Canadian Revenue Crackdown on Condo Flips

Long overdue. Lots of anecdotal evidence tax dodging in flipped assignments is widespread. If so, just wind of a crackdown will put a damper on speculative sales.
Currently there are three tiers:
No tax on gains from sales of primary residence.
Tax on half the gain from selling a recreational, rental, or investment property.
Full tax for making a business of real estate investment.
Some Toronto condo sales face CRA scrutiny

The CRA has yet to disclose how many sellers have been affected. But Toronto tax lawyer and text author David Sherman and other tax experts, accuse auditors of unfairly ignoring some legitimate explanations for sales. Meanwhile, Finance Minister Jim Flaherty wants the CRA to collect more than $500 million extra from suspected tax cheats this year.

“The auditors have applied a rare 50 per cent penalty for ‘gross negligence,’ even on those who had never owned a condo previously,” says Sherman.

Sure sounds like they want to make a point about the seriousness here, not just collect the tax.

One of Rhodes’ clients was single when he bought a condo in downtown Toronto in 2005. By 2009 he was engaged, and his fiancée wanted to be closer to her work in Guelph. So, he sold it, soon after it was registered. An auditor decided that the sale so soon after registration was suspicious, and so was the original choice of a two-bedroom apartment: “There is no reason to purchase a two bedroom condominium for one person,” he claimed. Rhodes says his client was assessed with over $100,000 of business income, resulting in a tax bill of roughly $50,000. He also faced a $25,000 penalty. “I estimate the cost to take this to the Tax Court (of Canada) will be around $10,000 to $15,000.”

It will be interesting to see if the decisions from this crackdown stand. Real estate seems to get its way on these things. Given the long timeline between condo sales and registration, most everyone could come up with a life excuse for bailing.

Condo Developers in Toronto backing off

Toronto Condo Kings Retreating to Avert Crash: Mortages

“Most developers have their hands in their pockets right now,” said Brad Lamb, president of Brad J. Lamb Realty Inc., a developer and the city’s largest condominium broker. His firm, which is marketing more than 45 high-rise developments in the city, won’t start a new project until 2014, Lamb said in an interview at Bloomberg’s office in Toronto. Lamb said he has eight projects in Toronto and Ottawa “on the drawing board.”

The supply of new high-rise units reached 21,262 in February, 34 percent more than the same period a year ago and close to a record 21,696 in October 2012, RealNet figures show. About 61,000 units are currently under construction -- the most ever -- and a record 35,757 residential units will come on stream next year, RealNet said.

Sales of high-rise homes in the city have dropped 34 percent since 2011, after rising 64 percent in the past decade until 2012. Prices have declined 5.5 percent over the past two years, according to RealNet.

Rising supply facing the headwind of sharply declining sales this year, implies this move is too late. Hat tip: vangrl posting at vancouvercondo.info

Toronto Condos Skewing National Data

CMHC Preliminary Housing Start Data Graph of Absorption of Condo units.

The absorption rate has yet to be impacted, and if there are enough wealthy foreigners, perhaps it won't ever be, but the market has yet to be tested. This is quite a bubble of inventory coming in the pipeline, starting to build at around 17 months ago. Assuming 18-22 months is the shortest time from breaking ground to delivery, we have a few more months before people are going to have to get full financing or do a re-assignment, or bail, depending up on their circumstances. 

Toronto House Prices on the Skids

source: TREB Market Watch

The Headline to the Release is "GTA Home Prices Up in July" but that is a desperation truth refering to the overall average for all types all areas, not a single one of the median numbers I'm tracking came out higher this month. (I only track those with enough sales each month to eliminate noise.) This is the time in the market shift when sales mix plays havoc with the average.

Toronto Median Sales Prices over last year

Medians for a variety of sales types. Not a single month on month increase among them. Detached TREB down $38,000 since the April Peak for a 7% decline. That means if you bought during the spring sale-a-thon and put 5% down you are officially, solidly underwater. Hope your snorkel doesn't have a leak . . . you are going to need it.

Toronto Median Condo Prices over last year

Duplicated from the above chart, here are condo prices only. Toronto Central looks unlikely to challenge the peak from September 2011. Median prices are down 6% or $22,000 since then.

And according to the link below, unsold NEW units are at 18k inventory. Sales of new units are down 50% from last year and the absorption rate is the lowest since the height of the 2008 crisis. And, get this, 52k+ condos were under construction at the end of Q2. Is that a recipe for a market disaster or what? Pull forward demand (last year's investor sales were insanely robust), build like crazed sky-addicted groundhogs, wait for the massive overshoot upward in inventory and then downward in price. Then watch as projects become pure apartments.

Note: just because condos are assigned doesn't mean the buyers are going to get financing upon completion and actually take delivery. Imagine divvying up the cost of occupying a tower by half or even a third of the expected occupants. What a mess it's going to be.

Toronto condo market loses steam as investors bolt

"The not-for-occupancy investor that has been driving 45 per cent to 60 per cent of Toronto condo sales in recent years disappeared as the monthly net cash flow to financing and paying condo fees and then renting it out remains negative while rental rates and prices flatten out," they said.

"This hard data confirms the anecdotes of pulled project openings and construction delays this year," the economists added in a research note

Toronto Detached Median House Price falls 5% from May

Based on the TREB report for June, the Toronto City Detached house price median (which isn't usually terribly stable) has declined more than 5% from May, 6.5% from April. Here it is in chart form:

Chart of Toronto House, Condo and Townhouse prices

TREB detached overall is down 2.5% since April or $13,000. If the decline continues next month, I'll add it to the Canada Cities Price Peaks and Declines page

Prices in Durham continue to rocket upward, which may be a substitution effect. Buyer perception of "reasonable" prices and unaffordable extremes drive them into purchasing a substitute, and in doing so push the price of the cheaper substitute good upward.

Chart of Toronto Condo Prices

Toronto's Condo Bubble in Seminar

325 project on the market
173 additional towers under construction
15 years of relentlessly rising prices

Toronto braces for a deflating condo bubble

Industry stakeholders stress that the potential for a crash is slight, and most of the talk at the Queen's University seminar was about the strengths of the market. But as construction cranes swiveled outside the windows, the discussion repeatedly circled round to the danger signals that have become impossible to ignore, similar to pilots explaining why they are packing parachutes to take onboard.

Who are you gonna believe . . . me or your lyin' eyes? Wait, is this parachute packed properly?

The developers talked about tighter financing and affordability. The real estate agent wondered about a growing gap between new condos and the resale market. The bankruptcy specialist worried about high supply and few players. The salesman talked about skittish investors and bad press. While it sounds like Canada may be importing the 2008 housing bubble from its neighbors to the south, nearly everyone in the industry argues that Canada is different.

The U.S. is more different from Spain and Ireland than Canada is from the U.S. Did that help? No. Overpaying is overpaying. Loaning in excess to the underlying economic value of a property is a bad idea no matter the structure of the regulations and the culture.

Toronto, with an area population of 5.8 million, accepts about 100,000 new immigrants every year. The bulk of them are from countries where dense urban living is common, and a hard-to-determine number of foreign buyers are helping to prop up the market.

The average immigrant is making 60% of what a native born is making. (source). The median household income in Toronto is $78,000 (source). Assuming the same rate of multiple income households (which would be a generous assumption given cultural differences) then the immigrant household median is $42,000.
Assuming a high downpayment of $20,000 the TD mortgage calculator says the median immigrant household can afford $150,000. Based on the TREB May 2012 stats, there were 18 condo apartments sold under 100k and 272 sold between 100 and 200k. Given the skew is upward (700+ were sold in the next two ranges) we'll say 1/3 of those were under 150k. That means that in the month of May, 100 or so condos were sold in a range affordable to new immigrants.

This is your great salvation? Selling 100 condos a month to new immigrants? This is the biggest delusion running right now in the industry.

Mortgage rates that start at 2.4 percent and don't rise beyond 6.75 percent have boosted affordability, especially compared with pricier single-family homes. The average condo price is C$368,000 (US$378,000) less than half the C$821,000 (US$844,000) it costs to buy a house.

See, again. Just because they look cheap in comparison, they aren't affordable. Not even to the median Canadian-born household in Toronto.

Canderel is focused on inner Toronto and has no plans to change. "I think we will continue to focus on downtown, because when things do change, they probably will fall from the outside in. In our opinion ... the margins will still be ... downtown," Rogowski said.

Does this guy actually look at the stats? The core is degrading the fastest. The others fared better, finally eeking out new highs. This could be a peak market sales mix shift, where demand, locked out of the high end, finds a substitute. Could be timing on projects. Could just be the bubble goes on.

Drost says a huge pipeline of supply is one concern, but believes the big players will weather a cooling in the market. "I think it will slow down but I don't know if we're going to see a lot of failures, frankly," he said, noting he has lived through several corrections and knows the signs. "I think probably the ones you will see or hear about are smaller developers who haven't managed their marketing well, that have maybe cut corners where they shouldn't have, and have not really matched up the project to the target market."

Noted.