Goodbye to rock-bottom mortgage rates and easy money
In the weeks and days leading up to Budget 2016, tax experts anticipated some big announcements regarding the Canadian real estate market. Why not? The Liberals campaigned on a promise to loosen the requirements of the Home Buyers’ Plan (HBP) and, more recently, vowed to do something about housing affordability.
Reading between the lines, you can’t blame a would-be homebuyer for hoping for a bit of help. Sadly, it didn’t come in the Liberal’s first budget. At least, not yet.
And those two little words say it all. That’s because Budget 2016 is packed full of promises and nebulous possibilities when it comes to housing.
Half a million spent on foreign buyer data
Perhaps the most blatant measure introduced in Budget 2016 to directly reference Canada’s housing market is the government’s pledge of $500,000 to Statistics Canada to “develop methods for gathering data on purchases of Canadian housing by foreign homebuyers.”
Those in the nation’s real estate market may have been hoping for more a bit more, but this announcement is an important and necessary first step. Unlike Australia, the U.S. and Britain (to name but a few), Canada does not, yet, properly track data that affects housing affordability. While statistics on housing starts, sales and listings are collected, there is still a vast information gap in this area of our economy.
By pledging half a million in funds towards the start of more robust data collection, the newly elected Liberal government is doing two things. First, they are staking their mark on a largely regional problem. Foreign home buyers impact very few markets in Canada, so this data collection will only really impact hot markets like Toronto and Vancouver, as well as vacation property areas, such as Cape Breton and Muskoka—all places known for attracting foreign buyers. Second, it’s sending a signal to provincial and municipal governments that they’re willing to work together. Municipalities and provinces are responsible for collecting local real estate data, but the feds are responsible for census information, including residency information. This commitment to track foreign homebuyers is a step towards three layers of government working together to not only collect data, but create policy to help Canadians find housing that’s affordable in their own backyard.
But the Liberal housing promises don’t stop there in Budget 2016.
Read: 25 ways the federal budget affects you
More rental units will help
As the Budget aptly points out “Not all Canadians can afford to—or wish to own their own home.” But finding suitable accommodation is a priority for this government, so to create more affordable places to live, this Budget 2016 will invest $208.3 million over five years, in an Affordable Rental Housing Innovation Fund. This new fund will be administered by the Canada Mortgage and Housing Corporation (CMHC).
Apparently, the money earmarked for these projects will prompt the construction of up to 4,000 new affordable housing rental units over the next half a decade. Perfect, right? More affordable rental housing will ease the pressure on market rents in cities where vacancy rates are very low (and housing prices are quite high). But here’s the kicker: this is seed money not just to build more rentals, it’s seed money to build and test out more innovative housing models. Developers who want to construct mixed use buildings—with a portion allocated to rental and a portion allocated to home ownership—will be given priority.
Even better is that this new initiative will eventually provide low-cost loans to municipalities and housing developers for the construction of new, purpose-built rental housing. Up to $500 million in loans will be made available each year, for the next five years. This capital will be made available to developers in the earliest, most risky phases of development. Why is this important? Because this incentivizes builders to stop concentrating on condos and start constructing mixed-use buildings. As such, the Liberals anticipate the construction of more than 10,000 new rental units in the next five years.
This is welcome news for anyone trying to establish themselves in one of Canada’s largest cities. Not only will new rental units help ease the rising cost of rent in cities like Vancouver and Toronto, but the possibility of mixed-use neighbourhoods—such as the highly successful St. Lawrence area in downtown Toronto—may mean the creation of “complete communities.” Communities that allow residents to live, work and shop in their neighbourhoods. Done right, this not only creates stronger communities, but helps strengthen local economies, which translates into a stronger national economy.
Residential renovators get a boost, too
The spending doesn’t stop there. Budget 2016 will also provide $208.3 million over the next two years to support the construction, repair and adaption of affordable housing for seniors. The funding will come from the Investment in Affordable Housing initiative and will not require provinces or territories to cost-match these investments.
Here’s the thing: while this funding initiative is nestled under social housing, it’s still unclear as to whether or not it will be provided to the institutions tasked to develop this housing or directly to individual seniors.
At present, the Budget states: this spending is intended to help seniors find affordable and suitable housing or “allow them to easily stay in their homes as long as possible.” It’s this last bit that is wide open to interpretation. Does this mean that seniors can expect another version of the Home Accessibility Tax Credit, a tax credit introduced by the former Conservative government that allowed eligible seniors to renovate their homes, for medical reasons? (The original HACT allowed for a 15% rebate on medical-based renos, up to a maximum $1,500 credit.)
If so, this would certainly allow seniors to stay in their homes longer. As an added benefit, this initiative helps support the home renovation industry in Canada—as any rebate or tax credit on renovations often translates into Canadians pulling the trigger on those remodels. This keeps small businesses working, which keeps people employed and keeps the economy moving.
Can’t ignore social housing and other aid
To this end, we can’t ignore the widespread initiatives within the Budget to improve accessibility and standards of social housing, particularly for seniors and First Nations communities.
- There’s the $573.9 million to be spent over two years to help retrofits and renovate social housing (and address the required repairs while improving efficiency and reduce energy and water use in these buildings).
- There’s $30 million, spent over two years, to maintain rent-geared-to-income for those relying on social housing.
- Another $111.8 million for homeless initiatives across Canada.
- Quebec homeowners impacted by pyrrhotite will get additional help from the feds, who will provide up to $30 million over three years to help with serious and costly structural repairs as a result of the presence of this mineral in their foundations.
- Over the next two years, the feds will spend $554.3 million to address First Nations peoples’ housing needs on reserves. An additional $177.7 million will be spent on affordable housing in the North and Inuit communities.
- $50 million will be spent on various projects to support military personnel and their families, including the construction of military housing across Canada.
Making money in real estate? You’re now under a microscope
The newly elected Liberals showed concern about tax loopholes and tax evasion in this Budget—and this will have extreme implications for those involved in the real estate business.
To crack down on tax evasion and tax avoidance, the feds are investing $444.4 million over five years to enable the Canada Revenue Agency to crack down on tax evasion and tax avoidance. Their expected return for this investment: $2.6 billion in previously lost revenue. The Liberals also pledged $351.6 million over the next five years to improve the CRA’s ability to collect tax owed. The feds anticipate another $7.4 billion in tax debt collected over the next five years.
Real estate investors need to take note. Over the last few years, the CRA has tried to close loopholes when dealing with real estate profit and whether or not it’s classified as a capital gain or business income. This injection of money will certainly help this endeavour.
Read an explainer on capital gains tax.
Read more on calculating capital gains tax on real estate sales.
Read more on reducing your risk of a CRA audit.
For anyone that invests in real estate—from condo assignment sales, to home flippers, to those with complex transactions involving foreign buyers—now is the time to start talking to a tax specialist.
Ask Home Owner columnist Romana King your real estate question »
Gone is the real estate donation credit
Last year’s budget included a proposal to provide an income tax exemption on capital gains of donated private corporation shares or real estate, beginning in 2017. (To qualify, the cash proceeds from the disposition need to be donated to a registered charity or other qualified donee within 30 days.) Budget 2016 eliminates this tax exemption.
Expect tougher mortgage rules and the disappearance of rock-bottom rates
Finally, there were some promises in the Budget that will impact big banks and lenders and, by way of trickle down, this will also impact homeowner and home buyers.
Budget 2016 introduced a “Bail-in” regime; this would reinforce that bank shareholders and creditors are responsible for the bank’s risks, not taxpayers. While it goes on to explain how banks will do this, the bottom line is that banks have now been passed the baton, when it comes to mortgage debt. Before they could opt to take out CMHC (or Genworth) mortgage loan insurance—even on properties where buyers put more than 20% down at the time of purchase. This shifted the risk from the bank to the taxpayer. If a house forecloses, the bank is paid what is owed through the sale of the home, but any shortfall is covered by the mortgage loan insurance. If, however, there were a rise in foreclosures and a rise in payouts, taxpayers could be theoretically on the line to cover the shortfall, should the insurance premiums collected not cover what is owed.
Read more on the consequences of mortgage default.
This “Bail-in” regime is “in line with international efforts to address the potential risks to the financial system and broader economy of institutions perceived as ‘too-big-to-fail’,” states the Budget.
What does it mean for main street home buyers? It means that with increased regulation and responsibility, banks will have increased costs and risks and they’ll pass this cost onto you, the consumer. So, even though mortgage rates remain historically low, gone are the days of rock-bottom rates. (For more on this read how the recently introduced 10% down payment rule impacted the market.)
Home buyers will probably also see stricter rules when it comes to mortgage applications, as banks try to contend with this shift in who is responsible for a potentially failed loan. That will translate into tougher standards and could mean that buyers who are on fringes—those without good credit scores and credit utilization, those without full-time employment income, or those with higher debt ratios—may find it hard to qualify for a mortgage, never mind getting the best rates.
What was missing in this budget?
Of course, the initial election promise to open up the Home Buyers’ Plan to more than just first-time homebuyers, and allow Canadians dealing with life events, such as work relocation, divorce or the death of a spouse access to the HBP, did not happen.
Nor did an increase in the capital gains inclusion rate, which was speculated to jump from 50% to 66.67% or even as high as 75%.
While home buyers may have wanted changes to HBP, investors and cottage-owners were on the edge of their seats, waiting to hear if a capital gain announcement would increase their overall tax hit. In the end, neither came.
While Budget 2016 didn’t end up helping first-time home buyers, it did hold a few initiatives that will impact the housing market in Canada. Whether it’s residential renovators who may get a bit of a boost this year, through a senior’s home tax credit, or commercial developers who can stay busy by shifting their focus to purpose-built rental and mixed-use developments, to real estate investors who will need to monitor their profit and how it’s taxed, to home buyers who will need to contend with stricter banking regulation that could impact mortgage lending. There was still enough in this budget to remind us: The Liberals are closely watching this nation’s housing market, and, we should expect more to come.
Read more from Romana King at Home Owner on Facebook »