Canada needs to review Capital Gains, foreign ownership of real estate
Last year it was suggested that Canadian housing prices were, on average, approaching an astounding 40 per cent overvaluation.
If that wasn’t sufficiently alarming, then three back-to-back reports which came out earlier this month should be sufficient to send ice-cold shivers of fear through every realtor, mortgage lender and mortgaged homeowner across Canada.
Moody’s, the ratings service, completed an assessment of housing prices in those countries – Spain, the UK, Australia and Canada - where housing prices over the past decade have gone well beyond sustainable market fundamentals. Its analysis contemplates a 44 per cent drop in Canadian housing prices, given a severe economic shock.
Meanwhile a subsequent report issued by the Toronto Dominion Bank’s chief economist predicts an annual twi per cent rise in prices over the coming decade. However, this report also concedes that prices are out of whack with underlying fundamentals.
Lastly, the Canadian Real Estate Association has just come out with its own report, bemoaning that while the number of sales nationally has dropped some 16 per cent this February from last, the average cross-Canada price—if sales from Greater Vancouver were excluded—continues to rise.
So what is going on? How is it that despite what is recognized as a growing affordability gap homes are still being bought at vastly inflated prices? How is it that despite a substantial drop in sales, prices are not—as might be expected—falling but are in fact continuing to climb?
The answer is to be found within the very-much changed makeup of the Canadian real estate market.
The "traditional" market - last recognized in the last quarter of the last century – was a pure supply-and-demand model driven by families who wanted to own their own home. Since then, steadily rising prices combined with restricted growth in real incomes combined with tightened-up mortgage regulations have all conspired to exclude more and ever more families from home ownership.
At the same time, speculative activities—encouraged by a generous Capital Gain tax regime and a voracious appetite by non-Canadians for ownership of real estate—have fed each other while driving prices into the stratosphere. Traditional speculation was no threat in the old days of supply-and-demand: you couldn’t sell a property for more than the market was willing to pay, so the secret was in buying as low as possible. Today there’s no ceiling. We hear anecdotal stories of buyers with, literally, trunks full of cash, and asking prices being jumped up by several hundred thousand dollars. Money, apparently, is not an obstacle.
So if we want to return the market to those who should properly benefit from it—Canadian families—what should be done? In my opinion, Capital Gain taxation and non-Canadian ownership of real estate are two areas which require a critical review.
CBC New posted March 15, 2013 (‘Home sales drop 16% but prices stay flat’) citing CREA’s Feb.13 sales report and CREA’s chief economist Gregory Klump.
Dana Flavelle writing in The Star Business section on March 11/13 and citing TD’s Chief Economist Craig Alexander.
Barbara Shecter writing in the March 11/13 National Post (‘Moody’s analysis contemplates 44% drop in Canadian housing prices’) regarding Moody’s Investor Service report on housing.