The mess that the string of interest rate hikes over recent years has left some homeowners is unfortunate, but it does highlight the risks involved when people over leverage themselves when buying a home. And more specifically when they do so with a variable rate mortgage. That said, it is not a situation where a fixed rate mortgage is the right choice all of the time.

It is something that people need to really dig into, and a part of what a good mortgage broker will be able to do when guiding clients through the process. For some buyers a variable rate mortgage IS going to be right for them based on their individual circumstance and all the different factors that will go into that.

Realtors working with 1st time homebuyers can be proactive in helping them along here too, and for any real estate agent for whom finding those clients is a struggle our online real estate lead generation system here at Real Estate Leads is an excellent resource that is available. There are very valid reasons why homebuyers are opting for short-term fixed rate mortgages. The workings of that is what we will look at with our entry this week here.

Waiting on Benchmark Rate Cut

The basics of it is that Canadian homebuyers are increasingly searching for shorter-term, fixed mortgage rates. And the reason they’re doing that is the expectation of a possible better deal in the future if the Bank of Canada makes cuts to its benchmark rate. The number of people searching for one- to four-year fixed rates has increased significantly over the course of this year. But what is interesting is 5-year fixed rate inquiries are up more than all of them.

There is a pair of primary reasons homebuyers are looking at the benefits of short-term, fixed rates. First, this type of mortgage safeguards them against near-term potential further rate hikes. At the same time it also potentially allows them to take advantage of lower rates sooner.

All of this is because experts are predicting that rates will drop in the coming years. It seems as if the bulk of economists feel that interest rates have likely peaked, but that one more quarter-point hike is a possibility this year because of a national economy that is performing much better than expected.

Variable Mortgages to the Wayside

Oppositely, inquiries for 5-year variable rates made to mortgage brokers are much less common these days. Variable mortgage rates did surge in popularity among homebuyers based on interest rates being at historical lows in the way they have been over recent years. This trend deepened during the pandemic when the Bank of Canada slashed its benchmark rate to a quarter of a percentage point.

There was a report in November of last year indicating the central bank said a 3rd of total outstanding mortgage debt in Canada was attached to variable rates. This is about a 20% increase from the end of 2019. But the rapid increase in the benchmark rate over the past 12 months to 4.50% has some homeowners seeing their amortization periods extended significantly or hitting what is known as the ‘trigger rate’ – the point where the monthly payment no longer covers the entire interest portion.

This then comes with a report that by November of last year that half of variable rate mortgage holders had hit their trigger rate. The expectation is that demand for variable rates will stay depressed and interest in short-term fixed rates should remain elevated until the Bank of Canada cuts the target for the overnight rate from its current level.

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There are a lot of areas with regards to the housing market in Canada where individuals will be on one side of the fence or the other with what’s best for all. Over the past 5+ years however, the one issue where there is full consensus is that if a truly balanced market is to be achieved then housing supply needs to be increased in a very big way. Without that demand will continue to outstrip supply to the extent that prices will always be pushed higher than they should be.

And as is always the case in any country, it’s the desirable metro areas where this is felt most acutely. For obvious reasons new housing starts in these regions is more of a challenge and most often simply because there is a lack of available land to build homes. Nothing to be done about that part of it, but anytime the opportunity to build more housing exists then municipal and provincial governments need to be promoting that to the best of their abilities.

Which leads to the topic of this week’s entry here – that new housing starts across Canada went up very emphatically across Canada last month. Housing starts experienced a significant increase in April and the CMHC reported the monthly seasonally adjusted annual rate of total housing starts increased 22% month-over-month in April.

This of course will have connected benefit potential for anyone working in the real estate profession, and our online real estate lead generation system here at Real Estate Leads is an excellent resource for realtors who are newer to the profession. Let’s look at the relevance of this surge in new homes being built in greater detail now.

260K+ New Homes

The number attached to this surge in new housing starts is 261,559 units, and this is primarily being driven by the multi-family sector. For April it was a 33% month-on-month increase with 201,621 units beginning to be built. Oppositely, the number of starts for single-detached homes in urban areas went down by 2% to about 40,000 units. Again, this is always going to be a reflection of the fact that lack of land for development makes housing starts in populated urban areas more of a challenge.

Across the country it was Vancouver, Toronto, and Montreal standing out with notable gains in total SAAR housing starts. Vancouver had an increase of 36%, and for Toronto it was 54% and Montreal 43%. But Toronto and Montreal had declines in single-detached starts, but substantial increases in multi-unit starts made up for that shortfall. Vancouver had increases in both segments.

The biggest surprise may be in the way that the largest monthly percentage gain was seen in the Atlantic region. Housing starts increased by 4,000 units to reach a total of 10,200 homes beginning to be underway last month. The number of starts in rural areas as a whole is notable too, with the monthly SAAR estimate of 19,974 units contributing to the overall growth in housing starts across Canada.

Fewer Detached Home Starts

With all this short-term positive momentum, we need to note the trend in housing starts remaining relatively stable. There has actually been a modest 0.2% decrease from March there and industry experts say that single-detached units are responsible for this drop. The number of these homes selling has been lower in contrast to the significant pandemic-era gains seen last year, and this is resulting in slower construction activity for building single-family dwellings as detached homes.

Economists foresee new home starts continuing to trend lower, and this is because of declines in home sales low-grade factoring into weaker homebuilding. While the recent surge in housing starts reflects a return to pre-pandemic levels they will likely drop significantly for the remainder of 2023 but then recover for 2024 and 2025. Constraints with new construction with labour shortages and higher construction and borrowing costs for housing developers are expected to be key factors if starts do in fact slow for the rest of the current year.

It’s plenty warm here on the West Coast of Canada already, and some would go further to say its downright hot. Spring 2023 seems like it is heating up the real estate market in Canada too, and it may well be that the thaw being experienced with median home prices is a good indication that the chill that set over the market over the last 14 months or so is coming to a definitive end. That’s something that has been forecasted for many months as well, and the positive in it all promises to be that more homes will be put on the market to provide much needed supply that is more capable of meeting demand.

The high demand part of the equation is always going to be a part it here in Canada. As has been discussed at length in real estate market circles, so many homes that would have been listed recently were not listed as owners chose to delay that until they could foresee getting the value they need to get for the home. There are always going to plenty of owners who would like to sell, but don’t need to and if the trend of increasing average home prices continues then more of these homes will be put on the market.

For realtors this will be encouraging of course, and it should be much the same way for prospective clients who can afford the home and will likely having more of them to choose from. Our online real estate lead generation system here at Real Estate Leads is a proven-effective means for realtors to get something of a jump on their competition and be first-in-touch with potential home sellers or buyers who may be more motivated to make their move now that the thaw is well underway.

Rate Hikes Now Non-Factor

The biggest reason median home prices declined was due to interest rate hikes over last year, but the average price of a Canadian resale home has now increased for four months in a row, from January through to the end of April 2023. The CREA (Canadian Real Estate Association) reported at this time last week that $716,0000 was the average selling price for a home sold on MLS last month (April ’23). That’s up from March in the same way March was up from February, and February from January.

All to the tune of an average home price increase of more than $100k since the start of the year. Quite a marked change from February of last year when the average home price peaked at $816k but the chill began and primarily because of the way higher mortgage rates made it more expensive and riskier for people to finance the purchase of a home. It’s understandable that many people saw the possibility over overleveraging themselves.

A short time later average prices bottomed out to $630,000 by midsummer 2022, but the market resumed its upward momentum as fall and winter leads us to where we are now in late Spring / early Summer 2023. As you’d expect, the GTA and GVA areas are the two areas fueling this rise in average home prices, and these regions also saw the biggest gains during the early days of COVID-19, plus the largest declines once interest rates were increased by the BoC.

5k+ Increase For Smaller Markets Too

Even if we remove those 2 regional markets the national home price average still stays well above a half million dollars – an average of $572k per home if you exclude the values for ones in the Toronto and Vancouver areas. Sales as a whole are up too, with the CREA reporting an 11% increase for the number of homes that sold during April and up from March’s 44,059 of them being sold. Sales volumes are at their highest level since last June, but still coming in at 20% less than seen during the feverish market of this time last year.

Home sales continue to rebound from the multi-decade low we saw at the beginning of 2023. That trend has been buoyed by solid job markets, lower interest rates and a buyer psychology that has changed and become more enthusiastic based on the right mix of affordability plus solid sale prices for home sellers but with the ongoing challenges of subdued supply playing a disproportionately large role in pushing prices higher.

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We almost always talk about the current market condition for housing in Canada with our blog entries here, but as any of you who do read here at least semi regularly will know from time to time we’ll put in an entry where we talk about the different knowledge bases that realtors can add for themselves to improve their level of expertise when it comes to being a real estate agent.

It is like any other profession where even if you come in as prepared as can be there’s still so much to learn, and as we know giving clients good advice with regards to the buying and selling of real estate is one of the most effective ways to ensure you’re their realtor again the next time they’re looking to make a move in the local real estate market.

Many of these people that do make more than one purchase in real estate are going to be investors, and if they’re making those purchases in quick succession of each other they are almost certainly buying as investors. But at the same time not every homeowner that owns more than property is going to be an investor. There are plenty of reasons why capital gains taxes exist, and if home flipping wasn’t so much of a big problem there might no be as much of a need for them.

But there are ways for clients to save on capital gains taxes for secondary property sales, and if you have clients that are in this scenario this is one example where this type of information will be very much appreciated. Realtors who are newer to the business may not be aware of it, and they may also be struggling to drum up new clientele in first place. Not everyone is blessed with rhythm and the ability to drum well as it is, but our online real estate generations system can give you and advantage there.

So let’s get right to them

1. Split the Principal Residence Exemption

The principal residence exemption makes it possible for Canadians to sell their primary home without paying tax on the profit. People with multiple properties can strategically split the exemption between their homes to reduce the amount of tax they’ll need to pay. Whether they’re selling a cottage or a house, you will want to start with knowledge of what you bought the properties for, and how much did they appreciate up until this date?

With cottages and vacation properties it is also possible to designate it as your principal residence for all or some of the year. This makes it so that the taxable gain is entirely exempted or significantly reduced, but your clients will need to be aware that the actual home will not be eligible for the principal residence exemption during those years. How this connects to their life insurance may also become a consideration.

If a large tax bill eating into their estate upon death is problematic then it’s probably best to save the principal residence exemption for their primary home. A rental property or renting a portion of their home can complicate matters too as the principal residence exemption is not applicable or otherwise pro-rated to the part of the home that’s not used as a rental.

2. Claim Sale Expenses

We do know that the government has a fairly low bar for claiming a property as a principal residence though, and the legal fees, realtor commissions and house repairs that go into selling the property can be claimed as exemptions. Finders fees, commissions to realtors or brokers, legal fees, land transfer taxes, advertising costs to list it – all of these and more that go into finding and connecting with the buyer can be claimed as expenses.

These become standard things upon looking for someone to buy it and executing the sale of the property with professionals, and the entirety of those costs can be deducted from the actual gain. In a sense it’s as if these expenses are added to your cost basis and it defrays what you need to pay in capital gains taxes. The only tricky one though is with claiming renovations because an owners will need to prove to be able to prove they were essential in order to sell the property.

3. Use Capital Losses to Offset Gains

In much the same way as it works for stock market investments, gains from one investment can be used to offset loses from another one when a client owns multiple homes and their secondary home is being considered as capital property. It’s not unlike tax-loss selling strategies investors often use in December. Using them to lower the taxable capital gain generated by the property sale is a valid strategy in the event the property owner has incurred stock market losses in a non-registered account in the current or previous years.

This can be very helpful when the primary residence exemption isn’t applied, and the owner has not option but to have the property being sold as secondary residence. There is more to this topic than one blog entry would allow, and there’s likely more that a tax expert will be able to tell you about this than we can. But it is very good information to have in your bank when you are working with investor clients who are selling properties often to finance the purchases of other ones.

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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 for new clients that are in your area. These individuals or couples have responded to voluntary online surveys and met the criteria with their responses as being people who are genuinely interested in buying or selling a home in the near future. From there you have the opportunity to be first in touch with them and convince them you are the realtor they will want to to work with. RE Leads is an excellent way to build up a client base for realtors in Canada.

At any given time there’s hundreds of thousands of Canadians who are approaching retirement age, and for those who are in vicinity of 60-65 now it’s quite likely that a considerable part of what has you able to retire soon is the equity you’ve built in your home. For many of them that accumulation process started when they purchased their starter home at a young age, often with a new life partner and plans to start a family in it.

For people who are at that stage of their lives now, that same ideal small, detached home in a suburb just outside the metro is an unattainable dream for the most part. There are all sorts of different levels to the overheated housing market that has made these types of homes unaffordable for this generation. This creates a different working environment for realtors who work with these young buyers who are entering the market and becoming homeowners for the first time.

Nowadays it’s more likely they’re only able to afford a condo rather than a house, and that affects all sorts of other major life choices that are made at this time. It also means different realities for the realtors with fewer qualified buyers chasing fewer desirable properties for this buyer demographic, but if new clients of any sort are few and far between then our online real estate lead generation system here at Real Estate Leads may be exactly what’s needed to change those fortunes.

We’ll focus on this new reality for young prospective homeowners who are looking for a yard to go with their home, and why that’s increasingly unlikely.

Unrealistic Aim

Realtors themselves all across the country are echoing this sentiment, that the traditional idea of the starter home is completely dead. Starter homes around 2,000 square feet in size was where families laid down roots and then made the progression through life as it relates to the homes they’ll live in from that point right up until they’re senior citizens and beyond. But now in the large cities in Canada where most of these people will choose to live these types of home are now unaffordable for the vast majority of them.

The latest March data from the regional real estate boards of Toronto and Vancouver show the average price of a detached house hovered around the $1.8 million mark in each city, and then with condos averaging somewhere around $740,000. Ask those same people who are about to retire what $740k would have bought in the mid to late 1980s and they’ll tell you it would have bought pretty much any property anywhere that wasn’t a mansion with acreage.

What we’re also seeing now is young buyers who have some type of fortune to their finances – an inheritance for example or parents who’ll pick up the down payment – skipping the starter home and going straight into a home that’s a more permanent one for them.

This again connects to a generation of parents who are now in their 60’s or older and have accumulated so much wealth from their purchases real estate and equity growing with those purchases over time. They see the possibility of having this same solidity of investment for their children. However, many times when these younger adults start house hunting they realize they aren’t going to get a detached property, at least certainly not in big metro regions of the country.

Impact of Shrinking Starter Homes

The first impact of these much-smaller starter homes being then norm is that some couples are having to delay starting a family because they can’t imagine having children in such a small space. The next one is where leaving B.C. or Ontario altogether and heading to provinces with more affordable housing like Alberta. This again leads to the logical suggestion of having the ‘missing middle’ of housing built in these areas, but municipal governments continue to prefer the unaffordable housing given the fact it means more in the way of property taxes for them.

A connected and related issue is also keeping talent in the city. Successful young professionals who are making significant contributions to cities are often the same people who are getting married and looking forward to starting this very important progression in their lives. As of now, the real estate market in Canada doesn’t have enough supply to allow them to be able to do that without assuming way too much debt.

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Sign up for Real Estate Leads here and receive a monthly quota qualified, internet-generated buyer and / or sellers leads that will be received by only one realtor – you. These leads will be provided only to you, and they’ll be for people who are interested in buying or selling property in the same city or town in Canada where you work as a realtor. This is an excellent opportunity for new realtors to gain an advantage that will do much to build your client base more quickly than you would without it. You’ll see it is a very good investment in growing your real estate business and be glad you chose to get onboard with it.