Toronto Income Property Newsletter – November 2014

The madness continues. This past month a triplex in High Park that needed a complete gut renovation asking $1.2M sold for the shocking price of $1.625M. That’s $425K over the list price. In many places that would buy you a complete other house, and then some.

I also tried a bully offer this month on a house in midtown. By the time they received my bully offer (which was almost $100K over the asking price), there were two others. So now there are multiple offers on the pre-emptive offers. It doesn’t seem that there is any way to gain the upper hand as a buyer in this market. To make matters even more difficult, many of you are looking for an investment property that fiscally justifies itself, which is becoming more and more uncommon in this marketplace.

My advice to all of you in this market is to be patient. If you don’t keep your cool, you may end up doing something that you might regret later. Remember there is always another suitable house around the corner. So be careful out there or you may end up overpaying. Is this the way things are going to be in the Toronto market forever? I would not think forever but with these never-ending low interest rates, this will be the situation at least for the foreseeable future. This month I will investigate what the experts think will happen with the Toronto real estate market in the upcoming months.

Oh, and congratulations to John Tory on his mayoralty victory. Let’s hope he can quickly gain consensus down at City Hall and get to work on making things happen. My best of luck to you, Mr. Mayor.

– P.A.

So, will this crazy real estate market ever get back to normal?

A report by TD Economics last month stated that Canada’s overall housing market will continue to stay hot for the rest of the year, with home prices expected to rise on low interest rates and increased demand. The bank upgraded its forecast for the real estate sector Thursday, predicting that home prices will gain an average of five to six per cent by the end of 2014.

This past February, the bank had expected Canadian home sales to flatten out, and called the market overvalued by about 10 per cent. It did not give an estimate on how much it thought prices would rise or drop. That earlier forecast was based on the belief that mortgage rates would creep up in the spring, but rates still sit near record lows and continue to prop up demand.

Low interest rates have helped with the affordability of condos, where prices are at their most favourable. First-time buyers who may have been pushed out of the market earlier may also be returning back due to the low interest rates, which have in part driven the demand for single-family homes. In May, the national average resale home price grew 7.1 per cent year over year — surpassing its 10-year average growth rate.

But looking past the short- to medium-term forecasts, TD said the Canadian real estate market is still expected to cool when interest rates rise and the number of available homes increase. Those factors should be enough to “tip the market” back into one that favours buyers. “Softer housing demand, combined with rising listings, will likely push the Canadian housing market towards a buyer’s market over the next year and a half,” “As home buyers have more choice, they will also have more bargaining power and price pressure will ease. These features would be consistent with the makings of a soft landing in Canada’s housing market.”

The report said the “soft landing” has already come to certain regions, like areas east of Toronto, while expensive cities “with more froth” like Toronto, Vancouver and Victoria will soon be seeing more weakness. TD also noted that it expects condo prices to fall by about two per cent next year, as an estimated 135,000 units currently under construction become available. This in turn will help boost the rental vacancy rates, keep rents flat, and make buying condos for investment purchases less attractive.

It’ll also make single-family homes — which are priced on average about $200,000 more than a condo — less viable for those looking to upgrade. As such, move-up buyers who would like to upgrade their condos to a single-family home may find it difficult since prices for single-family homes have rose an estimated eight per cent this year, and were expected to go up by another two per cent in 2015.

Toronto is on track to end 2014 as the hottest housing market in the country, with prices likely to rise 8.1 per cent, year over year, outpacing even Vancouver’s anticipated 7.1 per cent climb, according to Royal LePage’s House Price Survey and market forecast. The average price for a detached home in downtown Toronto now sits over one million dollars.

Thoughts on the Toronto Land Transfer Tax

Last month I talked about the second land transfer tax that we have to pay in Toronto. It became an election issue as Doug Ford was seeking to eliminate it over the next two years. We are the only city in North America with a city and state (province) transfer tax for the purchase of a new home. This tax adds a significant cost to the price of a property, which is most times paid for upfront and in cash. While many said the Toronto tax has would hurt the market, clearly this hasn’t been the case.

The revenues continue to exceed expectations since our market has been so hot. In 2010, the city expected to earn about $160 million. Instead, the tax pulled in more than $275 million. In 2012 the city planned to haul in $240 million and ended up generating about $345 million. This is a lot of money that would be difficult for the city to replace at this point.

For residential properties, the tax is charged as a percentage of the sales price. Here’s how the tax is calculated on a property with at least one, but not more than two, single-family residences.

* The first $55,000 at: 0.5 per cent
* $55,000 to $400,000: 1.0 per cent
* Over $400,000: 2 per cent

If your new home cost $500,000, you’ll pay $5,725 in land transfer tax to the city. If your house cost $800,000, your bill will be $11,725. The average price for a detached home in Toronto is about $1,000,000. Remember this is separate from the provincial property transfer tax, which is slightly higher than the Toronto tax.

So get used to it my friends. This tax isn’t going anywhere anytime soon.

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