How government policies had an effect over the past couple of months
We’re thinking of changing our posts from economic updates to political ones! Last week’s declines capped off what was the worst month of trading in the Capital Markets since December 2015. The reason? President Trump’s tweet of tariffs for steel and aluminum, stoking fears of a potential trade war while NAFTA talks are still in progress. Mr. Trump’s tweet was clearly against the recommendation of his Commerce Secretary, fueling rumors of yet another resignation in Mr. Trump’s beleaguered administration.
Meanwhile, Russian President Vladimir Putin scared the world with a speech on his latest nukes, reminiscent of a cold war prep rally. Markets reacted poorly to these events with the only silver lining for borrowers being a reversal on escalating interest rates. We expect the Bank of Canada will stay the course and not increase their overnight rate this week given lingering trade uncertainties and slowing economic growth.
Canada’s 4th quarter GDP came in at 1.7% (annualized). Consensus was 2% for Q4, so 2017’s economy ended on a cooling trend. 2 months into 2018, our economy is trending positively towards more modest growth. Continued weakness in the energy sector and recent measures to cool housing are taking their intended effect. Most analysts concur we’ll see modest growth of approximately 2% this year.
British Columbia’s budget related to real estate and mortgages
The BC Budget contained a lot of items related to real estate and mortgages:
Increasing the Foreign Buyer Tax (FBT) from 15% to 20% and expanding it to most regions in BCPreviously the 15% FBT only applied to the GVRD.
Introduction of a Speculation TaxThe new tax will be 0.5% this year, increasing to 2% in 2019. This tax is mislabeled as it is really a vacant home tax. The tax will apply to any non-BC resident in Canada or abroad, who don’t rent their home long term. This tax will affect Second Home / Vacation Homeowners not residing in BC, who don’t rent their home out long term. Short term rental arrangements such as Air B & B and VRBO do not count as long-term rentals and so, are excluded from being exempt.
New School Tax on Homes Assessed Greater Than $3 MillionThis new tax will be an additional 0.2% for homes valued greater than $3M and less than $4M. An additional tax of 0.4% will apply to the portion of a home’s value greater than $4M. Approximately 25% of the single-family homes in the GVRD will be taxed under this new tax making it controversial! Our concern is the unintended consequence of this tax on the existing rental stock. For example, a single-family home worth $3M rented upstairs / downstairs for $6000/month will now have an additional tax of $6,000 per year to pay. This increase will be passed along to tenants, eroding affordability.
Property Transfer Tax Increased to 5% For Portion Greater Than $3 MillionThe Property Transfer Tax is being adjusted to tax the higher end of the market. The application of the tax will apply as follows: 1% of the first $200,000, 2% of the balance to $2M, 3% of the balance to $3M and, 5% of the remaining balance. First Time Buyers who have never owned a Principal Residence can still claim the First Time Buyer’s Exemption for purchases of less than $500,000.
Cancellation of the BC Home Owner Mortgage and Equity Partnership ProgramWe are sorry to see this program canceled as of March 31st, 2018. This program was useful in helping First Time Buyers boost their down payment with a 5-year interest-free loan via a BC Second Mortgage. Down payments remain one of the most challenging aspects for First Time Buyers and this program was helpful. For those of you still planning to buy and use the program, there is still a few weeks left!
The BC budget did very little to address the supply/demand fundamentals or to propose anything meaningful to address affordability. We are seeing a slowing in the single-family markets, with prices starting to drop in certain neighbourhoods. Overall, the single-family market is mostly balanced. The condo/townhouse market remains robust, especially in the less than $1M price point. Demand continues to outstrip supply in this sector.
If you or anyone you know has questions about how the changes to Government policies may affect their mortgage, we’d love to hear from you! Despite political headwinds, we are still seeing an active and healthy market. Thanks again for your amazing support and have a great week!
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