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A Bubble, Eh? Scotiabank’s “Very Pessimistic” Outlook Is Real Estate Prices Rise 10%

Canadian real estate is so bubbly a large bank sees prices soaring in a downturn. Scotiabank (BNS) reported earnings today, filing the bank’s macroeconomic forecasts. These forecast scenarios help to determine outlook, and include a base case, optimistic case, and two pessimistic ones. Even in the bank’s worst case scenario, they forecast home prices will still rise at a breakneck speed.

Scotiabank Is Forecasting A Base Case of Home Prices Rising 16.6%
Let’s start with what the bank thinks is the most probable outcome — the base case. This involves everything carrying on as is, with no improvement or deterioration. In the base case, the bank has forecast annual growth of 16.6% from April 2022. In contrast, they had forecast annual growth of just 9.9% back in January. Higher rates have somehow accelerated their forecast. Which is a little odd since they’re also forecasting the higher end for interest rates.

In The Best Case Scenario, Real Estate Prices Rise Nearly 20%
The best case, or optimistic scenario, sees slightly higher growth than the base. Home prices are expected to show annual growth of 19.5% for April. This is a huge jump from the 12.5% seen in January.

Scotiabank’s Worst Case Scenario Is Prices RISE 9.8%
The worst case scenario, called a “pessimistic scenario” at BNS, involves another downturn. They split this one up into two, and the first one involves short-lived stagflation. In this scenario, home prices fall… uh, whoops. BNS doesn’t actually see prices falling in their worst case scenario over the next 12 months. Prices are seen rising 11.4%, up from the 3% in January. Since the last forecast, a conflict broke out, inflation soared to a multi-decade high, and interest rates are climbing. Somehow this boosted their outlook.

Then there’s the “very pessimistic” scenario for BNS, in which things become unhinged. It involves high commodity prices, financial uncertainty, supply chain disruptions, and people eating each other in the streets. Okay, everything but the last part, but the point is this is a terrible economy in this case. BNS sees this driving home prices 9.8% higher, accelerating from the 3.5% drop forecast in February.

A Bubble, Eh? Scotiabank’s “Very Pessimistic” Outlook Is Real Estate Prices Rise 10%

The strangely high forecast is at odds with their interest rate forecasts. BNS has one of the highest forecasts in the industry and has been outspoken about inflation. Somehow reducing leverage doesn’t impact their outlook.

In the bank’s eat-your-face-off-by-zombies style pessimistic case, prices actually rise. Not a little either but an increase of 9% over the next year. It’s bubbly for mom & pop investors to think downturns make them rich now. It’s another level when a big bank sees the system working that way too, assuming economic downturns lead to 3x the long-term growth average.

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Canada’s Housing Starts Rose 8% in April

There’s some good news on Canada’s housing supply front; the country’s housing starts rose 8% in April.

According to the Canadian Mortgage and Housing Corporation (CMHC), the trend in housing starts was 257,846 units in April, up from 253,226 in March, when they had declined slightly from the previous month.

The trend measure is a six-month moving average of the monthly seasonally adjusted annual rates (SAAR) of housing starts.

“On a trend and monthly SAAR basis, the level of housing starts activity in Canada remains historically high, hovering well above 200,000 units since June 2020 and increased from March to April,” said Bob Dugan, CMHC’s Chief Economist. “The increase in monthly SAAR housing starts in Canada’s urban areas was driven by higher multi-unit and single-detached starts in April. Among Montreal, Toronto, and Vancouver, Toronto was the only market to post a decrease in total SAAR starts, which was driven by lower multi-unit and single-detached starts.”

CMHC uses the trend measure as a complement to the monthly SAAR of housing starts to account for notable swings in monthly estimates and to obtain a clearer picture of upcoming new housing supply. However, the measure should be taken with a degree of caution. “In some situations, analyzing only SAAR data can be misleading, as the multi-unit segment largely drives the market and can vary significantly from one month to the next,” warns the CMHC.

The standalone monthly SAAR of total housing starts for all areas in Canada in April was 267,330 units, an increase of 8% from March. The SAAR of total urban starts increased by 10% to 245,324 units in April. Multi-unit urban starts increased by 14% to 178,092 units, while single-detached urban starts increased by 1% to 67,232 units. Rural starts were estimated at a seasonally adjusted annual rate of 22,006 units.

At a time when many fingers point to a lack of supply as the main culprit behind Canada’s housing crisis, this is some encouraging news for Canada’s market.

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Canadian housing starts rose in April – CMHC

The annual pace of new home construction in April surpassed analysts’ expectations

 

The annual pace of new home construction in Canada was up 8% in April compared with the previous month, the country’s national housing agency has revealed.

Canada Mortgage and Housing Corporation (CMHC) said the seasonally adjusted annual rate of April housing starts was 267,330 units, up from 248,389 in March, with the annual rate of urban starts increasing by 10% to 245,324 units.

Multi-unit urban starts registered a 14% annual rate increase to 178,092, and the pace of single-detached urban starts was also up – rising 1% to 67,232.

The six-month moving average of the monthly seasonally adjusted annual rate of housing starts, which came in at 253,226 units in March, rose to 257,846 units last month, while rural starts saw a seasonally adjusted annual rate of 22,006 units.

The overall seasonally adjusted annualized rate of housing starts surpassed analyst expectations, with forecasts having come in at 246,000 units ahead of the CMHC announcement.

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National home sales, prices fall in April

The news marks the latest stage in Canada’s housing market cooldown

National home sales and prices fell across Canada in April as the country’s housing market continued to cool following two years of record-breaking activity, according to the Canadian Real Estate Association (CREA).

Home resales were down 12.6% across the country from March to April, with the home price index also falling by 0.6% to $866,700. That marks the first time that measure, which accounts for pricing volatility, has declined since April 2020, just before the housing market began its unprecedented pandemic-era surge.

The actual national average home price was around $746,000 in April, CREA said, meaning that figure has now declined for two months in a row after peaking at over $816,000 in February. Still, prices remain around 7% higher than the same time last year.

CREA chair Jill Oudil said in a press release that many housing markets across the country had cooled off “pretty sharply” over the last two months, with the steady climb of interest rates and buyer fatigue two of the main reasons for the slowdown.

On a year-over-year basis, national home sales plummeted by 25.7% after setting a record for the month of April in 2021. The number of newly listed homes declined by 2.2%.

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A record number of new condos in Toronto are selling out before they’re even built

Though the latest stats from April show the beginnings of what might be a downturn in the GTA real estate market at large, it seems that one housing type is still in huge demand, at least when looking at the first quarter of this year so far.

While many stakeholders predict a cooling of prices and activity in Toronto’s ever-more-fervent market sometime this year, the numbers from the experts at Urbanation show that condos, particularly new units, have been selling very well this quarter across the region.

The first three months of 2022 marked the hottest Q1 on record, according to the firm’s latest report, with 8,253 units sold — a big jump of 55 per cent since Q1 of last year.

This is interestingly contradictory to the numbers that the Toronto Regional Real Estate Board reported for April specifically, during which the number of transactions for not just condos but all home types in the GTA plummeted 27 per cent from March 2022 and a massive 41.2 per cent from April of last year.

But, as anyone in Toronto can attest to, new condo buildings have been going up like wildfire in recent years, which would also explain another staggering stat from the Urbanation report: the fact that last quarter’s numbers exceed the 10-year average of new condo sales per quarter by 60 per cent.

With the housing type being the only reasonable entry for many into the city’s ultra-pricey market — that is, for many among the few who are able to get into home ownership at all — it makes sense that residents are vying to get their hands on condos in particular, especially when they are potentially cheaper pre-build.

They are also extremely appealing to investors both foreign and homegrown, who tend to hog multiple homes and sit on them to sell for profit later, or rent it out short- or long-term

This may be why a record high 94 per cent of all the new units in development in Q1 of this year were sold, making available stock hit an 18-year-low.

“New condominium demand has been far outweighing supply during the past two quarters, as total sales far exceeded the total number of units launched for presale,” Urbanation notes.

“Despite the strength in pre-sale demand, the level of construction activity underway in the GTA also declined for the first time in two years.”

Interestingly enough, downtown Toronto had the slowest price appreciation in the GTA for new condos — so unlike us! — at 14 per cent over the last year, compared to 23 per cent in Etobicoke, North York, Scarborough, and the 905.

For resale units, average prices downtown increased by 13.7 per cent year-over year, 21.6 per cent in the outer-416 and 27.8 per cent in the 905.

The price for the average resale condo across the region has also now hit more than $800,000 for the first time, showing just how ridiculous the market here remains.

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Anti-flipping proposal may get bogged down with exemptions

This article will appear in the forthcoming May issue of Investment Executive.

Ottawa’s proposed new anti-flipping rule represents a significant change in real estate taxation, providing the Canada Revenue Agency (CRA) with clarity regarding when profits on a home sale are subject to full taxation and limiting access to the principal residence exemption (PRE).

Under the proposed rule introduced in the 2022 federal budget, an individual who sells a residence within 12 months of acquiring it will be deemed to have flipped it unless they qualify for an exemption due to a “life event.” Any profit from the sale of residential real estate (including rental property) within a year would be taxed as business income and be ineligible for either the 50% capital gains rate or the PRE.

Under current rules, if the CRA thinks you’re flipping houses, they must argue that was your intention, said MaryAnne Loney, a partner with McLennan Ross LLP in Edmonton. Under the proposed rule, “if you’re under a year and you don’t fall into one of those carve-outs — that’s it, you have business income, there’s no further debate.”

Armando Minicucci, a tax partner with Grant Thornton LLP in Toronto, said the proposed rule, with its defined time threshold, gives the CRA “clarity” in deeming profits from a sale as business income.

Tax experts suggest, however, that the anti-flipping rule is unlikely to achieve the government’s stated goal of curbing speculation. Taxpayers will work around the new rule, either by delaying the sale of a home beyond a year or by attempting to qualify under one or more of the eight life-event exemptions.

“There are so many exemptions that it’s hard to see how this is going to apply to too many people,” said Mike Moffatt, assistant professor with Ivey Business School at Western University in London, Ont.

Said Loney: “I think you’re going to end up with a lot of people who are selling at 13 months who might have otherwise sold earlier.”

Under the proposed rule, life events that qualify for exemptions include property sold in cases of death, disability, the birth of a child, a new job, divorce, insolvency, personal safety or natural disaster. The government indicated that details regarding the exemptions would be set out in upcoming rules and that it would consult on draft legislation, which is pending.

The government could still tax profit from the sale of a home as business income if the property is sold after a year or a homeowner is eligible for an exemption, but would have to make the case that the seller was flipping. That can be a heavy burden and take a lot of time, Loney said.

In the budget, the Liberal government argued that “property flipping — buying a house and selling it for much more than what was paid for it just a short time prior — can unfairly lead to higher housing prices.” The proposed anti-flipping rule would “ensure profits from flipping properties are taxed fully and fairly.” The proposed rule would take effect Jan. 1, 2023.

In an email to Investment Executive, a spokesperson for the Canadian Real Estate Association said it was seeking more information about the anti-flipping rule and the implications, but did not say whether the association supported the proposed measure.

Moffatt suggested the exemptions could make it challenging for the CRA to administer the rule: “Whenever you come up with subjective rules that force CRA to make a decision, [the agency] can get themselves into trouble.”

The CRA could take a lenient approach, Moffatt suggested, and “wave through a bunch of borderline cases,” compromising the effectiveness of the proposed rule, or take a stricter approach and risk denying an exemption “that they should allow — and you know that’s going to be a front-page story.”

The government’s proposed anti-flipping rule fits with measures taken in recent years to enforce eligibility rules governing the PRE. Beginning in 2016, for example, the government began requiring taxpayers claiming the PRE to report details of the sale in their annual tax return. Previously, if a property was a taxpayer’s principal residence for every year they owned it, they didn’t have to report the sale on their tax return to claim the PRE.

“The CRA had no insight into what was going on out in the market” prior to the reporting change, Minicucci said.

In recent months, the government has sent education letters to individuals who may have applied the PRE in error, providing the taxpayers with the opportunity to correct or amend their returns.

The PRE is an expensive measure for the government in terms of forgone revenue, said Dino Infanti, a partner and national leader, enterprise tax, with KPMG Canada in Vancouver. Considering the significant gains realized in the housing market in recent years, the government is trying to ensure that those who are claiming the PRE are, in fact, eligible.

Minicucci said the CRA may have some justification for the new anti-flipping rule, “as much as I hate to admit it. By keeping it to 12 months, you’re narrowing [application of the rule] to people who are blatantly in the market to flip properties.”

Nevertheless, the rule could hurt people who sell homes but are not engaging in flipping, Minicucci said. He cites the example of a client who sold a cottage in 2021 within a year of purchase after they realized “cottage life just wasn’t for them.” With the recent run-up in prices, the client sold the property for significantly more than what he paid, resulting in a capital gain. Under the proposed new rule, because the client had sold within a year, the profit from the sale would have been fully taxable as business income.

Moffatt expressed skepticism about the effectiveness of the proposed rule, saying that most speculation occurs on secondary properties, not primary residences, and that the 12-month threshold might not deter flippers. He suggested, however, that the government could expand the scope of the rule in the future.

“I do wonder whether this is the thin edge of the wedge,” Moffatt said. “You start out with a system that would apply to almost no one and then over time start to eliminate some of the exemptions, extend the period from 12 months to 24 months to 36 [months], and so on. I think that’s a real possibility here.”

Minicucci agreed the government could adjust the proposed rule if it isn’t successful. However, he believes rising interest rates could curb speculation even before the proposed rule becomes effective.

“The main goal was to try to calm the market with respect to the constant increases in house values,” said Minicucci, speaking in late April. “After the past few weeks, that probably occurred anyway.”

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Canadian buyers returning to major cities, expecting to spend more: BMO survey

A new home finance survey from the Bank of Montreal has found that, among other things, more Canadians are looking to buy in major city centres as business picks up once again at urban offices.

The survey notes that interest in buying a home in a major city centre has risen 5% since last year. This comes after many Canadians began looking beyond the boundaries of large cities for their housing choices, spurred on by work-from-home arrangements and rising home prices in the last two years. Now, not only are city centres attracting more interest from buyers, but BMO notes that preference for moving further from the city has seen a similar decline.

Those aren’t the only changes in Canadian’s buying plans according to the survey. Across the board, results seem to indicate that Canadians have become increasingly prepared to change their plans in response to rapidly changing housing conditions.

According to Hassan Pirnia, Head of Personal Lending & Home Financing Products, BMO Financial Group, “Financial hurdles are having a major impact on the purchase plans for these consumers in terms of what they will buy and when they will buy. Most understand that they will need to spend more; the impact on timelines is split, with some buying sooner before prices go up more and some holding off to see if prices come down.”

The results of the survey indicate that 68% of respondents were willing to change how much they spend on a home purchase, with 73% of those willing to spend more. The reasons listed for spending more on a home include increased home prices, growth in income, and increased savings because of the pandemic.

More than one-third of respondents expect to pay 10% or less for a down payment and two-fifths are relying on help from family to have enough funds.

Overall, the survey found that the amount Canadians expect to spend on their homes has increased 26% in just the last year with the average spend coming in at $588,000. Buyers in Ontario had the highest expected spend at $790,000 and the highest increase from last year, going up over $200,000.

Finally, more Canadians are rushing for mortgage pre-approval amid the uncertainty of rising interest rates. 30% of survey respondents said they are already pre-approved to buy, up 8% from last year, with another 43%3 planning on getting pre-approved in the future.

“Market conditions are quickly changing,” said Robert Kavcic, Senior Economist, BMO Capital Markets in the report. “We could see much more balanced conditions very soon as the Bank of Canada is expected to raise interest rates further through the remainder of the year. That will bite into affordability and possibly temper market psychology. Longer term, underlying fundamentals are still strong thanks to a firm job market and demographic support.”

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