgages and mortgages with amortization periods of up to 35 years. CMHC said at the time that it had addressed all of Mr. Dodge's concerns. CMHC said it had no comment yesterday, but the governor's comments suggest his concerns remain.

Since then, Canadian housing prices have soared, and consumer demand in general has surpassed most analysts' expectations with its endurance.  At the same time, Mr. Dodge says he is re-evaluating his thinking about how risky and sophisticated credit structures affect the Canadian and global economy.

The credit crunch that has seized global markets since August and caused a tightening of credit in Canada was partially caused by a lack of understanding on the part of central bankers, Mr. Dodge said.  The world's central bankers failed to realize the magnitude of the easy money made available over the past few years through sophisticated market structures, and as a result, central banks kept interest rates too low.  For Canada, the too-low rates were offset by the appreciating Canadian dollar, he added.  But going forward, central bankers will have to better take into account the pricing and availability of credit, when setting monetary policy, he cautioned.
Generally, he expressed confidence that the Canadian economy is supple and strong enough to handle a dollar at par with the U.S. currency and tightening credit conditions at the same time.

“The adjustment is continuing, and in the end the Canadian economy will emerge as a rather strong economy, even if there are difficulties,” he told reporters.

“We're in the process of adjusting and the growth of the economy will not necessarily be as strong as it was in the second quarter but it will continue [to grow] rather strongly.”

The Canadian economy grew an annualized pace of 3.4 per cent in the second quarter, but economists have been scaling back their expectations for the rest of this year and next, and warning of a growing risk of recession in the United States. Within the past year and a half, Canadians have increasingly chosen longer mortgage amortization terms than the average 25 years. Terms of 30, 35 and even 40 years have become much more popular, particularly among home buyers taking out high-ratio mortgages in which they are putting down less than 20 per cent of the purchase price, according to a recent Royal Bank report.

It is interesting that he didn’t specifically mention Toronto and doesn’t seem to be terribly concerned with the declining American dollar bringing our exchange rate to par.  It’s amazing that only five years ago, in January 2002, our loonie hit a record low of 61.79 US cents.

Helping the dollar's rise over the past few months was a Statistics Canada report that the economy grew by 0.2 percent in July, the same rate as in June.  While the rising currency has been a boon to cross-border and online shoppers, it has also hurt Canada's manufacturing sector, concentrated in Ontario and Quebec, and anyone else competing for sales in the U.S. There have been nearly 250,000 manufacturing-related jobs have been cut over the past three years in an attempt to reduce costs.

"The sectors that obviously get hurt the most are the ones most linked to the United States. The forest products sector has certainly been very hurt by this, (also) the smaller auto parts companies," said Scotiabank economist Carlos Gomes.

We’ll keep a close watch on these economic forces as there eventually may be some consequences to our local market. We’ll just have to wait and see.

Have a great month everybody and Happy Thanksgiving!

P.A.