“What’s Really Behind Canada’s Condo Bubble”
This is why you should read the Financial Post and not the Toronto Star. Well, this and about a thousand other reasons, but I digress…
Agree or disagree with this story, it’s fantastic insight.
“WHAT’S REALLY BEHIND CANADA’S CONDO BUBBLE By: Diane Francis Financial Post May 5, 2012
The condo bubbles in Toronto and Vancouver are caused by foreign speculation and are making housing unaffordable. This creates financial risk for Canadians in terms of government-insured mortgages. But there’s another issue of vital concern to taxpayers.
There are three times more condo high-rises being built in Toronto than in New York City and seven times more than in Chicago. This boom not the market at work but is manipulation by “hot money” from abroad.
“I have come across something I find astonishing, and which amounts to systemic tax fraud by investors, mostly foreign, on a massive scale,” wrote an investor involved in the industry.
He explained how it works: 1. Foreigners sign an agreement of purchase for a condo unit, or for 50 at a time, and put down a 5% deposit. This buys a right to purchase the unit later at a fixed price. In financial markets, this is known as a derivative.
2. Many developers include in the agreement of purchase the right to “assign” this right to buy at a fixed price. In financial markets, this is called creating a futures market. This assignment of a right to buy at a fixed price turns buyers into speculators (unless they want to move in or rent out the unit) who are set up to flip the units for a profit as prices are pushed upwards.
3. Some developers and intermediaries are in the business of helping speculators flip their rights and pocket a fee for doing so. For instance, Mr. X from Asia pays $15,000 for the right to buy a $300,000 condo. Then, when the price of similar units rises to $400,000, he can assign the right, get his deposit back and make the $100,000 difference. There is a speculation frenzy going on that makes prices escalate so rights can be bought and resold over and over again before a building is completed.
4. The paperwork for these agreements is kept in-house, and my source said one intermediary told him that there are no T-5s issued to the speculator or to the Canada Revenue Agency, something that stock and futures market intermediaries must do so taxes can be paid on the $100,000 trading profits. Instead, the profits vanish, possibly along with the paperwork, and taxes paid will be by the end user if they buy, rent out the unit and make a capital gain down the road.
“[Condo] brokers tell me I can flip my assignment and pay no tax and there is no paper trail. They say, ‘We do it all day long,’ ” said the investor who asked to remain anonymous.
Under CRA rules, foreigners making Canadian-sourced income are fully taxable by the federal and provincial governments. In Ontario or British Columbia, the total tax bill would be 46% or $46,000 in tax for $100,000 profit.
The unpaid taxes could be staggering, said a real estate agent. In Toronto, 20,000 condo units have been sold each year for the past five years. Let’s assume one-quarter were sold to foreign speculators who flipped the assignment and made $100,000 profit without paying taxes. Their Canadian-sourced income would total $500-million a year, and they would owe 46% of that in taxes, or $230-million.
Most condo developers may not be involved in this game, but a few – notably developers with Asian and Middle East owners or backers and buildings located in downtown areas – certainly are.
So this is what must happen. As I argued last week, Ottawa must forbid the purchase by foreigners of any residences in Canada. Australia did this in 2010 after foreign speculation and tax evasion damaged its housing market.
The Canada Revenue Agency should send in auditors to the lawyers and intermediaries and developers who have the lists of those who signed agreements of purchase. If they did not close on those deals, and the deals sold for more money than the agreements, then auditors must work backwards and assess income taxes.
The Ontario and other securities commissions should get involved because what is happening, if these reports hold true, is an unregulated financial futures market is being created using and abusing Canadian residential properties as vehicles. Likewise, the federal and provincial government tax collectors should get involved.
If speculators who owe taxes are long gone – many of them are offshore funds that buy out entire buildings then sell units abroad – then the intermediaries and developers should pay the taxes.
This frenzy is forcing prices upwards. Meanwhile, condos in the suburbs often take months to sell because buyers want them as homes, not as convenient money machines to flip.
The investor who described the tax shenanigans took his information to several politicians and called the CRA hotline, but got nowhere. Tax officials said they needed specific foreigners’ names and addresses to investigate, but this is beyond a simple case. This requires a task force to look into the issue.
A realtor said ordinary foreigners are buying from “funds” that are bundling units in Toronto and promising huge returns.
“Foreigners have been lured into so-called investment products, property units, with promises of high yields,” wrote this real estate professional. “They are often small investors who go to property seminars overseas. Many of these buildings do not allow Canadians to buy these units, obviously, because of the tax implications.”
The Australians were victims of the same shenanigan and shut it down. Now Canada must too.
This is nothing new, to me, at least.
The only difference here is that the astute Ms. Francis has drawn the obvious comparison to a futures market, which is something we’ve had in the Toronto real estate market for quite a long time now.
There is one aspect of the article I disagree with, however, and that is the presumption that the foreign buyer only puts 5% down. The initial deposit might only be 5% (actually it’s $5,000 with the balance of 5% within 30 days), but subsequent 5% deposits are normally staggered around 90 days, 270 days, 360 days, and then upon closing.
Many new developments require upwards of a 25% downpayment before final closing. I don’t know of many developments these days that will let you write up a deal with only 5%.
Years ago, 5% was available, but it rarely is anymore.
The standard was always made out to be 20%, but in actual fact, you could ask the girl at the sales centre to draw up an offer with 10%, and they’d take it. They were fine, so long as all the Joe-Schmoes off the street would sign up for 20-25%.
Over time, developers began to realize that demand was so high, they could stop offering 5-10% deposits, and begin to jack up the rates.
Today, you’d be hard-pressed to find a project that doesn’t want 20% total before occupancy, so perhaps this article is a tiny bit misleading. I just don’t want people to think it’s as easy as it’s made out to be in the article. And in order to make these so-called $100,000 profits that are alluded to in the article, you’d have to hang on for the entire duration of the pre-sales, construction, and occupancy. Well, to be honest, you’d have to get into a time machine and go back to 2007 when pre-construction actually produced $100K profits, but I think I’ve beat that horse to death and beyond…
So if some or many of these foreign investors pulled their money out, would the ‘house of cards’ collapse? Personally, I don’t think so. Not an utter collapse. Sure, prices would drop, but that’s true of any market where supply and demand shift. Is there anybody out there naive enough to say “Less demand doesn’t matter – prices will keep rising”? Well, okay, I’m sure there are, but they’re just pure salespeople and aren’t being honest with themselves, let alone the public.
If foreign investment pulled out, yes, prices would decline. But to what extent is unknown, and who says foreign investment is going to pull out anyways? This article makes no claim on that subject.
The taxation issue is a very interesting point, and it is something I wish our government would chase down. It’s a pipe-dream, but it’s money that ultimately comes out of our pockets as taxpayers. Remember that a capital gain on a primary residence is tax free, so if condo owner sells their $350,000 condo for $450,000, that $100,000 is tax-free. But they paid $350,000 as an assignment to a foreign investor who paid $250,000 to the developer – so there is a $100,000 gain that is unaccounted for, and untaxed.
Revenue Canada: it’s your move…
When my buyer-clients are looking at a house or condo, I’m doing the same thing – except I’m also sizing up the property and trying to learn all I can about the sellers.
You have to know who you’re dealing with… Continue reading
Simple Mortgage Calculator
|Mortgage Amount ($):|
|Interest Rate (%)|
|Monthly Mortgage Payment of|
|Property Purchase Price ($)|
|First Time Buyer|
|Total Land Transfer Tax:||$|
|Province of Ontario:||$|
|City of Toronto:||$|
Mortgage Broker – Mortgage Architects
I have been working with Joe Sammut and Jody price since the day I started in real estate. Simply put: they are the only mortgage brokers I recommend and the only mortgage brokers I trust.
I have personally used Joe & Jody for every real estate transaction I’ve ever been involved in, and they have secured financing for over one hundred of my clients.
Joe Sammut & Jody Price Mortgage Architects 1-888-575-4403 www.mortgagegate.ca
Real Estate Lawyer – Larry Lychowyd
Real Estate Lawyer – Larry Lychowyd
I have only been working with Larry for a few years but already he has represented close to fifty of my clients, and every single one has been satisfied.
Larry is diligent and incredibly detail oriented, and I’m always impressed with the speed of his work. He’s personable, accessible, and always available.
Larry Lychowyd Barrister, Solicitor, & Notary Public 416-466-8063 email@example.com
Home Inspection – Ken Haller
Home Inspection – Ken Haller
Ken’s knowledge of houses, in any area of the city, is simply unsurpassed.
Ken Haller Ken Haller Home Inspection Services 416-465-8236
Painter – Barry Miller
Painter – Barry Miller
Painter Barry is an old school painter. His father, “Mr. Miller,” painted for my parents in 1980, and Barry has been painting all of his life.
Barry has painted for every member of my family, and likely for two dozen of my clients.
Barry Miller 416-441-2228
Flooring – D.B. Flooring
Flooring – D.B. Flooring
Djuro has put hardwood in the homes of every one of my family members and in all of my investment properties, as well as working with many of my clients.
The best testimonial came from my brother who said, “You know how Dad’s ‘guy’ for this, that, or the other thing never really pans out? Well Djuro’s prices are about 40% less than what I was quoted by a couple other places. I think Dad found a winner here.”
Djuro Babic – D.B. Flooring 416-574-5092
Movers – S&Sons Moving
Movers – S&Sons Moving
Other than perhaps renovators, I’m not sure of another industry that disappoints quite like movers.
I hear all kinds of horror stories about movers that drop things, break things, dirty the floors, and those who are late or take longer than promised.
S & Sons Moving is a company that has gone about 11 for 11 in my books. They never disappoint.
The first time I used them, I took one look at this skinny 140-pound Bulgarian kid and thought, “How the hell is he going to carry all this stuff?” Well, looks can be deceiving.
They’re quick, efficient, and their shoes are never dirty! S&Sons Moving 416-253-7641
You know the old saying: “Only two things are certain in life: Death & Taxes?” Well that saying should have a third element to it: Mortgage.
Every single property owner will at some time or another, have a mortgage.
Nobody buys a house in cash, and even if somebody had $1,000,000 in a suitcase, he wouldn’t buy a $1,000,000 house; he would buy a $3,000,000 house and hold a $2,000,000 mortgage.
With interest rates as low as they are right now, and banks and other financial institutions lining up to hand out money to borrowers, it’s no wonder why our real estate market is so strong!
My advice to all those prospective property buyers: Don’t waste any time—get a pre-approval NOW! How else do you know WHERE to start, WHAT houses to start looking at, if you don’t know WHAT mortgage amount you can get approved for?
Ask yourself a few preliminary questions:
How much is your current rent?
Can you afford more than that per month?
How much money do you have for a downpayment?
Can your parents help you with a loan?
Do they have equity on their house they can “gift” to you?
Do you have an RRSP you can use?
A very basic rule of thumb for mortgage calculations is the following:
Every $100,000 of mortgage carries for a $600/month mortgage payment.
Example: a $300,000 mortgage means you will make an $1800 mortgage payment each month.
Canada Mortgage & Housing Corporation
Perhaps the most important detail to remember about mortgages in Canada is the following: If you don’t have at least a 20% downpayment on your property, you have to pay an insurance premium to the Canada Mortgage & Housing Corportation (CMHC) on the entire mortgage. Mortgages with less than a 20% downpayment are called “high ratio mortgages.”
Up until May 2007, this was a 25% minimum. Legislation was enacted that makes it far more affordable for Canadians (first time property owners especially) to purchase homes.
Simply put, if you have only a 5%, 10%, or even a 19% downpayment, you are considered to have a “high ratio mortgage,” and are required to pay the appropriate insurance premium to CMHC.
The premiums depend on the amount of your loan:
2.75% premium on downpayments of 5% – 9.9%
2.00% premium on downpayments of 10% – 14.9%
1.75% premium on downpayments of 15% – 19.9%
There are no ways around these CMHC insurance fees, however there are ways to ensure you get the required 20% downpayment if you don’t have it in cash, i.e. borrow equity against your parent/sibling’s house, take money from your RRSP, etc.
Just use 20% as the “magic number,” and remember that you need $50,000 downpayment on a $250,000 condo or a $120,000 downpayment on a $600,000 house in order to avoid paying the insurance premiums.
Mortgage Brokers vs. Banks
Here is where some of you may disagree with me, but I’m going to give my OPINION, and you all know what they say about opinions…
I truly believe that when looking for a mortgage, you should use a BROKER.
Here are a few reasons why:
Most people believe “I’ve been with my bank for 20 years! They know me! They’ll give me the best rate possible!” This isn’t always the case. The mortgage business is extremely competitive, and often banks just can’t compete with brokers.
Banks often tell you what you want to hear, as they are in the service industry and will try to keep your business at all costs.
Mortgage Brokers use up to 50 lending institutions to find you the best rate possible; a bank is just ONE!
Mortgage Brokers will let lending institutions “bid” on your mortgage, and get the best rate possible from the most competitive companies in the business.
I had a situation where my client, Drew, got a quote from his bank at 5.14%. I told Drew to give my mortgage broker a call, and within 24 hours, my broker had gotten Drew pre-approved for a mortgage with a rate of 5.04%. The following day, Drew went back to his bank to tell them he had found a better rate elsewhere, and the mortgage representative at his bank said to him “Oh, well we can match 5.04%, no problems!”
Here is my issue with this situation: If the bank can match the rate of 5.04%, then why didn’t they just do that in the first place?
I feel often that banks are not trying to get you the lowest rate possible, but rather, the lowest rate possible that you will accept.
Banks are in the business of making money and the higher the rate you accept, the more money they make. A mortgage broker, on the other hand, gets paid by the lending institution that gives you your mortgage, whichever lending institution that may be! The payment that the mortgage broker receives is not at all a function of the rate that they provide you with, so he has no incentive to provide you with a higher rate. He will go through as many lenders as possible to find the best rate.
Here is a partial list of lenders that my mortgage brokers use. Do you think that your ONE bank can compete with ALL of these lenders?
AGF Trust Bank of Montreal/FirstBank Direct B2B Trust Bridgewater Bank Business Development Bank of Canada Caisse Populaire Citizens Bank of Canada Co-operative Trust Company of Canada Desjardins Credit Union Equitable Trust Company Equity Plus Financial Inc. FirstLine Mortgages First National Financial GE Money Gibraltar Mortgage HSBC Bank of Canada Home Trust Company ICI Mortgage Managers Inc. ING Mortgage Broker Service La Capitale Group Financier Inc. Laurentian Bank Manulife Financial Maple Bank & Trust MCAP Mortgage Bank & Trust MyNext Mortgage Company National Bank of Canada Resmor Trust Scotia Express(Scotiabank) TD Canada Trust Xceed Mortgage Corporation
My Mortgage Broker
I have an excellent relationship with my mortgage broker, and he is the ONLY mortgage broker to my clients. His name is Joe Sammut.
What I like about Joe, is that you can reach him directly by email or cell phone almost any time of day. He has an amazing group of people working under him, and he is courteous, personable, and will meet you in person to discuss your mortgage needs.
I have used Joe for every single real estate transaction I have ever been involved with on a personal level, and Joe has worked for over one hundred of my clients.
Give Joe a call today, get pre-approved, and let’s start looking for a home!
Joe Sammut 1-888-575-4403 www.mortgagegate.ca
First Time Buyers
Are You A First Time Buyer?
Allow me to simplify the process.
Consider this: -A house or condo is undoubtedly the largest purchase you will ever make -The first house or condo purchase is one that you want to get right!
Much of my business comes from first-time buyers and young people, and over the years I’ve perfected the process.
Take a look at my High Five: Five Steps For the 1st-Time Buyer 1) Mortgage Pre-Approval 2) Finances & Budget 3) Property Location 4) Property Type 5) Features & Amenities
Let’s look at these steps in depth, shall we?
1) Mortgage Pre-Approval
How can you be expected to know what to look for before you know how much you can afford? Getting pre-approved for a mortgage is absolutely, positively, the first step in the process of buying your first home.
Whether you use a mortgage broker or a bank, get a pre-approval done ahead of time, and you won’t be scrambling to get financing when you find your “dream home.” And what if you find that dream home and then you can’t get enough financing to purchase it? Avoid disappointment and surprises by getting pre-approved at the onset.
The interest rate you receive with your pre-approval can be held for 120 days, so if rates increase, you’re protected!
During the mortgage pre-approval step, you’ll also be expected to determine your downpayment, so if you have to ask Mom & Dad for help, now is the time to do it! Most first-time-buyers receive a little cash inflow from their folks, so there’s no shame in it!
2) Finances & Budget
This ties directly into the section above on mortgages – how much can you afford to pay into your mortgage per month? What is your minimum monthly carrying cost? This includes your mortgage payment, property taxes, and maintenance (fees on a condo, upkeep on a house).
What is your take-home pay from your job, and how much can you comfortably spend on your mortgage and subsequent carrying costs?
How much do you spend on your car (insurance, gas, maintenance), cell phone, gym membership, sporting leagues or social clubs, hobbies and activities, groceries, clothing, entertainment?
Take out a blank piece of paper, and brainstorm all the costs you might incur during a given month.
Make a budget, and figure out how you can avoid living from paycheck to paycheck.
I find it’s best to identify where you want to live in the city before you analyze what type of residence you want to live in. This ties directly into your budget and mortgage, since you might be limited in both the location and type of property depending on what you can afford.
Leslieville? Queen West Village? St. Lawrence Market? Toronto Harbor? Entertainment District?
Which friends do you want to live near? What are your favorite restaurants, hang-outs, and locales?
Where do you want to call “home?”
4) Property Type
Now we really get into specifics!
If it’s a house you’re looking for, congratulations: you are part of the very small portion of first-time-buyers who can actually afford a house!
If it’s a condo, do you want a loft or an apartment? Is that a hard loft conversion or a new soft loft? Do you need a 1-bedroom, a 1-bedroom-plus-den, or a 2-bedroom unit? Do you want to live in a high-rise with clear city views or a low-rise with quick access to the street?
Condos come in all shapes and sizes, so think of the condos you’ve seen while visiting family & friends, and come up with a picture in your head. Maybe even try to quantify that picture with a sketch of a layout or a list of ideas that appeals to you.
5) Features & Amenities
This is about as specific as we get, since now we’re analyzing the actual condominium unit or interior of the house itself. You might want “all the bells & whistles,” but perhaps you can’t afford it, or you could trade some features off for others.
Do you really need granite counters in your condominium kitchen?
You might want a 3-bedroom house in Cabbagetown, but can you make do with a 2-bedroom?
Make a list of all the features & finishes you’d like in your house or condo, and try assigning a value to it.
If you have a car, then clearly you would call parking a 10/10.
If having outdoor space is a must for you, then let’s call that 9/10 or maybe even 10/10 as well. If your dream condo has a patio, and you want nothing to do with a loft with only windows and no outdoor space, then sure – call it a 10/10.
But let’s not get crazy here and turn down a potential condo because there is no walk-in-closet, when most 1-bedroom condos don’t have them.
When you’ve completed these five steps, you are way ahead of the game.
I have people come to me who know only that they want to buy their first property, and little else.
Many people don’t even know what they like or have never set foot in a condo before!
The mortgage-pre approval, financing, and budget can take some time and can be tedious, but the rest of the process is fun!
When you’re ready to get started, give me a call or an email.
A house and the land that surrounds it can both be beautiful, but what if there are three hundred identical homes, right next to it?
Well, at least the golf was good…
First round of the year and I shot a 92. I hadn’t swung a club since last September, and I’m still nursing a bevy of old-man injuries, so I’m okay with that.
My buddy shot a 77 with four birdies, and amazingly that was with a quadruple-bogey on the 10th hole, where, ironically, I had been grilling him about his recent marriage proposal…
Here we were – two engaged dudes, golfing in what was essentially a retirement community for older couples. Seems only fitting…
The whole golf course is surrounded by 60 and 70-something couples, walking the streets, holding hands, and crossing the fairway like it’s a park. “FOOOOOORE!!!”
The houses in the video above are tiny bungalows, likely only 1,700 square feet. But it’s not the size, style, or location I take issue with; it’s the lack of creativity that went into the design. These houses are identical, from the lot sizes, to the floor plans, to the position of every single window. Only the brick is different (red or grey) and that’s almost an identifiable pattern.
I don’t have access to these homes on MLS, but you can search around on Google and find a handful of listings; shockingly, these 2-bed, 2-bath bungalows are priced upwards of $500,000.
I’d love to live near a golf course when I retire. But on a golf course? I’m not so sure about that.
Ballantrae is a great little place to visit for a day, whether you’re a golfer, real estate enthusiast, both, or neither!
BTW – if any of my readers have a good hole-in-one story (ie. you’ve actually made one), I’d love to hear it!
You’ve decided to purchase a new condo in GTA. Now what ? Walk into a new developer’s sales site, get all the information from the sales
people there, and then buy something. Right? WRONG! Buying a new condo without using an Exclusive Buyer’s Agent is like shooting yourself in the foot. Continue reading