2016 is nearly over, and it’s been a unique one for Canadian real estate. Between the Vancouver tax, new regulations and the closing of a tax loophole that benefited foreign buyers, this year has been eventful to say the least.
What do all these changes signify?
Depending on where you live in the country, it can mean anything from good news to a cause for concern.
First, let’s look at the big picture.
Prices are still massively on the upswing nationwide. In the 12 month period ended July 2016, house prices were up 9.9% nationwide–and much more than that in Vancouver and Toronto, respectively.
At the same time, that hasn’t stopped market commentators from speaking about a “bubble” and a coming “crash” or “slowdown” in the market. It’s worth noting that commentary of this sort has been commonplace since 2008’s global recession, where Canada’s real estate market stayed relatively stable, even growing, while the U.S. suffered the worst housing collapse in decades.
So, house prices in Canada are still trending positive. However, there are two major legislative changes coming that have analysts nervous. It pays to look at each of these and whether they could mark a shift in the Canadian real estate market.
Changes to Lending/Home-ownership Laws
New regulations brought in by the liberal government in October of this year came as a shock to many observers. While the rules are detailed and complex, they can be summarized as follows:
An increase in the mortgage rate ‘stress test’ (basically, to get a mortgage, you need to prove that you could afford it even after an interest rate increase.
Restrictions on when the government will insure low ratio-loans (that is, loans where the borrower puts little money up-front in collateral).
Anybody who sells their primary residence will have to report the sale to the CRA.
What do these new rules mean for homeowners?
In general, there will be additional scrutiny on anybody buying a home, and it may be harder to qualify for a mortgage.
This is unlikely to massively impact the market demand for homes. Canada averages well over 200,000 immigrants per year. Of those, a certain percentage will end up becoming homeowners. Further, there is a constant population transfer from the smaller cities to Toronto and Vancouver, a fact that spells increased demand in these cities regardless of the new regulations.
Closing Of The Foreign Buyer Income Tax Loophole
Another major change in the Canadian real estate landscape is the closing of a “tax loophole” that allowed foreign buyers to avoid paying capital gains tax.
A capital gains tax is essentially a tax on price appreciation. For example, when you sell a stock, you will pay a certain tax on whatever profits you have made.
Under previous laws, all Canadian homeowners–whether residents or not–could claim one house as a permanent residence. The home claimed as a permanent residence would be exempt from capital gains.
But now, only buyers currently residing in Canada can claim this exemption.
What does this mean for the Canadian housing market?
For the moment, that’s not entirely clear. It does mean that foreign investors will earn less profit on quick, speculative investments–for example, “house flips” and other investments intended for quick re-sale. On the other hand, foreign buyers mainly eying rental investments and other long term holdings will not be affected.
So, what’s the “bottom” line for anybody looking to invest in Canadian real estate?
If you have been ‘on the fence’ about buying or selling a home, the time to act is now
There will be increased red tape in the future as these new regulations are brought into effect, while the strong market performance of Canadian homes is likely to continue.