July 2013 Monthly Report

Welcome to Summer!

Our thoughts are with those who have been affected by the Albertan floods. That said, we're confident that our Albertan brothers and sisters will be able to recover from this disaster.

In addition to reading about the Alberta floods in the paper, the news often covers a wide variety of real estate stories. The media, in an attempt to feed the public's insatiable appetite for real estate news, often publishes interesting pieces of real estate information that help sell papers. Due to constant heavy dose of statistical information, it's important to understand how the data is collected and how to interpret these facts.

Below are the 3 most commonly misunderstood real estate statistics in the media:

1) Pace of Canadian Housing Starts Up

http://globalnews.ca/news/627941/pace-of-canadian-housing-starts-up-in-may/

This shouldn't really matter to buyers or sellers out there. While this is related to the real estate market, it is more relevant for the construction industry than it is to the resale housing market.

Remember, these are new home construction figures: not sales or pricing numbers. Unless you're a construction worker or materials' supplier, this type of information is largely irrelevant to your real estate decision-making process.

2) Home Sales Drop!

http://business.financialpost.com/2013/04/03/toronto-vancouver-home-sales-fall-sharply-in-march/?__lsa=ca1a-ee8a

This kind of information is important for buyers and sellers to know and also helpful for realtors to use. A drop in home sales is sometimes a precursor to lower prices down the road. That said, there are a multitude of reasons that home sales could slow that wouldn't also result in a corresponding drop in prices.

It is therefore important to remember that these are unit sale figures, not price figures. These statistics also generally need to be seasonally adjusted to reflect the fact that sales tend to be slower in the winter and summer as opposed to the spring and fall. You should talk to a professional to see whether a drop in sales velocity is because of a slowing market or because of some other extraneous event.

3) Average House Prices Rise 6.5%!

http://www.cbc.ca/news/business/story/2011/10/17/crea-housing-september.html

This is the most misunderstood of the media reports that come out because averages are a terrible metric to measure house prices.

This is because the type of home that is sold in a given month strongly influences the outcome. For instance, if a lot of luxury homes are sold one month, then the average price of homes will go up, even if the typical home price doesn't change. This is exactly what has already happened in Vancouver, where the average price has risen 5.4% year over year, but the typical home price has fallen (see graph below).

For a more complete analysis of these statistics, please feel free to contact me at the email address or phone number above.

June 2013 Monthly Report

First, a mea culpa: last month, we speculated that it was likely that we would now have an NDP government. Like everyone else, we were wrong. With the Liberals' reelection, it's likely that there will not be any big surprises that will impact the housing market. Expect the status quo.

One sector that will likely benefit from having a Liberal over an NDP government is the commercial real estate market. After a strong run in the residential real estate market over the past several years, more and more people have begun asking questions about commercial real estate and its viability as an investment product. The answer to this question is that commercial real estate has proven to be a strong, stable investment, especially when compared to the recent volatility in the stock market or the infinitesimal interest rate returns being paid out by banks.

BC, in particular, has seen a disproportionate number of fortunes being made in commercial real estate (http://www.vancouversun.com/health/Cancer+donation+sets+record/6676983/story.html). In fact, 4 of the 8 BC-based billionaires made their fortunes through commercial real estate investments (http://en.wikipedia.org/wiki/List_of_Canadians_by_net_worth).

So what are the similarities and differences between residential and commercial real estate?

Residential and Commercial real estate share some commonalities and the licence to trade either asset is the same. That being said, because there are several key differences, real estate agents typically focus on one category or the other. There are exceptions, of course, and in smaller markets, agents often need to sell all manner of real estate. Macdonald Realty's sister company, Macdonald Commercial (http://www.macdonaldcommercial.com) offers professional commercial real estate services in all seven (7) main commercial real estate asset classes:

• 1) Land
• 2) Office
• 3) Retail (Stores, Malls, Shopping Centres, etc.)
• 4) Industrial (Warehouses, Distribution Centres, Industrial Manufacturing, etc.)
• 5) Multifamily (Apartments)
• 6) Leisure (Hotels, Sport Facilities, etc.)
• 7) Healthcare (Medical Centres, Nursing Homes, etc.)

Pros of Buying Residential Real Estate:

• It's the only investment product that you can also live in.
• The Principal Residence Exemption (http://www.taxtips.ca/filing/principalresidence.htm) is the single biggest tax loophole that the typical Canadian can take advantage of.
• The Realtor MLS system makes the residential market more liquid and transparent.

Because of this, buying a principal residence is one of the best investments you can make. That said, if you're considering buying real estate as a pure investment, you may also want to consider commercial.

Pros of Buying Commercial Real Estate:

• Most commercial tenancies (except multifamily) are triple net, meaning the tenant(s) is responsible for paying (1) property tax, (2) insurance, and (3) common area maintenance of the leased property IN ADDITION to their negotiated lease rate. In residential, the landlord is primarily responsible for these three items and must pay it out of the rent he collects.
• Commercial leases are generally considered to have been negotiated between two equal parties, meaning that both sides need to adhere to the stipulations of the lease. In residential, the Residential Tenancy Act is heavily tilted in favour of the tenant, meaning that it is much more difficult to get rid of bad tenants in residential real estate.
• The commercial real estate market is generally more stable than residential real estate market because it is more likely to be based on 5- to 10-year prevailing lease rates rather than psychology or speculation. This means it generally has a more objective economic rationale underpinning the price than the residential real estate market.

The reason that many people shy away from commercial real estate is one of familiarity. Everyone has had the experience of living in a residential property and therefore has at least a rudimentary knowledge of what it is. In commercial, there are so many different asset categories that even seasoned commercial agents tend to focus on a few of them. After all, a nursing home, a parking lot, and a hotel all require different management skill sets. Fortunately, professional property management companies, like Macdonald Commercial (http://www.macdonaldpm.com/), can help you manage a wide range of assets.

If you're interested in learning more about investing in real estate, either commercial or residential, feel free to contact me at the address above.

April 2013 Market Update

With the reintroduction of the GST/PST tax regime on April 1st, we have received some questions about how this will affect the real estate market. The short answer is: There will be a minimal effect; some people will win, while others will lose. However, we must break down its effects into 3 separate categories: New Construction, Resale, and Fees.

New Construction

This category is the one that is likely to be most influenced by the change back from HST to GST. All new residential construction will be taxable at the 5% rate rather than the previous 12%. However, the government will also be eliminating the New Housing Rebate, and adding a 2% transitional tax (for a total 7% rate, down from 12%). With the lower tax burden, there should be a net savings for buyers of newly constructed real estate in B.C.

But that's not the end of the story. The change back from the HST to the GST & PST will result in higher construction costs as government rebates for input costs are eliminated. That means that while the tax burden may go down on these homes, the cost base will go up.

The net result is that for homes valued at more than $525,000, the overall cost will likely go down, while homes that are valued at less than $525,000, the overall cost will likely increase.

For more details, see the government's GST/HST info sheet: http://www.cra-arc.gc.ca/E/pub/gi/gi-132/gi-132-e.pdf.

Resale

The change back to GST should have little to no effect on the resale market as 'used' homes are not subject to HST and will not be subject to GST or PST. There is no change to the Province of B.C.'s Property Transfer Tax, which will remain the same: 1% on the first $200,000; 2% on the balance.

Fees

The change back to GST will apply to the fees associated with a transaction and will lead to a slight decrease in these fees. That said, many of the fees currently associated with transacting a home already charged both GST & PST so there will be no change; however, the taxes on a realtor's fees will decrease by 7%. For a $1,000,000 home, real estate commissions typically average around 2.95% of the purchase price. A tax decrease of 7% on this amount means that the typical realtor commission should decrease by roughly 0.2065% of a home's purchase price.

Taking all of this into account, it is clear that the change back to the GST will have a positive effect on the market, but only slightly so. That said, depending on your asset class, you may end up behind.

To learn more, please feel free to contact me at the address above.