Prices Can And Do Fall, Hard
A report from the Toronto Star in Canada. “Re-sale home prices in the Toronto region dropped 12.4 per cent, or about $110,000, year over year in February. The average price fell to $767,818, from $875,983 for all housing categories, including detached, semi-detached, town homes and condos. The number of sales also plunged nearly 35 per cent last month compared to Feburary 2017 — to 5,175 transactions from last year’s record 7,955, according to the latest statistics from the Toronto Real Estate Board. The sluggish start to 2018 is what the real estate board says it predicted after the extraordinary Toronto-area market peak in the first four months of 2017. Last April, prices topped out at an average $920,791 — 24.5 per cent above the previous year.”
“Sales have since been declining because that month the Ontario government took cooling action by introducing its Fair Housing Policy, including a foreign buyers tax, said Jason Mercer, TREB director of market analysis. In Newmarket and Aurora, sellers are still lagging buyers in their expectations of what homes will fetch, said Richard Gibb of Century 21 Heritage Group. ‘You still are seeing those housing prices based on last year’s sales. There definitely is a large number of listings that are way over-priced,’ he said. ‘There are a lot of homes that would probably sell, but (buyers) know the house is overpriced so they’re going to wait,’ he said.”
From Curbed. “Canada escaped the global financial crisis in 2008 unscathed relative to much of the developed world, but after 15 years of virtually uninterrupted home price appreciation, America’s neighbor to the north might be cooking up a financial crisis of its own. Loose lending has helped create a housing bubble to rival that of the U.S. in 2006, and with household debt in Canada being among the highest in the world, Canadians have little room in their budgets to absorb rising housing costs.”
“The next year will be telling because unlike in the U.S., the interest rates on most mortgages in Canada reset to the current rate every five years, and 47 percent of Canadian mortgages will ‘reset’ within the next year. ‘We’re basically in a correction now, which most people believe will be a soft landing,’ said Hilliard MacBeth, author of When the Bubble Bursts: Surviving the Canadian Real Estate Crash. ‘I’m pretty sure it’s not going to be a soft landing. It’s going to be a crash.’”
From Macleans. “Real estate agent Paula Minuti knew the housing market had reached a turning point. The problem was her clients refused to accept it. In May 2017, Minuti listed her clients’ home in York Region, a collection of suburbs just north of Toronto. Just a few months earlier, homes in the area were selling in a couple of days for tens of thousands of dollars—or more—over the asking price. But this house had sat on the market for eight whole days without any offers. Now a bid had finally arrived, just shy of the listing price.”
“Minuti urged her clients to accept it, pointing out that negotiating power in the market was shifting to the buyers. Her clients refused, sending it back with a request for an additional $45,000. Minuti walked the counter-offer to the buyer’s agent, who was waiting outside while his clients sat in their car. The agent did a double take and went to the car to inform his clients. They started the engine and sped away in a fury, leaving their agent dumbfounded at the curb. ‘They were pissed,’ Minuti says. No amount of pleading over the next few days could bring them back. The house sat on the market for two more weeks before another offer came in. It was $15,000 less than the previous one. This time, Minuti’s clients took it.”
“This is the new reality in many parts of Ontario. After years of booming prices and a few months of complete insanity, the housing market in many cities is falling back to earth. The average home price in Aurora, Markham and Vaughan has plummeted more than 30 per cent since last April, whereas sales fell more than 60 per cent. Prices in Richmond Hill, meanwhile, have dropped a whopping 43 per cent from the peak. The experience of York is a microcosm of what a wider housing crash in Canada might look like. It illustrates an obvious truth that many Canadians have either forgotten or never had to consider: home prices can and do fall, hard.”
“‘For five years, they were basically our bread and butter,’ says Sylvia Morris, a real estate agent who specializes in Unionville, an area of Markham. Foreign buyers, typically from China, would purchase four or five houses at a time. ‘This time last year, I’d put a property on the market and within two or three days, I’d have 10 offers on it,’ she says. Morris often participated in transactions where buyers never even visited the property; their agents sent video footage instead. Minuti saw countless local clients repeatedly shut out of bidding wars. ‘The offers I would get would just blow everybody out of the water,’ she says. ‘I’m talking $150,000 or more over asking.’”
“Domestic investors and speculators could be just as aggressive, though. ‘It was just off the charts how many people were buying investment properties,’ says Realosophy president John Pasalis.”
“Getting caught in the frenzy caused problems for aspiring landlords, Pasalis notes, as prices escalated and rental income no longer covered the carrying costs. Last year, 95 per cent of all investment properties purchased in 2016 were losing money each month, Realosophy estimated. ‘When you see people buying investment properties where they’re losing $2,500 a month, it tells you people have this belief that prices will just keep going up forever,’ Pasalis says.”
“The notion the market could only move in one direction was dispelled by the Ontario government’s Fair Housing Plan in April 2017, which imposed a 15 per cent non-resident tax on homes sold across the Greater Golden Horseshoe. More than anything else, the plan changed the psychology of the real estate market, cutting through the speculative mentality that was causing prices to rise more than 30 per cent each month. ‘John, who asked that his real name not be used, purchased a home in the GTA for $1.3 million in June. An appraisal was conducted soon after. ‘It came back short. Very short,’ he says. ‘I had a small heart attack.’”
“He borrowed $300,000 from a private lender at nine per cent interest under a one-year term, and found tenants rather than flip the property. The rent doesn’t cover the carrying costs, so he’s losing money every month. ‘I probably got ahead of myself on this one,’ John concedes. He hopes to refinance later this summer with an alternative lender at a more bearable interest rate.”
From the Vancouver Sun. “The speculation tax, calculated at two per cent on assessed value, would levy $20,000 on a $1-million recreational property. But a British Columbian with an income of $100,000 a year would only get back the $7,000 or so that he or she would be paying in provincial income taxes. When I raised that likelihood in a column last week, I heard from numerous British Columbians concerned that they might be facing a big bite from a tax that was supposedly crafted to target foreign and out-of-province speculators.”
“From a Vancouver Island resident with a condo in Vancouver: ‘If the proposed speculation tax proceeds as you describe, the two-per-cent tax will far exceed the B.C. income tax that we normally pay. We will have no choice but to sell our Vancouver condo. We’re not speculators. We simply wanted to enjoy a few days a month in the city we used to live in, in the comfort of our own condo.’”
“On the problem for seniors with recreational properties that have been in the family for years: ‘If they pay zero income tax because their annual income is low enough to warrant no tax — i.e. married couple making around $25,000 or so — they’d never recover the amount.’”
“From someone with a place on Bowen: ‘Kelowna, the Gulf Islands and Bowen Island have many vacation or second-home properties and this sudden change may have a sharp negative impact on property values as families scramble to part with a property they can no longer pay the annual taxes on. In the small island vacation home areas, often the most expensive homes such as waterfront are second homes.’”
