Tuesday, May 5, 2009

What the government giveth, the government taketh away!

The last six months has certainly seen an interesting real estate market in the city of Toronto. Like most other countries around the world, we cheered record highs, only to be crushed by record lows. Fortunately, for Toronto, I believe the worst is over and we have nowhere to go but up.

The Canadian Real Estate Association reports in its latest survey that every residential transaction in the country generates, on average, $46,400.00 in ancillary spending (renovations, additions, painting etc.). For years, real estate has been the engine driving the economy; therefore, it would make sense for the government to try to restart the real estate engine as quickly as possible. So what do they do.......

Let's talk about the double land transfer tax in Toronto first. While initially this Mayoral decree did not significantly slow the Toronto market, a recent study conducted independently by the C.D. Howe Institute has determined that there has been a $170 million loss to Toronto as a direct result of the tax increase forcing buyers to the 905 area and elsewhere. So - our roads are pockmarked with potholes, our garbage pick-up is sporadic and we are paying double - for what?

To the rescue - the Feds - finally, after over 12 years of lobbying by the Canadian Real Estate Association, the RRSP withdrawal limit for first time home buyers was raised to $25,000. And into the "down" market the first timers came to take advantage of the combined increased RRSP limit and historically low interest rates. This move did help to put us back on solid ground, but if the government had gone one step further and allowed this withdrawal for every buyer, we would have had an even more positive result.

Along with the increased RRSP withdrawal, the Federal government also sweetened the pot with home renovation tax credits. This is a 15% tax credit on eligible expenditures (additions, kitchen/bathroom renovations, new furnace, painting etc.) exceeding $1000 but not to exceed $10,000. Therefore, if you replace your windows for $9,000, then you will receive a tax credit of $1,350.

Then comes the "taketh away part" with McGuinty's harmonized tax proposal. Under the harmonized tax proposal, homebuyers and sellers will pay extra tax (GST plus PST) on a wide range of services such as legal fees, commissions, inspections and moving costs. For a resale house in the $360,000 range, this tax will add another $2000 in cost to the consumer. You can now see the fast erosion of the $46,000 ancillary spending figure I stated at the outset, thereby, once again, chocking the economic engine of the country.

The moral of this story is, if you aren't in the market, get in now while the inventory and prices remain stable and before the harmonized tax is approved. If you are already in the market, move up! The odds are that you will be able to move up with very little increase in costs due to two factors, low interest rates (sometimes under 4%) and a smaller price spread between price ranges, the higher you go.

After all is said and done, I remain confident that Toronto is one of the best cities in the world and one of the most undervalued. Real Estate is THE pre-eminent lifestyle investment.