Real Estate News Archives

Rate Cuts and Housing, The Booming US Economy & Canada’s Innovation Problems

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

Bank of Canada Moves 0.5%

Coming off the back of a Bank of Canada rate cut of 0.5% on Wednesday, October 23rd, 2024 there are still some questions in the air about if/how/when we will see this change start to impact fixed rate mortgages, housing market activity, employment rates, inflation etc. I also wanted to briefly mention an anecdote I heard from a friend of mine since we are nearing Halloween and I thought it was interesting, related to the economics of Halloween.

Inflation Down from August

As it stands right now, the 5 yr government bond which fixed rate mortgages are based on, has actually begun to tick up slowly in the past 2 weeks, but the longer term trajectory is declining overall. The Bank of Canada said in their last decision discussion that if the economy begins to evolve in the way they anticipate that more rate cuts are on the table. Inflation as of Sept 2024 was down to 1.6%, oil prices dropped quite a bit more than anticipated which is helping, housing has finally also started to subdue, I have noticed this myself, that prices for housing rentals and purchase are becoming more competitive and even post interest rate cuts the “crazy increase in activity” hasn’t happened.

Prime Time For Home Buyers and Investors

There are still a lot of good deals out there for the savvy investors and home buyers, condos are somewhat oversupplied in many markets and I truly think that now is a once in a long time type of purchasing opportunity (feel like I’ve been saying that for 2 years, but I think we’re approaching the tail end of good deals). There is a great opportunity right now to get into a property at a great price with lots of choice on the market and ride declining interest rates, lock in a fixed rate a year or two from now at something closer to 3-4%. Once companies begin hiring again the hiring freezes are over, economy starts moving again, I’m predicting a very different market 12-18 months from now once these rate cuts have worked their way through the economy.

Local Real Estate Strains and Successes

The Bank of Canada has also predicted in their October 2024 Monetary Policy Report that GDP will climb as we go into 2025 and 2026 as compared to 2024 (which was a tight year, if you tried to renew a mortgage at the start of this year you’ll have felt the strain). So if we’re factoring everything in, expanding economy, lower inflation, decreasing housing prices, decreasing interest rates, 5-7 months of supply in some (great) housing markets, I really think this is a case of buy when others are selling. However, housing tends to be a very regional thing, some areas in Toronto have actually just continued to go up, through all of this, it’s almost like it’s own little bubble where the economic strains didn’t happen (generally in the 1.75 million – 3 million range in particular pockets).

The Problem with Condos (Oversupply & Office)

Condos on the other hand are dime a dozen right now, so much available, great prices if you know where to look, and very few buyers. Now, why are there few buyers, well if you go back to my last post where I talked about the increasing vacancies in office real estate you’ll have noticed that downtowns are having a harder time than suburbs are right now with a majority of office employees working from home 2 or more days a week. There’s simply not as much need to live downtown anymore, so people have moved out to the suburbs where they can get something larger and only have to commute downtown once or twice a week, not a bad deal especially considering you can get a bit more space for the same price as a shoebox downtown. I believe that the general economic malaise, in addition to the shift in expectations for office workers has led to a twofold issue of extremely high office vacancies (20% in some downtown areas), which has led to this oversupply of condo inventory as well. If you look at all these factors of different types of housing supplies building up in different areas they are all somewhat related to a simple yet profound change in the way that our world works post-covid (in part).

Consumers Are in “Wait and See” Mode

Another thing noted in the Monetary Policy report is that consumer spending has continued to decline from the start of the year to Q2 (and likely into the end of the year). Things like cars, vacations, and interest rate sensitive goods are all seeing declines compared to last year. People are feeling the strain, so the interest rate cuts are quite welcome. On a personal note, I was searching for an apartment to rent recently as well as potentially purchasing a used car, and it seemed like every time I looked prices were continuing to decline, “if prices will keep dropping, why not wait until they bottom out.” I’m sure that’s what a lot of people who are looking at housing and cars and any other large purchases are thinking right now. There will have to come a point where interest rates on loans are appealing enough that people will want to purchase their car or home or whatever else, either that or prices are low enough to entice the same. But the issue with just waiting for prices to come down is that we need people to be spending money for our economies to not collapse, so holding rates too high for too long can lead to some negative consequences that most people would not be too happy about.

United States Riding the AI Wave

Strangely through all this downturn stuff, the US economy and stock market has just been doing just fine. The US has a lot of growth companies, and have been able to ride this new “hype wave” of AI which has just injected even more excitement and money into their veins, meanwhile a resource based economy like Canada is suffering because of reduced demand and reduced spending on things like oil and gas, while supply of oil and gas continuing to improve. As an aside, Canada continues to be a bit of a place that is tough on innovators, there are tons of regulations, which arguably is good, but too much can lead to a stifling of innovation. Highly regulated sectors tend to favour incumbents, again, not necessarily a bad thing, especially in some sectors where regulation is extremely important.

Canada’s Lacking Innovation Problem

I don’t know that innovation is quite in the blood of Canada in the same way that some parts of the US “move fast and break things.” On the other hand, if you look at a lot of these “fast movers”, we’re essentially returning to baseline with some modern upgrades where now instead of 20 cable channels we have 20 streaming companies, and instead of taxis we have Ubers which are just as expensive or more expensive in some cases. There’s a great video about how tech companies are becoming worse and worse and basically once they undercut and drive out all their competition they cease to be good deals and with the monopoly they now hold increase their prices and leave people without any other option but to pay for their services.

Tech Company Monopolies, Poor Regulation

It’s a bit more complicated than that, but in a nutshell, that is what has been the ultimate result whether it was the intention from the get go or not. From a business standpoint, it’s just good business to try and get hold of a monopoly or something close to it, patents were invented with that idea in mind. Allow innovators to profit off their creations. But just as I was complaining about too much regulation, there are some sectors that do not have enough regulation or are too highly influenced to properly regulate and encourage competition. There are simple reasons why we can’t have a purely capitalist economy, and why a purely state run economy runs into problems as well. As with anything, there needs to be a good middle ground, in some ways Canada does a better job of this than the US, but with respect to innovation, I think Canada needs to be more encouraging of this and work on keeping our best potential innovators in Canada instead of just hopping over to the US where the rules are a bit more favourable.

Economics of Halloween (God Bless the Dollar!)

To close off this discussion I wanted to divert a bit and talk about Halloween. It’s not the largest shopping holiday, but it is one that almighty capitalism has invented to collect our dollars. I was speaking with a friend recently and was informed of these seasonal Halloween shops and the micro economies that they work in. Some of these smaller stores will top $1,000,000 in revenue just on this one holiday, retail margins tend to be significantly smaller than something like software, but if you have a few stores opened, each doing $1,000,000 in revenue, you have quite a solid business on a few months worth of work each year. So I was curious, how much money does Halloween bring in each year? I only have the US numbers and they tend to spend a bit more than Canadians but it’s interesting nonetheless. In 2023, Americans spent $12.2 Billion on Halloween. Seems like a lot of money. To give a frame of reference Amazons 2 day “Prime Day” sale this year generated $14.2 Billion in revenue. So, while Halloween is quite popular among children and their parents. Amazon, in just 2 days, does more revenue. Other holidays spending for reference: Valentines Day $25.9 Billion, Black Friday online sales $70 Billion, Easter $22.4 Billion. Halloween at $12 Billion is a good attempt at a shopping holiday, but it doesn’t seem to have as much mass appeal as pretty much any other shopping holiday. Moral of the story, give Halloween a boost and buy some chocolates this year :P. Just thought this was kind of interesting. That’s all for my economic brain chaos, thanks for reading.

Keep Investing,

Oliver

Newsletter #24: Bank of Canada Rates and Economic Impacts. Slower Return to Housing Market

This Weeks Blog Post:

Rate Cuts and Housing, The Booming US Economy & Canada’s Innovation Problems:

Why does it seem like the US in invincible
Why tech companies get worse and worse every year, the undercut and monopolize strategy
Small tidbit on Halloween and shopping holiday economics

Read the full article here: https://oliverfoote.ca/canadas-economy-vs-the-us-innovators-technology-housing/

Market Talk:

This weeks market talk is sort of woven into the blog post. But effectively. yay! 50bps rate cut! Bank of Canada says more to come. Economy should improve in 2025-26. Housing still slow, especially condos. Amazing time to be a buyer. Probably won’t see this type of inventory again for 10+ years if rates continue coming down.

Event Update!

Thank you to those who have already indicated interest in my event (details below)!
If you would like to be a part of it you can respond to any of my emails until the event with: “sign me up!”
If you have done so already, expect to receive a Zoom link about 1 week prior to the event.

Topics:

Mortgage rule changes coming Dec 15, 2024,
how interest rates are affecting housing & the economy,
and more!

Details:

Date: Saturday Nov 16th, 2024 @ 10:00AM
Duration: 45 mins – 1 hr
Location: Zoom! (Webinar)
Special guest: Deren Hasip from Mortgage Scout

Hope to see you there!

Market Performance as of Friday October 25, 2024:

S&P 500: 5,808.12 (+22.46% YTD)
NASDAQ: 18,518.60 (+25.41% YTD)
S&P/TSX Composite: 24,463.67 (+17.21% YTD)

Canada CPI Inflation Sep 2024: 1.6% (0.4% Decrease from August 2024)
Current BoC Benchmark Interest Rate: 3.75% (0.5% Decrease on Oct 23, 2024) Unemployment Rate August 2024: 6.6% (0.2% Increase from July 2024)

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Canada’s New Capital Gains Tax ($77,000 per year increase)

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

If you’ve purchased stocks or own some real estate then you’ve likely heard about what changes the federal government has proposed to the capital gains tax. I thought I would go through and talk about this and in a future post I may go over some of the other changes proposed. There was talk of millions of homes getting built which might be what we need to work through our housing problem. But will we have to manpower to accomplish these lofty targets? I’m not so certain.

Let’s begin with the big headline. The changes to capital gains tax. Under the proposed 2024 budget the capital gains inclusion rate, which is the percentage of the gain that is taxed, will stay at 50% for gains under $250,000. However, beyond $250,000, 2/3rds of the gain will be taxable at your marginal tax rate. This would most likely be taxed at the highest tax rate since the gain itself will almost produces enough income to put you in the highest tax bracket.

So lets take an example. You sell a real estate asset and it produces a gain of $500,000 under the current system where 50% of the gains are taxable, you would owe tax on $250,000. If you’re in Ontario the combined federal and provincial tax rate is 33+13.16 = 46.16%. So you would owe approximately 250,000*.4616 = $115,400 total on the gain.

Under the proposed change, your first $250,000 would produce $125,000 of taxable income. I’m going to assume this is still taxed at the highest tax bracket. This means you would owe $57,700. Then on the next $250,000 gain, you would have an inclusion rate of 2/3rds which is $166,666.67 of taxable income. This means you would owe $76,933.33 in taxes. The total tax amount is $76,933.33+$57,700 = $134,633.33.

So the change in taxes owed is approximately 134,633-115,400 = $19,233 increase. As you get into higher gains this number does increase quite a bit. Another way to look at this is as an “effective” tax rate. If you get taxed on 50% of the income at a 46.16% tax rate your effective rate on all this income is .5*.4616 = 23.08%. The effective rate of 2/3rd’s is 0.6667*0.4616 = 30.77%. So this is an increase of around 7.69% in taxes on any capital gains beyond $250,000.

If you are an investor, and you are buying and selling many stocks, real estate, or businesses and making millions of dollars a year doing so, you’re going to owe approximately an additional $76,900 in taxes per $1,000,000 in capital gains. That would be a total of around $307,700 per $1,000,000. Where under the current system it’s closer to $230,800 per $1,000,000 gain. The increase is the equivalent of a pretty decent salary for the average Canadian. Crucially, primary residences remain tax free, which is the majority of Canadian’s largest asset and many Canadians retirement plans.

Many people in the business community are arguing that this change could do a few things. It could disincentivize venture capital from investing in Canada, disincentivize general investment in new businesses, and cause investment money to leave Canada altogether and put us into a further state of stagnation. Our per capita economic output has actually declined over the past year due to our recent population influx combined with higher interest rates. Interest rates impact borrowing costs which is how a lot of business invest, less investment equals less economic growth; generally speaking. Additionally, if companies who are mobile choose to leave the country altogether, depending on the nature of their work, they may or may not be able to keep a Canadian workforce. Which could also negatively impact the Canadian jobs market.

Regardless of your stance on this I do believe that a change of this nature (some type of tax increase) was likely to be proposed at some point as more and more people feel they cannot get ahead for one reason or another and politicians hear about peoples problems and look for someone to come after. With the higher interest rates impacting food, gas, and other essentials. The cost of purchasing a home having outpaced wage growth by almost 4x. It is likely to put a target on the backs of people who have already found their success as governments search for a solution to these issues and try to find people to help pay for their programs and chosen investments.

So if this change does pass what will happen? I think this change most likely won’t cause any major exoduses out of capital markets. It’s unlikely that people with strong ties to their families and communities will end up jumping ship. After this change, capital gains are still going to be taxed at a lower rate than equivalent earned income theoretically still making it a good idea to invest. I also doubt that it will cause any investors to change their long-term plans and sell all their investments this year. Investment is a long-term game and takes detailed planning. So even with this change I don’t see it having an outsized impact on the markets.

I’m not a politician, not an economist either, so I can’t say whether or not this new tax will actually provide a meaningful contribution to the deficit or if maybe the better approach is to simply spend less. There could also be a variety of other solutions out there that don’t require a tax like this. No one enjoys paying higher taxes. Another point I think is worth mentioning is that the current government has lost some popularity among constituents. Therefore, if I was a prudent politician looking at my odds to win the next election, I would likely try to be a bit more aggressive on what could be one of the last budgets I get to table to see if I can push through some final big changes before I get the boot. We’ll see how this pans out, and I will be following the news on this change closely. While I do have further thoughts on this topic it is a bit of a challenging one to discuss so I’ll leave it there for now. Feel free to let me know your thoughts via email or leaving a comment below.

All the best,

Oliver

Newsletter #13: The Proposed Capital Gains Change, Other Real Estate News.

April is coming to a close! The big news the past few weeks has been the federal governments 2024 budget. The big discussion in the business and real estate communities has been the proposed increase to capital gains tax. I write about that in my blog post. As far as real estate goes there were some proposed increases in spending on building new housing. The government also wants to introduce accelerated Capital Cost Allowance acceleration (faster depreciation) for certain purpose built rental housing, which could incentivize more builders to take on those projects. The home buyers plan for using RRSP towards a down payment has increased from $35,000 per person to $60,000 per person.

This Weeks Blog Post:

How the Proposed 2024 Federal Budget Could Impact Investors:

Discussing what financial impact the tax increase will have
Will the change cause lower investment? Maybe some people to leave the country?
If this changes goes through it could send an interesting signal to people who are well off and prompt them to get ahead of further changes by moving elsewhere.

Read the full blog post here: https://oliverfoote.ca/2024/04/28/how-the-proposed-2024-federal-budget-could-impact-investors/

Market Performance as of close Friday April 26, 2024:

S&P 500: 5,099.96 (+7.53% YTD)
NASDAQ: 15,927.90 (+7.87% YTD)
S&P/TSX Composite: 21,969.24 (+5.26% YTD)

Canada CPI Inflation Mar 2024: 2.9% (0.1% Increase from Feb 2024)
Current BoC Benchmark Interest Rate: 5% NC (Next Meeting: June 5, 2024)
Unemployment Rate Mar 2024: 6.1% (0.3% Increase from Feb 2023)

See you in two weeks! Oliver

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Landmark Court Decision in the US regarding Realtor commission, NAR sued for $1.8 Billion:

Update Dec 12, 2024: Added Newsletter Email Archive at End of Post.

Realtors Look Out:

This headline seems to be everywhere in the past week, and if you haven’t seen it well, welcome to my world. The National Association of Realtors (NAR) in the US is known to be a big lobbying organization and it’s Canadian counterpart CREA is also quite good at lobbying. With real estate values being so high, and so much money flowing into the industry, these big organizations have a lot of sway.

The plaintiffs were a group of sellers in Missouri who brought forward a case stating that the seller in a real estate transaction has to pay for both the buyer and the seller agent fee. Effectively masking the cost of working with a realtor from the buyer which they were claiming was an anti-competitive practice. Another issue in the case was that the NAR controls the MLS (think Realtor.ca or HouseSigma), where most people go to find the home they plan to buy. Prior to this lawsuit, the NAR had a stipulation on the MLS system that in order for a seller to list a home they had to offer at least 1 cent to the buyers agent which played into the anti-competitive nature of the suit, basically the NAR positioned themselves at gatekeepers to the largest selling marketplace. I can think of a few other companies, cough cough Apple App Store, that acts as a gatekeeper to app developers who want to get their apps out there by restricting other app stores or the ability to “side load” apps.

The jury did find the NAR and Keller Williams Realty, one of the largest brokerages in the US, guilty of anti-competitive practices. Naturally, the defendants did say they are going to appeal the decision. Overall, I think it is a good thing anytime anti-trust lawsuits are successful as generally the outcome is more competition and the ruling in this court case could mean that sellers don’t have to front the commission for the buying and the selling agent which could increase competition. One of the main arguments of the NAR for the seller paying both fees is because buyers already have to come up with a down payment and other fees already associated with a purchase out of pocket. So this ruling could potentially make the barrier to purchasing a home even higher for buyers.

So, what does this mean for Canada? Will there be a similar lawsuit brought forward here, now that this case was successful in the US?

As of this very moment, I don’t see this being the case. There are many brokerages that do offer reduced commissions in Canada and some brokerages offer “mere listings” where someone can sell their own home on the MLS without using a realtor. Which are two of the bigger arguments that the plaintiffs used in the US case. We are also instructed in our education courses that as a buyer’s agent we are required to show a listing regardless of what a seller is offering if it is going to potentially be the right fit for the buyer. In practice this is a bit more complicated. In these cases the buyer will likely end up being asked to pay for part of the fee depending on the contract with the buyers agent. In a marketplace where all other homes don’t require that same buyer to pay the realtors fee, it can be a difficult, or even impossible pill for a buyer to swallow depending on how much they planned and saved for.

Update Dec 10, 2023: It has been brought to my attention that there is a similar attempted class action lawsuit that has been filed but is still many steps away from making it to trial in Canada. They have made some ground trying to name some Brokerage’s as a defendants who agreed to some allegedly anti-competitive rules set out by TRREB. We’ll see what ends up happening and if the class gets Certified. Note this lawsuit is focused in Toronto.

Historically in Canada there have been many times where flat rate brokerages or reduced commission brokerages come around and offer a reduced fee. But when times get difficult in a slower market like today, they can struggle to survive and often go out of business relatively quickly. When it is tough to sell your home people tend to get a certain level of comfort coming from someone who does this as their full time job rather than the 50% of agents who are part-timers. I find that as long as a realtor is doing a good job of explaining to a seller what they are getting for their services, most sellers tend to see the value in investing the money to make the home selling process smooth, easy and to get a good price for their home. The Greater Toronto Area has so many realtors the competition is very high and the level of service that an agent has to provide has to be very good in order to shine amongst the crowd of “everyone is an agent”.

Also depending on where you’re looking, ‘typical’ commission rates do vary around the province, for example in Kitchener/Waterloo, Hamilton, St. Catharines and other outer markets commissions can be lower, but so is the cost of doing business overall. As always, everything can be negotiated, you just have to ensure that the person you are hiring to sell your home is going to provide you with a service level that you can be happy with.

There is also new legislation coming into effect on Dec 1, 2023 called the Trust in Real Estate Services Act (TRESA) which will replace the old 2002 legislation in an aim to increase transparency and consumer choice in their real estate purchases or sales in the province of Ontario.

One of the biggest changes that will be put into place is the process of open bidding. Sellers will have the option to sell their homes in an open bidding process where they can instruct their agent to disclose the price of an offer and the conditions of an offer to all the other buyer’s agents who have shown interest in their home.

This is a positive change overall and some sellers will opt for this more transparent process and may see it as an advantage to disclose what other people are offering since it may allow buyers who do have the budget and the desire to purchase a home to outbid their competition. I suspect some sellers will decide to continue with the blind bidding process as they may see this to be more advantageous since buyers have to do a bit more guesswork as to where the final price will land. Depending on how the market is at any given time, your specific situation, and how much activity a house is getting, there will be advantages and disadvantages to each method.

It will be interesting to see how this open bidding rule will change the marketplace. I do think that new companies will be formed thanks to this legislation that puts houses up for sale in an “auction” style sale, whether this is an online auction or an in-person auction. The seller would set a reserve or minimum sale price publicly or they can set their price internally, which would be a “sale on approval” strategy. The latter would allow them to either accept or deny the highest price within a certain timeframe. The exact particulars of the legislation are still being worked out, and auction companies like this do already exist for selling homes, it’s just a matter of how well this will catch on with consumers.

In Australia, they do have this style of open bidding where everyone who wants to purchase the home will show up to the house on the day of the auction and then it proceeds as a typical in person auction would with an auctioneer. I remember watching this air on television years ago and at the time Australia was going through it’s own housing crisis and prices were still sky high even with the this transparent method of bidding so I don’t imagine this single thing will be the silver bullet that fixes our housing affordability problems.

Newsletter 1: My First Real Estate Newsletter!

Happy Sunday and Happy Dawali to those who celebrate!
Welcome to the first edition of my newsletter!

Super excited to announce this new bi-weekly addition to my business.
In this newsletter you’ll find some weekly real estate news and my thoughts on it.
Exclusive local discounts only available to people who read this newsletter.
Information about my latest podcast episode and guest!

Feel free to send me a direct email anytime if you have any thoughts you’d like to share, or if you have any questions you’d like me to address for the next edition of the newsletter!

Follow along at oliverfoote.ca.

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This Week in Real Estate:

Landmark Court Decision in the US regarding Realtor commission, NAR sued for $1.8 Billion:

Group of Missouri sellers brought forward an anti-trust case against the National Assocation of Realtors
Main issues under consideration were seller commissions and gatekeeping of MLS systems.
How will this affect Canada? What does our current landscape and legistlation look like?
Will a similar case be brought to the true north? Why or why not?

Read the full blog post here to find my thoughts:

https://oliverfoote.ca/2023/11/11/landmark-court-decision-in-the-us-regarding-realtor-commission-nar-sued-for-1-8-billion

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This Weeks Podcast Episode:

I interview one of my long time friends Zach Gomes.
He is now the first franchisee of Canadian Barbecue Boys! (Grill Hero).
We talk about how he got started, some of his customer horror stories, and how he went from cleaner to franchise owner in just 4 years.
Listen to the episode on your favourite platform!

YouTube:     https://youtu.be/M1yiQ1tSwe4
Spotify:     https://open.spotify.com/show/5tdMXuCbaV7AhnSTFzemOU
Apple:     https://podcasts.apple.com/us/podcast/oliver-foote-podcast/id1714701272

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Exclusive Discount:

In line with the podcast episode Zach was generous enough to provide a discount code to anyone on the mailing list or anyone who listened to the podcast and lives in the Region of Peel where he services!

Get your BBQ cleaned!

Use code: PEEL24

Get a quote here: https://get.canadianbbqboys.com/quote/

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Hope you have an amazing week and looking forward to doing this again soon!

Best regards,

Oliver Foote

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