2023 – All Change & More Of The Same

Merry Christmas & Happy Holidays to each and every one of you. It’s hard to believe it’s mid-December already, which means this is my final long-form real estate update of 2022. The last twelve months contained the most volatile real estate market we’ve seen in years, with much of the violent upside already undone by prices returning to levels seen over a year ago.

So, what do we expect heading into 2023? More of the same. The biggest factor in the Canadian and British Columbia real estate markets remains Federal and Provincial interventions in the markets. It’s a shame that this requires a little more ‘political talk’ than a usual market, but I’d be failing to advise my friends and clients well if I didn’t at least attempt to outline the interventions and their potential outcomes moving into 2023 as they remain a significant influence in our markets. I’ll start with the Federal side of things and wrap with the significant Provincial changes; as you’ll see they vary significantly in their impact, I’ll score each change with my own perspective on how much they’ll matter following a brief explanation.

Interest Rates – ‘It’s Like Putting A Humidifier and Dehumidifier In The Same Room’

The recent pull back in real estate is seemingly disproportional from fundamentals, with interest rate hikes by the Bank of Canada bearing the bulk of responsibility for the volatility we’ve seen. Following years of ‘cheap money’ inflation ‘ran hot,’ the Bank of Canada are trying to combat this with surging interest rates. Unfortunately I agree with a number of thoughtful economists who hold little faith this will do enough to return us to the BoC’s mandate of 2% inflation when the Federal government continue to announce new projects of hundreds of millions of dollars on an almost daily basis.

In the words of CIBC’s Benjamin Tal, “If you look at spending, it’s rising a bit too strongly for my taste. If you have fiscal policy rising and monetary policy trying to slow the economy it’s like putting a humidifier and dehumidifier in the same room and seeing who is going to win… If you go back to the 1980s when they won the war against inflation, it didn’t happen until fiscal policy joined the battle.”

Evidenced by the constant announcements of new spending initiatives, fiscal policy has not yet ‘joined the battle.’ As a result, these hiked interest rates have done little to cool inflation, have hindered affordability, and have cost average Canadians hundreds of thousands of dollars in home equity. More and more Canadians are realizing this so I do anticipate more pressure put on the BoC to slow the hikes, with them at least plateauing by mid-2023. If a Federal election is called in 2023 perhaps we will see some pull backs on the interest rates at that time too. I fully expect interest rates to remain the #1 factor impacting Canadian real estate next year.

Impact Factor – 9/10

Foreign Buyer Ban – A Storm In A Teacup

A number of years ago a section declaring citizenship and/or residency was added to the standard contract of purchase and sale (offer) contract in British Columbia. Over the course of hundreds of transactions I can count on one hand the number of times I’ve seen the ‘non-resident/citizen’ box initialled by the buyer. We’ve also had a ‘foreign buyer tax’ and ‘speculation and vacancy tax’ across many of British Columbia’s real estate markets for a couple of years now, discouraging foreign buyers from purchasing residential property.

As a result, this Federal legislation is a bit of a ‘storm in a teacup’ for us here in British Columbia. It is not yet even clear how much of the new legislation will be enforced and we expect a number of broad exemptions. This change seems to be more about posturing than actually making a tangible difference over the two-year term of the ban, starting in January 2023.

Impact Factor – 2/10

Anti-Flipping Tax – Just Another Layer Of Complexity

Also taking effect in January 2023, the Federal government is attempting to ‘crack down on real estate flipping.’ The motivation for this seems to be to stomp out short term speculation in the real estate market. As with the above foreign buyer ban there were already additional taxes on the books to try to combat this issue, with the CRA pursuing homeowners that ‘flip’ for either business income or capital gains. The primary change with this new legislation is eradicating the ‘Principal Residence Exemption’ for homes owned for less than 12 months. There will, however, be many exemptions to the taxes including life events like the death of the individual or a related party, an addition to a household, breakdown of a relationship, a threat to personal safety, serious illness or disability, work relocation or termination, insolvency or destruction or expropriation of the home.

I anticipate that neither this anti-flipping tax nor the foreign buyer ban will have much impact in the market at all, but they do make good headlines. It’s another layer of complexity though, and if any of our clients are concerned about whether or not these changes will impact them our advice will be to speak with a professional accountant as each situation can differ significantly. When in doubt, assume you’ll be taxed!

Impact Factor – 2/10

Ban on ‘Exclusive Listings’ – Ontario-Centric Realtor Protectionism

Although this isn’t a change from the Federal government or Bank of Canada, it is a change that may impact real estate markets across Canada. The Canadian Real Estate Association (CREA) proposed this change to take effect on January 1st 2023 and then conceded to the negative response received from their membership, which consists of every ‘REALTOR®’ in Canada, to take a vote among members in April 2023. At the risk of offending friends in organized real estate, I do think the announcement of this policy was a lesson in how not to make change and I was glad to see it kicked back to the membership.

Will it matter in British Columbia? Significantly less than it will in Ontario. Real estate practices vary significantly across Canada, with British Columbia being an outlier in not permitting ‘limited dual agency,’ which allows a Realtor to represent both buyer and seller in an agency relationship and retain both ‘sides of the fee’. This potentially incentivizes more ‘doubled enders,’ which led to more exclusive listings for a period of weeks prior to hitting the national multiple listing service database. There are many legitimate reasons for exclusive listings however, and the negative feedback seemed to be primarily motivated not by greed but by agents genuinely concerned this reduces consumer options, in spite of exemptions having also been proposed. Our final sale of the year was an exclusive listing, a decision made purely on the client’s best interests.

Impact Factor – 1/10

Rental Restrictions Are No More – Benefits Some, Hurts Others

Moving on from the Canada-wide changes for 2023 we transition to some genuinely significant Provincial changes here in British Columbia, many of which were launched this past month. We’ll start with one change I’m surprised hasn’t received more attention in recent weeks, the end to long-term rental restrictions in strata properties. It’s difficult to predict how this is going to impact the market overall but a few scenarios do spring to mind when trying to evaluate this policy change:

  • Former ‘rentals allowed’ stratas used to benefit from disproportional interest from real estate investors, this change may see their values fall in line with other comparable complexes.
  • Former ‘no rentals allowed’ stratas, particularly older/cheaper complexes, may see increased demand as real estate investors attempt to purchase cash-flow investment properties.
  • Buyers of ‘no rentals allowed’ stratas like the above may be frustrated with more rental units in their complexes. Two potential outcomes here, among many, may be a perceived drop in ‘pride of ownership’ and even preemptive maintenance spending as investors seek to keep their monthly expenses low.
  • Owners that previously were unable to keep their properties as rental properties will now be able to rent them out, they will no longer need to prove ‘hardship’ to the strata. This may free up a number of owners to make a move happen where previously they were unable to.

There are so many scenarios this change touches that it’s nearly impossible to get a sense of the macro level impact on property values. One thing that is clear though is that it may see an increase in available rental stock, which may even put downward pressure on rent prices. This change is a complex one and incredibly difficult to predict exactly how it will play out.

Impact Factor – 6/10

Age Restriction Options Reduced – One Size Fits All, Apparently

For years strata age restrictions have been tested in the courts and seemingly 55+ years of age was the only consistently upheld strata bylaw. Other common age bylaw restrictions, i.e. 19+ and 45+ were fairly regularly defeated in court. This has now been enshrined in legislation, with many stratas already responding to the change by holding an emergency special general meeting to increase their age bylaws to 55+ or to remove them entirely.

Undoubtedly this will also benefit some and harm others; for example if someone in their 20s had purchased a condo that was 19+ that has now voted to increase their age restriction bylaws to 55+ the value of their property will most likely be negatively impacted by this change as they have fewer potential buyers for the home. Equally, if a homeowner in an age restricted complex now has no age restrictions on their property they may have seen a jump in value. Similar to the rental restriction change, this will open up more options for real estate consumers in British Columbia, but not without impact on others who did their best to make decisions based on the restrictions of the time.

Impact Factor – 4/10

Home Buyer Rescission Period – Would Have Mattered A Year Ago, Not So Much Anymore

One of the biggest challenges of the last two years’ real estate markets in the Lower Mainland was the reality that going ‘subject free’ was almost a requirement to win in multiple offers. As a result buyers were often given just 15 minutes in a home to decide whether or not they wanted to purchase the home without a home inspection or appraisal. Many subjects were able to be safely handled in advance, i.e. title review, strata document review, property disclosure statement review, etc. but home inspection and financing/appraisal do take time.

A subject free, ‘deposit in hand’ offer was a firm contract, there was no backing out for the buyer without significant legal and financial repercussions. Now that the heat is out of the market with subject free offers and multiple offers being incredibly rare it’s fair to say the BC Government responded more than a little late by adding a three business day rescission period and an associated cost if the buyer chooses not to proceed with the purchase of .25% of the total purchase price.

Other than complicating some of the paperwork this will have very little impact on the market as we’re regularly seeing a more historically normative seven to ten day subject removal period for standard subjects, which gives more than the 3 day rescission period reserves. With subjects being present in these contracts the rescission fee will not apply if the buyer walks on the basis of standard but vague subject clauses. The fee will also not be held in trust, and the provincial government seems to be encouraging sellers and buyers to handle this directly, which will be a mess if it ever does come into play.

Impact Factor – 2/10

Land Owner Transparency Registry – Owners Can’t Hide Behind Corporations or Trusts Anymore

November 30th 2022 was the deadline for land owners holding land in trusts or corporations to register their interest with the Land Title & Survey Authority of BC. Announced in 2021 as an anti-money laundering effort the registry will be publicly searchable. The nature of the registry does certainly increase transparency, whether it will impact money laundering will need to be seen. The impact on the day to day real estate consumer will be low, it’s certainly not enough to reduce demand or increase supply.

Impact Factor – 1/10

If Your Head Is Spinning, You’re Not The Only One

That’s a lot of change, isn’t it?! We’re doing our best at the David Smith Homes Group to keep up on all of this and to consider how it may impact our clients. As I said at the beginning, it’s a shame to have to end the year with a post that some will perceive as overly political, but frankly I don’t know how to best advise our clients without taking these things into consideration – I’m not being overly political if politics continue to have such an influence over markets. I also don’t believe this is an inherently negative article, I did attempt to give an honest summary of the various changes and their potential outcomes.

Part of the problem with central planning in general is that inevitably it leads to more and more intervention, trying to balance out one decision with another. As a result bureaucracy increases, as do the costs associated with it; some citizens benefit while others suffer; and volatility increases while predictability decreases.

It seems though that at both the Federal and Provincial level we have individuals who genuinely believe they are intelligent enough to manipulate the markets to their ends. I do not expect this kind of interventionism to stop anytime soon. In the meantime, we will continue to do our best to stay ahead.

If you’re interested in discussing how any of the above may impact your situation specifically, we’d love to hear from you and will happily free up the time to discover some answers together. Never hesitate to reach out directly to me at david@davidsmithhomes.ca or 778-246-4344.