I'd like to take a moment to respond to a letter you would have received back in June of this year from Shayne Fedosenko, a Pemberton Holmes REALTOR® from their Sooke office. In case you missed it, I've linked to it here, as reprinted on the Pemberton Holmes Facebook page.
Apparently, Mr. Fedosenko, an individual who makes his income from helping others buy and sell real estate (in economic terms a rent seeker), is feeling great concern about the current state of the Victoria Real Estate Board's market territory, in which your constituency falls. He opines that it is not the HST - a tax shift that ultimately benefits his personal business model - that is to blame, but instead feels the new restrictions on how mortgage lenders calculate secondary suite income as it is used to qualify for mortgages has reduced the amount of money available to would-be buyers looking to purchase homes with suites.
He makes several deeply distressing claims: the first, that mortgage amount qualification used to be calculated along these parameters:
"This is the way that it used to be: you could take the suite income, say it was $1200/month and they would add it to your mortgage qualifications as a $200,000-$250,000 increase in your qualification amount, now what they do is take the amount of the rent: $1200 /month, multiply it by the 12 months in a year and add it to your income, making only an extra $ 40,000+ to your qualification amount."In the past, before the current government allowed the Canada Mortgage and Housing Commission to liberalize mortgage insurance products, lenders would not have lent to the extent that Mr. Fedosenko suggests is appropriate. Canadian banks would only lend so that total debt servicing did not exceed 35% of household income. Historically speaking, this translated to home values in the Victoria area growing steadily with inflation along the lines of household income so that an equilibrium of home price to income ratios did not exceed 3.5 to 4 times annual income. Whenever home prices did exceed this equilibrium, like the run-ups in prices that ended in 1981 and 1994, the market would naturally correct back to this equilibrium, usually over-correcting for a short period of time first.
Currently, the Victoria average home price to income ratio as calculated by the Royal Canadian Bank's annual affordability survey pegs the home price to income ratio exceeding 7 and nearing 8. This is unsustainable and not good for the community nor the country. Simply put, mortgage debt obligations are robbing local families of the ability to spend money in their communities on the things that many of their incomes depend on. The Government of Canada must take the correct actions, and they did, through restricting taxpayer exposure to the excesses of the real estate market.
Currently the CMHC is as over-extended in the real estate market as the home owners that Mr. Fedosenko purports to be concerned about. This quote is from a news story on the CBC website appropriately titled Michael Hlinka: Is a Canadian housing bubble about to burst:
"The household debt-to-income ratio has remained on an upward trend ... as debt accumulation continues to outpace the growth in disposable income.
But households aren't the only entity overextended. CMHC, which insures these mortgages, has about $9 billion in equity, while it guarantees - get this - $770 billion in mortgages.
That's more leverage that(sic) we saw from any U.S. bank or lending institution, by the way."Dr. Martin, I'm certain you will agree with me when I say that the Government of Canada is not in the business of bailing out the poor financial decisions of Canadians. This is a slippery slope that we should not tread towards. What's next? Car manufacturers lobbying to bail out the poor credit decisions of their financial arms when they lend to people that cannot afford to purchase new cars?
The second claim, which to me, highlights the questionable ethics of some members of the local real estate industry, mixes market data in an attempt to obfuscate and confuse readers (in this case you) to believe market conditions are favourable to their (industry's) desired outcome. Normally, this means trying to make buyers and sellers, both real and potential, believe now is always the best time to buy and/or sell a home, activities to which they collect "rent" on. In the case of Mr. Fedosenko's use of market data, with regards to his letter to you, he is trying to convince you that current market conditions are much worse than they actually are in an effort to have you take action on an issue in the wrong direction.
Mr. Fedosenko claims that "Last month [May 2010] there were 300 home sales on the Lower Vancouver Island with 4700+ listings." According to the data published by the VREB, there were 671 home sales in their reporting area, that is more than 140% higher than claimed. Now initially I thought Mr. Fedosenko may have been referring to single family homes with his 300 number. But it turns out that number doesn't match either as there were actually 364 single family homes sold in May 2010.
Mr. Fedosenko also claimed there were 4700+ active listings at that time. While his numbers still don't match May's VREB reported number (just over 4500, it wasn't until the end of June 2010 that listings peaked at 4700), at least they come within 5%, an understandable error.
Mr. Fedosenko's opinion also differs from the one given by his real estate association's current president, Randi Masters, who noted that current sales volumes "reflect a return to these historically average levels compared to the significantly higher levels seen between 2001 and 2007 when we had a very active market." Masters suggests the market is now balanced, Fedosenko claims "Hundreds of foreclosures [are] coming, about 75% of the home owners could not qualify to buy their own houses (especially with suite)."
Mr. Fedosenko also makes incorrect claims regarding suite vacancy rates. He writes: "Please note that there is a zero vacancy for suite rentals right now in this area." CMHC does not track secondary suite rental vacancy rates. However, their reported vacancy rates for the Victoria area show an over 100% increase in the amount of vacant units, which by the end of 2009 was 1.4%, after several previous years at approximately 0.5%. While we don't know actual numbers, it stands to reason that secondary suite rentals would have followed a similar trend.
I understand Mr. Fedosenkos' concern for home owners, the local real estate market and the impacts valuation changes will have on the economy. I've been writing on this very subject, much to the chagrin of many local real estate industry actors, for several years now. I am deeply troubled by the extent to which certain actors will go to maintain the unsustainable market status quo and do further damage to the financial well being of Victoria area families. The writing was on the wall years ago; all you had to do was look to see it. The current government chose the wrong policy options in 2006/2007 and extended mortgage insurance to people who would otherwise not be able to over-extend themselves because the banks would not lend to them.
This is Canada's version of a sub-prime mortgage crisis. Any attempts to prolong the real estate market at current price levels will only deepen the impact of an unavoidable market correction. We should have learned from the experience of our American cousins. The current government allowed similar activities to occur in our mortgage and real estate markets that will have profound financial consequences for Canadian households and the broader Canadian economy. We need only look south of the border again now to learn a new lesson: four years after their market began its much needed correction, no government intervention has been effective in preventing catastrophic financial losses for banks or homeowners; instead, government actions simply "doubled down" on the debt loads and will lead to higher taxes and restricted economic growth over the long term further hurting households and the broader economy.
I implore you not to encourage further exposure to the grave financial risks inherent in the Canadian real estate market for either the Canadian government or Victoria and area households through excessive and unsustainable debt. If you feel compelled to further investigate real estate related issues, I encourage you to read up on the Competition Bureau's upcoming tribunal challenge against some of the Canadian Real Estate Associations' business practices that they (Competition Bureau) have deemed anti-competitive.
Thank You,
House Hunt Victoria
To the readers: if you are as concerned as I am in regards to this issue, please feel free to cut and paste my letter above or write your own letters to your local Member of Parliament. Here's their contact info:
Esquimalt - Jdf Hon Keith Martin
MartiK1@parl.gc.ca
250-474-6505
666 Granderson Rd
Victoria, BC V9B 2R8
Victoria Denise Savoie
Savoie.D@parl.gc.ca
250-363-3600
970 Blanshard St
Victoria BC V8V 2H3
Saanich – Gulf Islands Hon Gary Lunn
lunng@parl.gc.ca
250-656-2320
9843 Second St
Sidney, BC V8L 3C7
54 comments:
I have a question about negative equity ... Let's use a hypothetical case where someone buys a house for $550K and after 5 years has paid off $40K. However, during those 5 years the house resale value declines (due to a market conditions) by 20% such that the resale value is now $440K. At mortgage renewal time, would the owner be obliged to "cough up" the $70K difference between the remaining mortgage amount and the resale value? What other options are available to them to renew their mortgage? How does CHMC insurance factor into this?
I'm concerned about what some homeowners might be soon facing if they bought a house in the past few years with a 35 or 40-year amortization with low or no money down.
HouseHuntVictoria: Thanks for the great article/letter to MP Kieth Martin and for clarifying the issues raised by Shayne Fedosenko from Pemberton Holmes.
DavidL,
Cheers.
You have to ask yourself what would be in the banks' best interest should this situation occur. If the mortgagee is having no trouble making the payments, why would the bank want to get the difference all at once and potentially force the unit into foreclosure?
That said, and I'm no expert on mortgage contract law, the bank potentially could do exactly that (cash call). If the property goes into foreclosure and is CMHC insured, CMHC could be obligated to pay the difference between the sales price and the mortgage amount owing.
Why would the bank foreclose?Foreclosure= no mortgage payments. For CMHC foreclosure=liability that would eventually be written down. Borrowers in this situation have few other places to turn. Do you think they can get fully discounted rate with negative equity? No way; they pay listed rate.
HHV great letter BUT are you really, I mean really worried that some dumbass realtor misquoting figures/stats and sounding so damn desperate is going to convince the Govt. to revert back to their old ways in hopes of saving the masses of idiots that will be under water soon???
As I said great letter but you wasted an hour of your life their pal.
Oh and Keith Martin is a black sheep in Ottawa....nobody is going to listen to a thing he says.
Anyway I do love the sheer distress and desperation in the scumbag realtor's letter. Bought a smile to my face on an otherwise gloomy day :)
@DavidL
I am no expert but I believe this is how it works. Correct me if I am wrong.
At renewal, the bank doesn't make you re-qualify, but you won't be able to negotiate the rate or move the financing to any other lender, so you are stuck paying posted rates.
Assuming that the owner is still making payments, the bank will not call the loan. You continue to make payments based on a mortgage of $510K even though the property is only worth $440K. Sucks for the owner.
If you balk and walk away, we have recourse loans in Canada unlike The States. The bank will sue you and force you into bankruptcy to recoup the loss. If they cannot recoup all of the loss then they get the rest back from CMHC.
A lot of people think that CMHC is there to protect the buyer since the buyer pays the premium, it is not. CMHC is to protect the lender.
Now if you were in a situation where you had to sell (transfer, divorce, yadda yadda) and you owed 70K more than the house sold for, you can either declare bankruptcy, or continue to pay a mortgage payment on 70K even though you sold the house.
So typically there wont be a cash call (except for some funky HELOC mortgages) your options are:
1) Bankruptcy
2) Continue to pay at a high rate on the full mortgage amount
3) Sell, and continue to pay a mortgage on the difference you still owe.
The idea that as a tax payer I would be supporting CMHC making housing so unaffordable that my family cannot afford to buy a house is crazy. We are all on the hook for the decisions of the uninformed.
It is my understanding that CMHC insures the first 20% of the loan. If the market was to drop 20%, the bank would be on the hook for the costs of liquidating the property.
Nice letter HHV. It's scary how much suite income has come to mean. The authorities have really created a big problem letting it get so out of hand over the years. Wait till people start to die in these crap joe home owner I can build a suite cuz I watched flip that house. I wonder how many even have insurance covering the people downstairs, It's crazy, especially in Greater Victoria.
Keith Martin isn't even in the Self-servative caucus anymore, so I doubt the Harper zombies will listen to anything he has to say.
The thing I loved about Fedosenko's facebook letter was the desperation in its tone....statistics be damned! The anecdotal about the panicky realtors on the gold course was priceless stuff....
Sweeeet!
:-)
@HHV, Robert Reynolds - GBA, and others - thanks for your explanation!
I was thinking about CMHC, it is run as an insurance company but it is backstopped by the taxpayer. In my industry
(I sell life/disability/critical illness/health Insurance) *shameless plug*
insurance companies have to keep a set amount of reserve capital to pay claims (about 200% of expected claims in a given year). And even if this is not enough, there is an organization that backstops the insurers in case they are insolvent Assuris I am going to try and do some digging to see if CMHC has the same requirements as a Life Insurance company.
Basically, I am wondering if the premiums paid by buyers is enough to fund the claims if there were a catastrophic crash and huge foreclosure rates. Or if there is nothing in the vault but the Canadian Taxpayer.
CMHC will only have to pay out where there is a difference between the amount owing on the mortgage and what the final selling price is. Keep in mind that it's not like the US where individuals just walked away from underwater mortgages. In Canada the power of the banks to ruin someones life (through bankruptcy and creditor protection) is much greater than in the US.
Interesting
From CMHC annual report 2009 p. 123
5MB PDF
CMHC uses Dynamic Financial Analysis (DFA) to model the impact on the Insurance Activity of adverse
economic shocks, including recessions. Recessions can involve a combination of adverse mortgage interest
rate impacts, high unemployment rate outcomes and deteriorating house prices, each of which will have an
impact on the Provision for Claims. In isolation, an increase of 100 basis points in the unemployment rate would
be expected to increase the Provision for Claims by about $150 million, while a decrease of 100 basis points
in the rate of house price inflation would increase the Provision for Claims by about $25 million and an increase
of 100 basis points in mortgage rates would increase the Provision for Claims by about $40 million over a one
year horizon. These would be persistent, lasting until the rates revert back to their previous levels.
*emphasis added*
So by my eye it looks like CMHC has 1.276 Billion in reserves as of Sept 30, 2009. and $473 billion in insurance outstanding.
If using their own metrics, if there was a 15% decrease in the average price of a home in Canada there would be $375 million in claims.
(The wording they use is somewhat ambiguous, they say "a decrease of 100 basis points
in the rate of house price inflation" does this mean a 1% price decline or a 1% decrease in the rate of inflation. IE: if prices were going up 5% per year, and they dropped to 4% per year?) I have taken it to mean a decrease in prices.
There has also been a 50 base point increase to VRM's since Sept 2009, so there is another 20 million in claims.
The big one is unemployment rate. We have actually decreased the unemployment rate slightly since the report came out, but I can't help but wonder what impact it has really had graph
between 2008 and now unemployment has gone up 200bp, or $300 million in claims.
No,no,no
You won't be paying a mortgage on the amount you owe. The bank may allow you to have a demand loan for $70,000, but not amortized over 30 years. And that could be a grand a month for the next five years.
Or they may just want the cash and damn it, you gotta find it somewhere or else they will not allow the sale.
As for declaring bankruptcy over $70,000. I think you have to owe a lot more, before you can go for bankruptcy protection.
Or you keep the property and rent it out at a loss of $500 per month (better than the previous option at a grand a month -or you mistakenly think so!) and hope prices go back up. That's the most likely scenario over the next few year for most people. Then you just have to wait until you owe a quarter of a million bucks, then declare bankruptcy.
Highly leveraged property is a bitch on the way down!
Or, lastly you can offer to work on your parent's car or take them shark fishing.
See: Menendez Brothers
You
JustJack: ... you can offer to work on your parent's car or take them shark fishing.
That's hilarious! ;-)
***
Using the same hypothetical situation outlined in my first question ... when the mortgage comes up for renewal - does the CHMC only insure the resale value of the home? Therefore, if market conditions have caused a drop in housing values - then the bank (or mortgage company) would be obliged to get an independent assessment of the resale value of the house in order to get CHMC (or equivalent) coverage. This would mean that the portion of the mortgage above the CMHC-insured amount would be unsecured ... the bank would be assuming all risk on this portion - which is why the might want it paid back right away?
congratulations you just bought a new house....now get in the basement (sorry, in-law suite) and make room for your tenant overlords! What? can't find a tenant overlord...another 400 bucks ought to seal the deal!
http://victoria.en.craigslist.ca/apa/1908012062.html
A mortgage is a money pledge with the home used as collateral. So, in the majority of cases, as long as you make your payments in a timely manner then you're secure for the length of the term.
At the end of the term, you have the option to renew. And so does the bank. Its the money pledge that CMHC guarnteed not the house. So, in almost all cases, if your just rolling the mortgage over for another term, then it doesn't matter if the collateral has gone up, down or sideways.
The only time the collateral becomes an issue is when you miss payments. Only at that point, does the bank and CMHC care about the value of the collateral. Then you will start to get letters from the bank's lawyers and eventually be contacted by an appraiser at your door. But that doesn't mean you have lost your house to the bank - well not yet.
You still have options and the process can take many months. But that can vary depending on what institution you have a mortgage. Equity lenders will MOVE FAST, to get you out of the house and the house sold. Because they were lending based solely on the value of the home - not your income.
The big banks will usually try to make some solution. After all the banks don't want your house - they just want your money.
The bank will sue for the money - they don't sue for the house. If you don't pay, then the bank will get conduct of sale and will be awarded ownership by the courts and then the bank will sell the property to recover the money.
If there is any money left (and chances are there won't be) then you will get whats left. If the mortgage is CMHC insured and the proceeds of the sale do not cover the debt and expenses, then CMHC will pay out the bank and sue the home owner for any loss.
And the costs are BIG, with the high end lawyers billing at $600 an hour.
It varies from lender to lender, but say your late by a few days and the credit union has started the process.
Even if you make the late payment, a $3,500 fee is tacked onto the back end of your mortgage. Its all in the fine print.
Silly you for thinking you out smarted the lender be hard balling for a quarter point in interest.
Its a shark invested financial account sea.
Many of the newer homes have been built with "purpose built" suites. These suites have to pass municipality standards and inspections are done at each stage along with the rest of the dwelling. Thus these are termed legal suites. The property assessment reflects the knowledge of these suites.
However thousands of homes have "illegal suites". Suites that would not meet building code standards or if they do....the owner hasn't applied to make their suite legal.
So question:
What do you think? Do most people claim the revenue from these suites? If they do, they can write off expenses incurred in relation to the suite. i.e. if you have a home with 1600 sq. ft and 400 sq ft of that is the suite; then you will be able to deduct 25% of your costs of say electricity and heating bills,insurance, & taxes etc. As well you will be able to claim $100% of the costs of maintaining the suite such as new cabinets, flooring, paint, appliances etc. All the while though the owner will have to keep in mind that when he re-sells that home....he will have to pay the capital gain.
Alex,
I doubt more than a handful are claiming the income on their taxes. People who have fully legal suites or own purposeful rentals are probably pretty high up in reporting. People who illegal suites or rent out basements/rooms are probably not reporting much of their income.
msr: I believe that you are right. I just brought this up because I have noted no-one talks of it.
There is not much left that the government has not taxed. But with the baby boomer generation coming into retirement, and needing more medical attention.....unless we get a lot more people by way of immigration; the government is going to have to find ways to bring in more funds.
The lottery? Gambling proceeds? Inheritance? Legalizing marijuana? or does it wait until they know that over 60% of homes have suites and go after the owners?
I wonder.
Just Jack:
Its a shark invested financial account sea.
Well, after your "happy" assessment of repossession by the bank, court-ordered sales and lawyers ... I'm glad that my outstanding mortgage is less than 20% of the resale value of my house.
Alexandrahere: What do you think? Do most people claim the revenue from these suites?
I agree that very few people claim rental income from their primary residence. According to friends I know who work for the CRA, income of this type is rarely audited (if unreported) so that most people don't feel obliged to include it as income when filing taxes. As you say, there is also the capital gains "hit" when selling ...
I know a number of people who purchased this spring (before the April 19th rule change) who were only able to qualify for their mortgage based on suite rental potential. It is these people that I'm worried about when it comes to mortgage renewal time in a few years.
I doubt CRA will go after homeowners who make less than $10k net off suite income. It's not worth the bother compared to some more significant back tax cases out there.
I and others are curious about whether his suite stats are within reasonable boundaries or not.
http://www.mortgagecentrecitywide.
com/blogs/cossl/?p=233
3 calculation are done using an example of an 800/mth suite:
max mortgage w/o suite: $292,765 w/ suite (old rules): $414,433
w/ suite (new rules): $326,223
So the old rules allowed a 'bonus' of 122k while the new rules allowed a 'bonus' of 34k. This is a factor of 3.6
As 800/mth would add 122k to the mortgage in the example, a 1200mth would add 183k.
We now know that you can get 3.6 times more added on under the old rules compared to the new rules.
So if the buyer gets a 200-250k 'bonus' under old rules, then they should get between 55-70k under the new rules.
40k doesn't even fall into the range it is supposed to.
The paragraph fails to mention how the numbers were calculated (50% added/80% offset etc), and if one intends to write a serious letter to parliament, it is best to provide accurate figures/stats and not just pull them out of thin air.
Under old rules, folks could get a 40%(!!!) more expensive house just from having a suite, and this is now down to just over 10%.
By the way the Google Street View car is driving around Victoria right now or very recently. They've been digging up Hillside street for a couple weeks, and those pictures are on street view now.
"Please note that there is a zero vacancy for suite rentals right now in this area."
What? How does he know this? Where are the stats kept for suite rentals? That's because there is no such thing.
S2
Please note that there is a zero vacancy for suite rentals right now in this area.
Gee, those people at the UVic housing office must be really confused: http://housing.uvic.ca/ads/index.php.
They are currently listing 95 faculty listing (houses, apratments and suites) and 399 listings for students. Is this the new "zero vacancy"?
Just so you guys know you do not pay capital gains if you declare the rental income on a suite as long as you don't claim capital cost allowance which makes sense. So as long as you don't claim depreciation you don't have to pay tax on the appreciation but only if it's your primary residence.
But if you write off expenses on the property, do you not have to pay capital gains on the portion of the home that you have rented?
For example, if half your home is a suite, and you expense the costs on your taxes. And, if you have a capital gain on the home, is half the home subject to captial gain? Because obviously you were only using half your home for your primary residence.
I don't know.
Again, it's not the house - its the money.
Court action on properties where the mortgage is 20% or less of the value do happen. Now most lenders will try many ways to keep you in your house when you have so much equity in the home. The lenders will offer to add the missed payments to the end of the mortgage, extend your amortization, interest only payments, etc. These options increase the return that the banks get as do your late fees etc. Most lenders have their own full time collection departments and someone has to pay their wages and office costs. So, if your late by a couple of days and get zinged $3,500 you may feel better knowing that you're supporting a growing industry in Canada.
You pay - you stay
You owe - you go
I lurk here often and greatly appreciate everyone's comments, especially the data and graphs that people take the time to produce. For once I feel like I can offer something helpful and accurate.
As I am an accountant I can tell you without a doubt that fairfield is correct. Unless capital cost allowance is claimed there is no capital gain or loss on a personal residence even if a portion of it is rented out. The one exception is in very rare situations where a large percentage of the house is rented out (say 75%) immediately on purchase, CRA could agrue that it was technically bought as an investment property and the personal use is not material enough to make claim it as a principle residence. But even this is rare for CRA to do.
As for claiming rental income on your tax return, it is true some people neglect to report it. Some with intent and others not realizing they are required to. Lately though CRA is using computers to match up addresses to all the people who file a tax return with that address. If they see more than one last name they often investigate the situation to see if there is a suite. I have seen them catch taxpayers this way, reassess their tax returns and then add interest and penalties. I expect to see this type of reassessment more and more as CRA's tax revenues fall and deficits have to be paid for.
To begin with, all income, legal or illegal is subject to income tax. Years ago people did not have to pay income tax on their tips. But now they do. Believe me the government went after thousands of people not declaring tip income. They don't seem to bother with people declaring a "reasonable" amount on their tax form.
Currently the government may well not being going after owners with suites in their principal residence. But when things get tight and more revenue must be made,and where the income is obvious, then I believe they will. Will this be in the next few years? Who knows.
The capital gains goes something like this:
You buy your home for say $600,000. Two years later you put a suite in your home and decide to rent it out. You then must get a realistic appraisal of your home. Make sure you also keep the official assessments. So now after you have put the suite in your house is valued (appraised at) $645,000. Okay, now you rent the suite out for say $700.00 per month or $8,400 yearly. You keep all of your receipts. AT the end of each year you must (even though many don't) declare that income. You have many deductions though. All maintenance and purchases for the suite are 100% deductible. Also if the suite say takes up 1/3 of your house's sq. footage then you may deduct 1/3 of your heating costs, (if you have the same meter), 1/3 of your taxes, insurance, yard maintenance etc.
Now say your rent your place for 7 years and now you decide you need the entire house and no longer wish to rent. You must then get your house re-assessed. This assessment will tell you how much your house went up/down in value since the assessment you had done at the beginning of the rental. Okay, your house has gone up in value now to $800,000. You must keep these records. Five years later you decide to see your home. It sells for say $825,000. The next year when you pay your income tax....you will have to pay the capital gains. Of course there could be a capital loss? Anyway, your capital gain would be the difference between the $800,000 (the assessment you had done when you stopped renting) and $645,000 (the assessment you had done just before your started renting) $800,000-$645,000= $155,000. Now you divide that $155,000 by 1/3 (the square footage taken up by the suite)=$51,666. You pay income tax on 50% of the $51,666 which would be $25,833. This amount minus 1/3 of what your real estate commission/lawyer fees etc would have been. This amount would then be added to your total income for that year.
If you had decided to rent that suite out again and not have sold the house, then you would get yet another assessment of the value of your house before your started renting it.
BCAccountant is right about the capital cost allowance. If you don't use it then you won't have to pay the capital gain. You do however have to report the income and pay the appropriate taxes.
In the last say 10 years, many young or first time buyers purchased huge new/newer homes with purpose built, legal suites.
The ONLY way they could get a mortgage was to include the rent they would be getting for the suite. Many of these people will be declaring that income. I wouldn't want to be them in a few years if they weren't. But they will also be claiming in many cases 40 to 50% of the expenses of running the houses because they have that suite. Part of these expenses remember is the mortgage. In this case, they probably also will be using the CCA, because they are so cash strapped that they need every penny they can get. They will be paying Capital gains one day on 50% of the amount the house went up in value.
Detached home prices in the inner municipalities are still a bit mushy with sliding prices, as home prices have now rolled back to 12 months ago levels. And that's with a drop of 35% in sales volume from the year before. Summer listings, as expected, have decreased and now show a reasonable 4 to 5 months of house inventory. But the trend is established for lower prices.
Because the price drop has been so recent, I don't think that there is any panic in the streets of Fernwood, with the recent drop in prices going unnoticed by most home owners, with the typical home now selling for $570,000 or roughly 6.5% off peak prices. So if you bought your home a year or more ago, you would still say that real estate as a good investment.
But then we look at condos.
Think of condos as a stacked bird cage full of Canaries. And the Canaries are not happy. Over 6 months supply of sky boxes for sale in the inner districts with sale volumes down an eye popping 45% from last year. Prices have rolled past that of 12 months ago with most of the drop in prices happening in the last 60 days. The typical condo fetching $277,500 today as opposed to two months ago for $309,000.
The gap between condos and houses is widening. In order to buy your first detached home in Victoria, most will have to sell their condominium first. And that gap will continue to widen. So, fewer and lower priced condo sales today, will have an affect on the detached house prices of tomorrow.
Last year condo sales made up 45% of the condo/home market. Today condo sales have dropped to 40%. I think the Canaries are feeling panic as they read the newspaper lining their cages.
and how is your Friday
Sorry Alexandrahere that is only true if you claim CCA . You do not have to pay capital gains taxes on the sale of your primary residence unless you claim CCA. There's information on the CRA website about this. Check out "Changing part of your principal residence to a rental or business property". It's basically a kind of loophole that says if you don't claim CCA and don't make any structural changes to your property to rent a portion of it out then it's 100% considered to be your primary residence and is 100% exempt from capital gains taxes.
A note on Capital Cost Allowance or the depreciation of just the improvements to the land.
You are allowed to depreciate the improvements to the land. For decades accountants have warned landlord's not to use CCA, because property values have always increased and there has been a big tax bill when the property was sold. Now, we may be looking at a decade or more of lower and stagnated prices, as the baby boomers move through the cycle of their lives. As they (the largest economic group in the history of the world) switch from buyers of real estate to sellers and from spenders to savers.
Thanks Fairfield, I agreed with you on my last post. It is nice to see you re-surface. We have missed you.
Jack you are so darn (for want of a better expression) funny. I agree with you re the condo scene. Things will only get worse when these new/newer, cheaply built, investor bought condo's have been used up by several renters and the kitchens & baths become dowdy.
Because it was the s/s appliances,granite counters and shinny baths that made the sales. In a few years when the polish wears off, these 700sq ft 2 bedroom condo's will be competing with somewhat older owner occupied updated 1100-1400 sq ft condos with large contingency funds. Guess which ones will sell for more?
Agreed, Just Jack ... your writing style and choice of words makes me smile. Also, your insights and knowledge of the Victoria RE market are fascinating. Thanks ...
"I expect to see this type of reassessment more and more as CRA's tax revenues fall and deficits have to be paid for."
Interesting speculation. If this is true, there are tens of thousands of homeowners in BC who should be quaking in their boots.
Interesting comments on the Calculated Risk Blog.
Home buyers remain optimistic about appreciation
In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.
With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.
“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.
Month-to-Date Market Statistics
Posted by
Aug 23 2010
Monday, August 23, 2010 8:00am:
MTD August
2010 2009
Net Unconditional Sales: 301 764
New Listings: 672 1,094
Active Listings: 4,243 3,509
Much appreciated Marko. So it appears sales will be around 400, and listings are still staying high. Still pointing to further price drops?
Good Monday morning all.
There was more activity last week than in the previous three.
Here are my stats: 16 Aug - 22 Aug
SFH - min two beds, two baths priced between $375K and $775K and in the core municipalities of Victoria, Vic West, Oak Bay, Esquimalt, Saanich East and Saanich West.
SOLD: 21
NEW: 21
PC: 31
OM: 13
There were over twice as many sales last week than the previous week.
Broken down to areas the sales were:
Esquimalt 0
Oak Bay 1
S.W. 3
Vic 8
S.E. 9
The average original asking price was $614,809 and the average selling price was $576,190. SFH sold for almost 94% of the original asking price. The weeks previous average selling price was $550,800. So the average price of a home sold last week was up $25,390 from the week previous.
Some notable sales were:
2374 Cookman: original price: $659K sold for: $548K, down by $111K. The house was assessed at %595K.
3038 Foul Bay $599K - 475K down 124K
3282 Wicklow 800K - $680K down 120K
Some price reductions:
820 St Charles 825K -699K down 126K
1329 Monteray 769K - 699K down 70K
1580 Noel 695K - 619 K down 76 K
1617 Michelle 719K - 649K down 70K
Out of the 21 houses sold, 11 were listed as having suites and two were listed as having "Excellent suite potential".
Condos
Minimum 2 beds, between $260,000 and $625,000.
Oak Bay: All
Esquimalt: All
Vic West: All
Victoria: Most areas (not downtown)
Saanich East: Most Areas
Saanich West: Gorge,Tillicum and Interurban
SOLD: 5 (2 were townhouses)
NEW: 16
PC: 14
OM: 6
The average selling price of the two townhouses: $454,500
The average selling price of apartment condos: $285,333.
The town houses sold for slightly more than 95% of asking and the apartments sold for just under 95% of original asking price.
I think sales will be closer to 500...probably 120 sales this week and about 80 in the first three days of the following week.
Marko
Wow, its mind boggling really. When you think of it, within my criteria in the core municipalities of Victoria, Vic West, Oak Bay, Esquimalt, Saanich East and Saanich west there were only 26 sales last week and in the last three weeks (since the 2nd of August), there have only been 61 sales. There has been 301 Sales reported in the Greater Victoria area since 1st of Aug. So, for the most part, 80% of the total sales
have been in the outer parts of the Victoria area i.e. Colwood,Langford,Sooke,View Royal, Central Saanich etc. As well as any houses selling for less than $375K or more than $775K.
The 'back-of-the-envelope' math is 14/21 business days completed in the month, with a projection of 452 sales.
There are always a few, no matter what type of market:
2740 Thompson Ave.
originally listed June 18 for: $800K
Price changed July 19 to: $790K
Relisted as new Aug 21 for: $770K
Price INCREASED next day to: $780
Nothing makes me want to go see a house that is:
- on a busy street
- priced $170K above appraisal ($607K)
- been on the market for two months
- increasing prices in a falling market.
Equally loony is the house a block over on Estevan (2407) that has had open houses every single weekend since listing on July 15th. Asking price $940K, appraisal $595K...I understand some upgrades, but almost a million dollars for a 97 yr old house with an original foundation on a busy street to Willows beach? Lunacy.
I see 515 Burnside is for sale again. MLS 282641. Anyone have the history?
Has anyone seen the recent movie "Date Night" with Tina Fey and Steve Carrell? I just saw it on DVD and thought there was a good moment in it - and example of housing bust awareness in pop culture. The Tina Fey character is a real estate agent in Teaneck, New Jersey. At one point she is showing a house and says,"It used to be 1.3 million, but now it's 350,000...." The couple answers that they think it will come down a bit further still, so they'll wait... Thought it was great.
At another point she is talking with her husband about the time it takes to drive to NYC - he says "You're always telling your clients it takes 20 minutes..." And she says she knows, but she's lying when she says that.
Just got this nice email from ING about CMHC insurance.
Unlike Home Insurance, Mortgage Default Insurance can cover your mortgage in case you default on your payments.
They make it sound like it protects you in some way...
Today, when you apply for a mortgage the minimum required to avoid Mortgage Default Insurance is 20% of the purchase price (this changed recently in 2010 when the minimum was lowered from the original 25%).
Is this just total BS? Never heard of it, it's been 20% as far as I can remember.
This article in the Globe and Mail is predicting price decreases in the fall.
How to weather the real-estate chill
Prof. Andrew thinks prices will drop after the slide in sales in July and August. A house that has been sitting on the market is unlikely to sell for the full asking price now that potential buyers know sales have plunged. “You can’t keep it at the current price. Prices are going to fall. I think that’s inevitable.” He thinks the typical seasonal slowdown in late October and November will be even sharper this year.
"Is this just total BS? Never heard of it, it's been 20% as far as I can remember."
It used to be 25% a couple of years ago. It was when I bought my condo in 2006
Victoria real estate is like skipping stones at the lake. No matter how hard you try after a few skips and jumps the rock sinks...
August 2010 compared to last 10 years.
And it will be the same story next month. There were 776 MLS sales in September 2009. This year will be a fraction of that. Looks like we are resuming the downward slide of 2008.
Over at KIV someone wants to buy a condo without a real estate agent and a realtor tries to scare them off. No info to help them out just an attempt to get a client. Must be desperate.
KIV discussion
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