From lower and middle-class tax cuts, to increased benefits for seniors, to a predicted $30 billion deficit, the budget had many important implications for investors. But one question we always get in our line of work, is how does this affect real estate and condo investors specifically?
Today I will answer this question.
More general to real estate, the budget had some interesting implications worth discussing. First, the government introduced a half million dollar spending measure to help understand the role of foreign buyers on Canada’s housing market. They say Canada, but they really mean Vancouver and Toronto.
This will be interesting, although we’ve maintained that for Toronto the foreign buyer debate isn’t really a consequential one. A CMHC survey of property managers reported recently that foreign ownership rates are in the single-digits in Canada’s biggest urban markets. The Globe and Mail even reported in December that the “overall share of foreign buyers in the Canadian condominium market is still small.” Just on April 7, the Globe and Mail elaborated that “international investors own 3.3 per cent of all condos in the Toronto census metropolitan area.”
A second interesting development is that the federal government believes we need more rental units in Canada. The budget introduced measures to provide low-cost loans to housing developers for the construction of purpose rental housing. This initiative will provide $500 million per year in loans.
The government also added over $400 million to the budget to help CRA crack down on investor tax evasion and loopholes. Specifically for our purposes, CRA has struggled over the years to differentiate between real estate capital gains and regular business income. The former is taxed at a lesser rate. This new funding will likely help clarify these rules.
Finally, there was some important news for big banks. The government appears to have removed the liability of mortgage default from taxpayers in the form of what we know as bailouts, and passed it back to the big banks.
Specifically, mortgage debt risk is now back in the wheelhouse of the big banks with a new “bail-in” regime. The bottom line is that the government is affirming (or reaffirming) that a bank’s shareholders and creditors are on the line for risks, not the taxpayer. In the past, if a bank was failing then the government could provide a bailout. No more. If a bank is going under, to re-capitalize, it must now convert its debt into stockholder shares.
It is unknown how exactly this will play out for investors. Banks may pass on more risk on to borrowers, or implement tighter lending restrictions.
So what does all this mean for the Toronto condo market? Here are three key takeaways for your next chat at the water cooler or to impress your in-laws.
1. Increased scrutiny on foreign buyers could be the initial salvo in an effort to implement higher forms of foreign taxation.
2. The tightening of tax loopholes for investors in relation to capital gains and business tax could have negative implications for house-flippers in Toronto. That said, at CONNECT asset management we advocate “The Wealth Multiplier” strategy. More on this later, but the benefits of this strategy will see capital gains and not business income on the sale of the property. This is because The Wealth Multiplier relies on buy-and-hold investing, which is passive income and thus subject only to capital gains taxes.
3. The so-called “bail-in” clause will force the banks to reconsider mortgage lending and risk. How this will affect investors remains to be seen, but with banks taking on more risk, it is safe to assume that this will impact investment loan regimes.
For us at CONNECT asset management, this continues to add to our belief that the time to buy an investment condo is now. Although we’ve seen a price increase year-over-year, condo’s are still well-priced compared to single-family homes.