As I approach my first decade in the real estate industry (time flies!) I can’t recall a time like the one we’re in currently. The long and short of it is that there has been increased interference in market dynamics, with governments at all levels pulling and pushing levers, with seemingly little appreciation of just how each decision may compound others. Actions have consequences.
By way of example, imagine you have an investment property, here are just some of the recent changes that have occurred in the last couple of years or are in the process of being passed. Before buying into the anti-landlord narrative that seems increasingly popular, consider what the result of these changes may be (hint: it’s not good for tenants either).
Federal:
- A “flipping tax” was introduced – these sales will now be treated as ‘business income’ rather than capital gains.
- The recently proposed capital gains threshold increase to 66% for all gains in a corporation or personal gains over $250,000 for the sale of non-principal real estate.
- The implementation of underused housing taxes with recent proposed changes.
- Interest rates have climbed spectacularly in response to our inflationary challenges and have not yet pulled back, increasing costs across the board.
Provincial:
- Increased rent controls, making it harder for landlords to keep up with spiralling carrying costs due to increased interest rates.
- A number of ‘enhanced tenant protections’ including a recent announcement suggesting notice requirements climb from 2 months to 4 months (taking many buyers beyond their financing preapproval period).
- British Columbia has implemented a flipping tax (up to 20%) to target what the government labels “profiteers”—those who sell their homes within the first one to two years of ownership.
- Implementation of a speculation and vacancy tax.
- Province-wide implementation of short-term rental bans with further changes to how short-term rental profits will be taxed and further enforcement.
Municipal:
- Short-term rental bans/restrictions were already in place for many municipalities and in many stratas.
- Zoning policies that demand affordable housing be built in unaffordable regions, thus hampering development.
- Increased permitting costs to developers.
That’s a lot of change, and for many property owners it’s proved too much. Until the last couple of months, I’ve never had my phone blow up with ‘Dave, I just want to sell this home as soon as possible’ calls. As the risks to owning investment properties have climbed, and the incentives have dropped, it seems many ‘Mom and Pop’ investors are bailing out and moving their capital to more favourable jurisdictions.
The impact of these sales has been two-fold: 1. Sales inventory has climbed significantly. 2. Residential rental home inventory is being lost.
From a moral/ethical standpoint, I’m more worried about the second impact. I don’t see Mom & Pop investors returning with much enthusiasm until we see significant changes in government, and I also don’t see corporate landlords filling the gap quickly enough, nor do I believe they will be a superior solution to the woes of renters. I spent many, many years as a tenant and I’d much rather deal with ‘Joe’ down the street than ‘Conrad’ in a Toronto skyscraper who has shareholders to answer to and deep pockets to lobby government.
Most of you though are here for my market perspective rather than moral one, so I’ll return to that climb in inventory and the results of that in the market. Sales ratios are dropping, which is reflective of not just increased inventory, but sales numbers tracking significantly below the inventory and in some cases actually pulling back. Over time that puts downward pressure on price and also tends to increase ‘days on market’, leading to less certainty and trickier real estate transactions (i.e. subject to sales dragging on for weeks or even months).
So what does all that actually mean?
I expect there to be interesting buying opportunities for the next two months, at least. I’m hearing from my colleagues in the mortgage space that they’re expecting the Bank of Canada to announce the first interest rate drop in the June announcement, with 70% of economists expecting the same currently. I’m personally not holding my breath, so this season may continue to last even longer, but there’s a good chance of a drop actually happening this summer. When it does happen, it will impact sentiment significantly, and sentiment is what moves markets – fixed rates had already begun pulling back at the turn of the year. Once the buyers get the signal to jump off the fence I expect we’ll see an increase in sales activity to absorb the higher inventory.
Overall, the sheer amount of interference, much of which is well intentioned, has led to enormous volatility and reduced predictability to the market. We’re finding the most important thing for us is to review each client’s needs at an individual basis. Some are choosing to sell immediately, some are purchasing in this dip, and others are on hold.
If you’d like to discuss your plans and hear how these actions may have consequences for your decisions please never hesitate to reach out at 778-246-4344 or david@davidsmithhomes.ca.