It is a well known fact that only reason interest rates as determined by the Bank of Canada have remained as low as they have throughout the COVID-19 pandemic was to buoy the economy and promote economic resilience in the country during this troubling time. Economists had warned that eventually rates would have to rise, and that would be the case even if it was going to be bigger-picture beneficial that they stay low. It is also very well understood by those working in real estate that low interest rates have added to the overinflated housing market and affordability woes for people.

The premise for how that works is simple – when it is inexpensive to borrow money, more people will do that to buy homes as investments, and the people who have the means of doing that are usually ones that already own a home that is their primary residence. Whether that home is owned outright may be another story, but the point stands. Low interest rates help everybody get into the market more readily, so home prices aren’t going to be any lower at all for anyone that does move forward with purchasing a home.

The challenge is created for first-time homebuyers, and in a roundabout way a different challenge is created for people working as realtors who haven’t built up their business yet. Fewer folks able to pay what the homes will cost means a depleted clientele base for some realtors, but here at Real Estate Leads our online real estate lead generation system can help check that disadvantage during difficult times.

It gives realtors who are new to the business a way to be fast-tracked to being in touch with legitimate potential clients who will be needing to work with a realtor in the near future.

Moving back to topic, however, it has been stated with certainty now that the BOC is going to be rising federal interest rates and not surprisingly there is already a bit of a rush for new homebuyers to get into the market before those new and higher rates become a reality.

Up to 6x Rates Hike

To get right to it, the expectation is that the Bank of Canada could hike its benchmark interest rate at least six times beginning in early 2022, and it is not unrealistic for realtors working with certain types of clients at this time to be advising those individuals or couples that they might want to speed things up and get in now if possible. homebuyers should start preparing sooner rather than later.

However, you can also tell them there is risk with getting into the market at today’s rates. These are not normal interest rates and eventually they will rise. Clients should be prompted to ask themselves if they can afford this mortgage if rates go up 10, 150, or even 200 basis. That could be catastrophic for buyer’s when it comes time to renew the mortgage on the home they’ve bought and they were stretched way too thin in the first place but could get away with it because of low rates at that time.

The governor of the BOC has said that rates could start rising as easy as April, and that goes against what had been said long before when it was stated that rates could hold steady at their current numbers into 2023.

Biggest Implications for New Homebuyers

For clients it is time to start thinking about the potential of higher interest rates and what that might mean. As stated earlier, we are all aware how ultra-low interest rates bolstered the Canadian real estate market throughout the COVID-19 pandemic and have helped propel home sales and prices to new heights.

That in itself hasn’t been a bad thing at all, whether you’re a working person, a homeowner, and as is the case for most people – both. But here we are with a reality that the bank rate is at 25 basis points. If the market is right it might go to 1.5 or maybe to 2% and obviously that is a significant increase over time.

Higher rates on the horizon will likely bigger implications for new buyers than for those carrying an existing mortgage that they’ve already paid down to some extent over time. The average mortgage now, is about $450K for a home in Canada. A 100 basis points rise would work out to an extra $250 per month and there are likely many households and working couples that wouldn’t be able to accommodate that.

Alternately, some of them may be better suited to taking the financial wallop on the front side and doing what’s necessary to meet down payment needs now so they can get into a fixed mortgage now and be at least somewhat better off down the road. Most realtors will have a mortgage broker they work with as a preferred partner, and yours should be able to help clients make that decision in the smartest way possible.

Increased Affordability? No Guarantee

Higher interest rates could cool off the housing market, but even if they do that won’t necessarily translate into improved affordability. That’s because higher inflation is currently offsetting any meaningful wage gains brought on by the labour shortage. The speed at which interest rates will be rising is going to be the key. A 6x hike is very aggressive, and so we all have to think about higher interest rates down the road when it comes to best assisting and advising people who are considering the purchase of a home.

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Sign up for Real Estate Leads here and receive a monthly quota of qualified, online generated buyer and / or seller leads that are delivered exclusively to you. What’s meant by that is you are the only realtor who will receive them and these leads will be for people who are currently living in the same area of the country where you are working as realtor. They will be ones who have shown themselves to be genuinely considering either buying or selling a home in that same region of the country, and from there the opportunity is yours to impress on them that YOU are the real estate professional they need.

No doubt that a home’s primary value is in the roof it puts over a person’s head, but even someone who doesn’t work in real estate or is a homeowner will know that it’s a whole lot more nowadays and especially as so much investment has been put in real estate. It’s safe to assume that supply is always going to outstrip demand in Canada, so here we are. Homes in areas that are considered to be desirable are always going to have more value, but of course nowadays we’re seeing homes in nearly every part of the country going up in value too.

This poses a problem for many would-be first time homebuyers who find that the prices of home are very much beyond what they can afford. On the other hand it’s a benefit for homeowners who like the sound of getting much more for their home than what it would be worth otherwise. It’s also an advantage for realtors who stand to gain more from being the agent who sells the home. This can be a tough business to break into for new realtors, but here at Real Estate Leads our online real estate lead generation system is an excellent way to get ahead early.

Different areas of the country will have different valuation levels for homes, and we thought we’d detail what we know about that here with this week’s entry.

Overall Overvalued

As a whole Canadian cities are overvalued somewhere in the vicinity of 22%. This is especially true for cities. This value is expected to rise another 2.6% next year, and with less growth the year following. The average growth over the next two years is forecast to be an annual average of 1.38%.

Ontario – Most Overvalued

Real estate in Ontario is the most overpriced in the country, and that likely won’t surprise anyone living there. The estimate is a 22.6% overvaluation for 2021. Prices are forecast to rise 1.3% next year and showing an average annual growth of 0.3% over the next two years.

BC – Undervalued

BC real estate is undervalued if you take it as a whole and not taking Vancouver – the most overinflated housing market in all of North America – BC real estate is undervalued. The province’s markets were 3.0% undervalued in Q2 2021 and only around 2.0% growth is expected for next year and an average of 1.8% annual growth over the next two years.

Nova Scotia & Quebec – Significantly Overvalued

Home values for Nova Scotia (15.3%) and Quebec (14.3%) are majorly overvalued too. Nova Scotia is forecast to rise 0.9% next year and drop an annual average of 3.0% over the next two years. Quebec will likely see prices rise 2.4% next year, with average annual growth reaching 3.0% over the next 2 years.

Alberta Real Estate – Most Undervalued

Alberta real estate currently comes in as the most undervalued market in Canada. The province’s residential market is estimated to be 19.8% undervalued in Q2 2021. Countering that though is the fact that Alberta home prices are forecast to lead the country in price growth over the next couple of years with an estimated 7.8% rise next year and 9.3% over the 2 years after that.

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Sign up for Real Estate Leads here and receive a monthly quota of qualified, online-generated buyer and / or seller leads that are delivered to you exclusively as a realtor. These are leads for the area where you are working as an agent, and you will be the only realtor who receives them. This creates an exclusive opportunity to be first in touch with these people and put your knowledge and professionalism on full display to bring them into the fold as new clients for your real estate business.

It was only in the spring of this year when some industry experts suggested a modest downturn in the Canadian housing market might have been a temporary ‘cool off’ period, and some others thought maybe the long forecasted correction for the market was about to arrive. The first part might be true if it were to have been categorized as a very temporary cool off, and in regard to the second one anyone who hoped median home prices in Canada were going to come down are going to be disappointed.

2021 is shaping up to the busiest year ever for the housing market in Canada, and while that is good news for homeowners looking to sell their home it can be something of a mixed blessing for anyone just starting out in career in real estate. Homes that sell for higher prices offer more of the earning opportunity they’d like to have for themselves, but that means more realtors entering the business to get a slice of pie. Then you have to also keep in mind that fewer would-be buyers stay as prospective buyers because they can’t qualify for the financing needed to buy these homes.

Here at Real Estate Leads our online real estate lead generation system is an excellent choice for any such individual who wants to gain whatever advantage they can when branching out as a real estate agent. It’s built on the power of Internet Marketing, but all you want to know is that it actually works. And it does. But enough about that, and let’s stay on our topic here regarding just how hot the housing market in Canada continues to be.

Full 18% Increase

If you’re a realtor you’ll be familiar with the CREA. They’re the group representing more than 100,000 realtors across the country and according to their records since Jan. 1 the average selling price for a home sold on the MLDS Service was just over $716,500, and that works out to an 18% increase from where we were at this point late in 2020. Sales are heating up right along with this, and similar records are indicating that to this point in 2021 some 581,000+ homes have been purchased from existing owners over the course of the last ten months.

The previous high for that number was 552,423 and that makes immediately clear just how 2021 really has been the hottest year ever for real estate in Canada. And let’s keep in mind that we’ve still got over a month to go here before the end of the year.

We’ve also seen home sales pick up considerably since the end of summer, although this is a trend that is seen nearly every year. It’s just never been as pronounced as it has this year when it comes the sheer number of homes sales attached to each month or quarter.

Steaming Ahead

It’s also well understood that the BOC’s maintain of low interest rates has been a pivotal factor in allowing so many homes to be purchased. The semi freeze seen in the early days of COVID ended early because it is likely that a great many people thought if they’re ever going to get in the market, the time is now. There’s also the fact that many were re-evaluating their life / work arrangements, but we won’t get into that end of it.

Ever since the summer of 2020, Canada’s real estate market has been on fire and it seems that each year we’re busting numerous records along the way. Mortgage debt should be a concern for would-be homeowners, but it appears it’s not so prominent a concern for a lot of buyers moving ahead with the purchases of homes.

Let’s look at just last month (October 2021) alone – the average selling price was exceptionally close to the monthly record of $716,828 set in March 2021, when activity was at its most frenzied pace for the year. Increases to mortgage stress testing did little to slow the trend and that is a good sign for realtors as it indicates that most qualified prospective buyers remain as such even if more is required of them.

Fundamental Changes

We are also seeing how this buying frenzy is starting to change the way buyers and sellers think about the market in fundamental ways. When you have a country of 36 million people adding another $18 billion onto existing nationwide housing debt in just one month, it is clear that anything that people might have assumed will be intimidating buyers isn’t really intimidating most of them at all.

So many times we’re seeing buyers who have already lost out on multiple previous offers coming to a new table with all they’ve got, and looking past the obvious realities of the housing crisis and demand way outpacing supply there’s also a part of this that shows how homebuyers want to get into the market or up the ladder because of the increasing values in real estate.

Values that – if all of this is any indication – will only be going up for the long foreseeable future.

The last thing we’ll mention about all of this today is how interest rate hikes are likely on the way from the BOC, and it’s been well documented by many news outlets regarding the way many would-be homebuyers are rushing for mortgage pre-approvals to get locked in before rates rise. This is something that realtors can also be receptive too for potential clients, but let’s not lose track of the fact that a part of your responsibility will be tampering their enthusiasm to buy home when you believe it’s not the right fit for them.

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Homebuyers rush for mortgage pre-approvals amid mounting signs of rate hikes to come

“There is this sense of urgency to get into the market,” Tal said in an interview. “People are starting to sense that interest rates are rising and will be rising in the future.”

House prices have increased at a much faster pace than incomes, which has begged the question of how young buyers just starting out in their careers are managing to come up with the cash to buy in.

How are people affording to buy in at today’s prices? According to a recent report at CIBC, almost one third of first time buyers who bought in the past year got money from their parents to do so. (Patrick T. Fallon/Bloomberg)

Tal looked into the topic in a recent report and found that for a growing number of buyers, the answer is: their parents.

Almost one third of first time buyers in the past year received some sort of gift from family to help with the down payment. The average amount was $82,000, but in big, expensive cities like Toronto and Vancouver, the average parental gift was $130,000 and $180,000, respectively.

Although the numbers are eye-popping, Tal says it makes sense considering the $200 billion worth of cash that people who managed to keep their job during the pandemic have accumulated.

“You cannot spend all of it overnight [so] a lot of it will go to help kids into the real estate market and that’s exactly what we are seeing.”

ANALYSIS It’s not just Toronto and Vancouver — Canada’s housing bubble has gone national

It’s not just first timers making withdrawals from the bank of mom and dad.

Tal calculates that even among those who already own and are moving up the property ladder, almost 10 per cent of them are getting even more help to do so, to the tune of $200,000 in Toronto and a staggering $340,000 in Vancouver. That’s more than the price of the average home in Saskatchewan.

Tal says the trend is clearly growing, which means policy makers need to be aware of it.

“We are taking a wealth gap that is already very, very wide [and] unfortunately this is really widening it.”

“If you are lucky enough to get it, that’s fine. But we have to find a way to produce affordability into the system and supply is the only solution.”

Little if anything needs to be said in regard to the fact that supply deficiencies are the primary factor in house prices being as high as they are in Canada. Demand far exceeds supply, and that is unlikely to change anytime in the foreseeable future. This does cause something of a dilemma for realtors working in the profession as on the one hand homes selling for more mean higher commissions, but on the other fewer homes on the market and higher prices mean fewer willing and / or qualified buyers out there to obtain as clients.

One of the things that has more recently been determined is that it is not only the lack of housing that is making prices go up significantly, but it’s also that there’s not enough of certain types of housing that allow the market to function as it had for decades with what has been called a ‘property ladder’ – those who can’t find what the want / need stay put and what would typically be freed up for the 1^st time homebuyers isn’t freed up at all.

This can also make it difficult for realtors new to the business to work with 1^st time homebuyers who would like very much to get on that ladder, but can’t. However, our online real estate lead generator here at Real Estate Leads is an excellent way to counter the trend and be more directly put in touch with people who are in fact still willing and able to make a move in the local real estate market.

Back on topic though, let’s use this week’s entry here to dig deeper into the lack of housing options that are a part of the dysfunctionality of the housing market in Canada currently.

There aren’t enough homes for sale in the Greater Toronto Area (GTA) and Metro Vancouver to satisfy demand, and that’s helping to push prices even higher.

Homes Sales Down – Buyers Can’t Find What They Want?

Let’s start with Toronto. The TRREB reported home sales were down 6.9% for October compared to the same month last year. You might remember that October 2020 delivered a record for home sales and October 2021 was runner-up. Sales were up 8.1% from the previous month. The board also reported a decline in low-rise home sales was offset by a double-digit increase in condo sales.

The number of new listings compared to last year is down by almost one-third, and that’s keeping prices elevated. The overarching belief among the board and realtors working in the city is that the only sustainable way to address housing affordability in the GTA is to address the ongoing mismatch between demand and supply.

Prospective homebuyers – like ones with growing young families – are not going to see an affordable condominium as an alternative if they need space in the home for their children. No matter how affordable it may be, it doesn’t fit their needs and the options they require aren’t there.

Vancouver Mirrors

The exact same scenario exists in Vancouver, with sales way down from last year’s frenzied pace in the West Coast city. The REBG reports that 5.2% fewer homes changed hands in October year over year, but during that time overall sales were up 11% over that same time period. In the same way as it is in Toronto a double-digit increase in condo sales offset a decline in low-rise sales, but we can safely assume that many would-be buyers didn’t even get in touch with a realtor because the type of home they want (and can even afford) simply isn’t available to them in the city at this time.

Let’s keep in mind as well that the MLS Home Price Index for Vancovuer was up 14.7% year over year in October and 1.1% compared to September 2021. Then add the fact new listings were down 27.3% year over year and we can make that connection that prospective buyers not buying homes because the majority of the ones on the market and within their budget aren’t the type of home that would make sense for them to ‘move up’ the property ladder.

This lack of suitable inventory for homes is something that needs to be taken into consideration too when decision makers in municipal governments talk about promoting more new housing starts. Simply building large numbers of condominiums is still going to leave certain types of buyers with specific prerogatives without a realistic home to buy.

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Sign up for Real Estate Leads here and every month you will receive a quota of qualified, online generated buyer and / or seller leads that are delivered to you exclusively. No other realtor receives these same leads, and you stand to benefit immensely when it comes to growing your client base. This system works built on Internet Marketing principles, and the individuals identified in the leads are ones who have voluntarily shared information that highlights them as very likely being ready to either buy or sell a home in the area. It’s a great way to build your real estate business, and it does come highly recommended by other realtors.

It has been a while since we created a blog entry that wasn’t focusing on some aspect of the Canadian real estate market, and we do enjoy sharing personal career tips for realtors from time to time here. So with that in mind we’re going to use today’s entry to discuss the merits of a move that many realtors make after they’ve built a solid footing with their career. That’s setting up a Personal Real Estate Corporation, and for some realtors this is indeed most beneficial with the way they can beginning their business income as a corporation.

Most of time these days when you see a realtor’s sale sign outside of a home you will see the realtor’s name with ‘personal real estate corporation’ or ‘PREC’ right below it. That means this realtors has established a PREC for their business and this is something that is possible in BC, Alberta, Saskatchewan, Manitoba, Quebec, Ontario, and Nova Scotia. And it is not only realtors who have this option, as many other types of professionals can make the same choice.

As mentioned, most realtors move to establish their PREC once they’ve well established themselves as a realtor working in that region. Getting to the point requires more than a few homes bought and sold, and for newer realtors who are struggling with getting to that point our online real estate lead generation system here at Real Estate Leads is an excellent resource that’s made available to realtors of any level of experience in the business. It puts you more directly in touch with people who are ready to make a move on real estate.

But enough about that for now, let’s look at the benefits of a personal real estate corporation for realtors and you can evaluate whether it will be the right fit for you. Keep in mind first that this arrangement won’t be a good fit for every realtors. Incorporation usually only makes real sense when they have an existing corporation with accumulated savings they wish to invest in real estate, or if the person is an investor who is looking to buy and sell real estate and will benefit from lower tax rates on this corporate business income.

Onto the advantages, and here they are:

1. Income tax deferrals

One of the primary advantages to having their own PREC for a realtor is the ability to defer income tax. The tax rate on small business income up to $500,000 is usually upwards of 10% in any Province, and profit left in a PREC generally qualifies for this low tax rate. After-tax profits in a corporation can be paid out as a dividend. These payments will be at rates ranging from 0% up to 47.74%, based on the recipient’s other sources of annual income.

• Income splitting with family members

Licensed realtors in most of the provinces listed above can also name family members as shareholders of their PREC, but all of the voting shares of the company must remain with the realtor. Non-voting shares may be issued elsewhere, and with dividends paid to them as applicable. Under Tax on Split Income (TOSI) rules though, most dividends paid to family members will be considered split income and taxable at the top tax rate. This negates the benefits of income-splitting this way somewhat but for some realtors it is still a favourable arrangement.

That will be especially true if the realtor is over 65 and / or their spouse works more than 20 hours per week in the business annually. Further, if a realtor can establish a PREC with accumulated savings inside the corporation, they can be directed into stocks, bonds, GICs, mutual funds, or ETFs as investments, or even re invested into real estate.

• Tax Deductions

Most expenses that would be tax deductible for an unincorporated realtor who is operating as a sole proprietor will also apply for one who has incorporated themselves with a PREC. The corporation will not likely result in the ability to claim more tax deductions, but there can be exceptions to that too and you will want to be aware of them when weighing this type of decision.

First consideration is with the ability to set up a Health Spending Account (HSA). HSAs allow the reimbursement of an incorporated business owner for personally incurred medical expenses without withdrawals being classed as taxable income. The other exception is for corporate-paid retirement counseling as relates to ‘the fees you pay to provide services such as financial counseling or income tax preparation for an employee are usually considered a taxable benefit.’

Another consideration for you is that there is no avoiding some additional costs that you will assume with a PREC. Having a corporate lawyer get you through the process may cost anywhere from $1,000 to $3,000 and PRECs will have additional costs for bookkeeping and accounting that will be above a realtor’s current ones for those needs.

Should you set up a PREC? Tax deferral is primarily what draws realtors towards it, and then income splitting is the next big plus for those who can pay dividends from their PREC without being subject to applicable rules.

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Sign up for Real Estate Leads here and receive a monthly quota of qualified, online-generated buyer and / or seller leads that are delivered to only one realtor – you. No other realtor receives these leads, and they are leads for prospective clients who are residing in the area where you are working as a real estate. These people have indicated a genuine willingness to make a move in the real estate market, and you have the opportunity to get in touch with them first and convince them you are the real estate professional best qualified to help them with their home sale or purchase of a new home.