Month: June 2021

The real estate market has shifted dramatically throughout the pandemic with thousands of people waking up to the possibility of living outside the country’s major commercial and industrial centres.

Real estate firms will have to adjust to changing trends like this but not all will be able to benefit immediately. Some will suffer financially from finding themselves in the wrong place at the wrong time.

This setback wouldn’t be as bad if they’d claimed all the tax incentives they were entitled to but real estate is a classic example of an industry in which people underestimate the amount of research and development that goes on. Hand-in-hand with that goes a lack of awareness that much of that work qualifies for a tax break called Scientific Research & Experimental Development tax credits or SR&ED for short.

Tax incentives available in real estate and construction

SR&ED is administered by the Canada Revenue Agency (CRA) and can be worth hundreds of thousands of dollars.

The key is recognising what qualifies and it’s worth speaking to a specialist tax advisor if you are unsure.

The type of work encountered by professionals in the industry will vary from the design and development of tools, equipment and the structures themselves to environmentally-friendly energy sources and even advancements in building materials.

Some specific examples would include:

• Development of new or improved materials for construction including metals, alloys, glass, plastics, ceramics, concrete, cement and insulation.
• Development of equipment and infrastructure to address non-standard construction scenarios encountered on real estate projects
• Creation of new methods and processes that help reduce the overall time that it takes for properties to be built
• Developing environmentally friendly technology that helps real estate developers to meet new environmental regulations

There is already a high chance that many real estate and construction firms will have been innovating over the past few years but have not noticed that these valuable government tax incentives apply to them. Both real estate and construction companies are not typically perceived as businesses that operate under the umbrella of science and technology, but the engineering side of their operations is likely to routinely meet the criteria for SR&ED.

The good news is that SR&ED can be claimed for up to 18 months after the tax year in which the work took place. Crucially, the definition for R&D is also relatively wide. Projects such as One Ontario, which have been set up to use innovation to speed up the process of building homes and preventing a housing shortage in the province, are likely to be doing work that is eligible for SR&ED.

What are these innovation incentives worth?

Depending on your province and your business structure, you can claim up to 41.5% of the expenses directly attributed to innovative activity. This is made up of a combination of federal and provincial innovation credits and varies by province.

Most expenses linked to the R&D itself will attract tax incentives. This extends to payments to contractors, materials, salaries, and other staff costs. The value of the incentives received varies according to the size of the project or the scale of the innovation.

Nevertheless, SR&ED is one of the most generous incentives and all too often it goes unclaimed.

Richard Hoy is president of specialist tax consultancy Catax Canada, based in Vancouver. You can reach him at [email protected].

The new B-20 mortgage stress test amendment, which either raises qualification from 4.79% to 5.25% or applies 200 basis points—whichever is higher—takes effect today, but borrowers shouldn’t fret too much.

The simplest way to get around the stress test is to go to an alternative mortgage lender because amortizations are longer in order to stretch borrowers’ every dollar, says Matrix Mortgage Global’s COO Laura Martin.

“An important point to make here is that, while there is a small segment of borrowers whom this would impact, borrowers can still qualify with alternative lenders that allow for higher debt service ratios and longer amortization periods to stretch their income dollars,” Martin told CREW. “The effects on the market will be a drop in the bucket compared to the overwhelming demand by eager first-time buyers and upgraders fighting for a scarce amount of supply for detached and townhomes with more space. The lack of construction for new homes has in large part caused this inordinate lack of supply, however, the price growth in secondary markets will encourage larger amounts of new housing construction. This, ultimately, could reduce the price pressures.”

In Canada’s most expensive markets, namely Vancouver, Toronto and Ottawa, the stress test should have minimal impact on borrowers’ abilities to secure mortgages. Using a $600,000 mortgage at 4.79% on a 25-year amortization, a borrower with $10,000 of debt would need to show an income of $120,500, but at 5.25% they would have to show $125,000 in income. In the rest of the country, it’s even more manageable.

“The increase in OSFI’s [Office of the Superintendent of Financial Institutions] stress test from 4.79% to 5.25% is a margin of only 46 basis points compared to the initial 2017 introduction of the stress test that required an additional 200 basis points to qualify—which will only have a marginal impact on borrower affordability or market cooling,” said Martin.

Another way around the stress test is by adding cosigners, however, Martin noted that alternative lenders require minimum down payments of 20%, although she says the majority of purchasers often plan ahead in order to void insurance premiums with the Canada Mortgage and Housing Corporation or Sagen (formerly Genworth). Still, Martin expects that first-time homebuyers will feel the short shrift more than anybody else.

“The real challenges for first-time buyers will be saving for down payment amounts of $100,000 amid their massive student and consumer debts, or paying off large mortgages with other economic pressures like inflation. In terms of cautionary measures to cool the market, this will almost certainly be too little, too late.”

According to mortgage broker Leah Zlatkin, buyers who were preapproved before June 1 but did not receive a mortgage commitment from their lender in time—likely a consequence of how many borrowers were trying to beat the June 1 deadline—their mortgage amount could be 5% less and that could affect the home purchase. Moreover, it’s not yet clear if all lenders will treat the situation uniformly.

“Usually consumers look at the lowest rate first,” said Zlatkin, principal broker at Brite Mortgage and a LowestRates.ca expert, “but buyers who are worried about the amount of mortgage dollars they will have access to should consider a slightly higher rate for a guaranteed quick turnaround on commitment.”

The COVID-19 pandemic has taken a significant toll on our apprenticeship system and heightened the risk that there may not be enough certified journeypersons in several trades a decade down the road.

Construction trades such as bricklayers, boilermakers and welders are simply not training enough apprentices to meet the demand in Ontario and nationally, according to data in a new labour market information report that was released recently by the Canadian Apprenticeship Forum (CAF).

The report, titled Apprentice Demand in Red Seal Trades: A 2021 National Labour Market Information Report, was done by Prism Economics and Analysis and draws on apprenticeship trends data and projections to provide a forward-looking assessment of demand and supply for trade certification.

Between 2021 and 2030, it’s anticipated Ontario will need 1,378 new certified bricklayers but only 545 are expected to complete their training. Ontario will require 3,630 new welders in the same period but only 610 are expected to become certified, while 850 boilermakers are needed but only 636 will likely receive certification.

According to the report, the pandemic has presented unprecedented challenges to Canada’s apprenticeship system, as mandated shutdowns and social distancing measures created new administrative challenges and imposed many obstacles to the delivery of in-school training, testing and certification.

Ontario’s construction and maintenance industry will need to hire and train nearly 104,000 additional workers over the next 10 years to keep pace because the industry is growing, and baby boomers are retiring.

Contractors are already anticipating problems. A survey by the Ontario Construction Secretariat found that 56% of contractors expect to have greater difficulty accessing skilled labour in 2021.

Construction is the backbone of our economy. Housing’s share of the country’s GDP, for example, spiked to a record 9.3% in the final quarter of last year—double the historical norm and up sharply from 7.5% a year earlier. It is critically important that the industry not be derailed.

The recent figures, however, indicate that a labour shortage in certain trades could jeopardize that recovery.

The provincial government is taking steps to address the problem in Ontario with the announcement of the Building Opportunities in the Skilled Trades Act which will establish a Crown agency called Skilled Trades Ontario that will replace the embattled Ontario College of Trades.

The long-awaited legislation was introduced recently by Labour, Training and Skills Development Minister Monte McNaughton to help apprentices prepare for in-demand jobs and complete their training faster. It will make the system more accessible to apprentices and much easier to navigate.

The agency will create a clearer pathway for youth interested in pursuing an apprenticeship, work to end the stigma around careers in construction, and simplify the apprenticeship system from start to finish.

The idea is to provide a one-stop-shop for apprentices, employers, and journeypeople. It will handle apprentice registrations, develop training standards, and issue certificates and licences to trades. Research will be conducted into the skilled trades and apprenticeships by the agency so that the province and employers will be able to anticipate what trades will be most needed down the road.

The agency has the support of RESCON and homebuilders and several industry heavyweights such as LiUNA, the Provincial Building and Construction Trades Council of Ontario, and Merit Ontario.

RESCON and members of the homebuilding community have been waiting for this new agency to be announced for some time now and we’re looking forward to working with the government to make it reality.

Richard Lyall is president of the Residential Construction Council of Ontario (RESCON). He has represented the building industry in Ontario since 1991. Contact him at [email protected]

Ottawa is Canada’s second-fastest growing city and it should surprise no one that its real estate market is as hot as any in the country.

“We’re seeing an incredible amount of people moving to the city, and there’s a lot of movement within the city as well, but the economics behind Ottawa is no surprise to me—it’s why we’re one of the fastest growing cities in Canada,” said Derek Nzeribe, president and founder of House Collection Realty and Milborne Group’s regional director for Ottawa.

Employment in Ottawa has long been associated with the federal government and the cities’ post-secondary institutions, including Carleton University and the University of Ottawa, but the city has also become a technology hub in recent years. A lot of research and development is done in Ottawa—the old Blackberry site was converted into a testing and creation facility for autonomous vehicles; Amazon has established large distribution centres in the city; Apple has built its own research and development base; and Shopify is headquartered in the city.

Nzeribe credits the Canada 150 campaign for highlighting the city’s virtues, having noticed the local market shift in late 2016 into early 2017, and while the COVID-19 pandemic was as much a nadir for activity in Ottawa as it was in the rest of the world, it wasn’t long before business resumed as usual. In fact, it’s writ large in Ottawa’s real estate market.

“In February 2020 from a month earlier, we saw numbers that were unprecedented with serious growth and a market that was still moving very quickly,” said Nzeribe. “Once the pandemic was declared and there was a bit of uncertainty, we saw a lot of that stall, but had there not been the pandemic and we continued on as business as usual, we would be in this scenario either way. The market was already heading in this direction.”

Now, the market is showing signs of healthy moderation. According to the latest figures from the Ottawa Real Estate Board (OREB), there were 2,402 sales in April, well above the five-year average of 1,830 transactions.

“As the typical spring market ramped up, April was poised to be the strongest on record with over 3,200 new listings of properties for sale. Most of these properties entered the market before the province’s stricter lockdown order was announced midway through the month. At that point, the trajectory sputtered, and while it continued to be active, it followed a noticeable decline as Sellers responded to the government’s resolution to reduce the spread of COVID-19,” said Debra Wright, the board’s president.

“Nevertheless, the number of transactions managed to surpass unit sales recorded in previous Aprils, and we presume the figures would have been even higher in different circumstances.” According to Nzeribe’s figures, the average detached home price in Ottawa was $892,000 in April, up from around $630,000 a year earlier, while OREB had the average condo selling for $427,145.

“From March to April, we’re still seeing pricing that’s holding steady,” he said. “We’re seeing about a 1% increase in pricing month-over-month but we’re not seeing incredibly fast paced moving numbers. We’re showing that things are starting to level off and coming to a more stable level of pricing. There are no longer 25-30 people bidding on the same house and properties are being listed closer to what their actual values are, and as a result we’re seeing the market stabilize now in that respect.”

However, Ottawa’s condo market is the segment to watch, added Nzeribe, because prices have rose by 11% from January to April.

“It’s interesting compared to other years, and it’s continuing to grow. I’m bullish on the residential condo apartment market in Ottawa. The reason there’s so much strong activity in the condo market is it’s in reaction to the other markets.”

A joint Nanos and Bloomberg poll last month revealed Canadians would welcome interest rate hikes as a means of cooling the housing market, but the reality is far more complicated than that.

“Who in their right mind would want interest rates to rise? Anyone who’s thinking they want interest rates to rise to slow home prices doesn’t understand how mortgage approval rules work because all mortgage approvals were written to 4.79%, now 5.25%, so what the actual interest rates are don’t actually mean anything as far as home prices have gone, because nobody is qualifying for any extra money over and above what they would if the actual interest rates were 4.79%, and 5.25% (as of June 1),” said Dustan Woodhouse, president of Mortgage Architects.

According to the poll, 49% of survey respondents either “support” or “somewhat support” the Bank of Canada increasing interest rates because they think it would quell runaway housing prices. But the reality is that it would take a significant rate hike to soften activity in the housing market, which would concurrently torpedo the economy, says Woodhouse, and as importantly, it would reduce homebuyers’ purchasing power.

“So to have a material slowdown in the amount of money people can purchase a home with, you would need interest rates to rise to 7.5-8.5%. That’s the real math on that,” said Woodhouse. “(Housing prices) would more than slow down: the entire economy would grind to a halt. The whole country would shut down. That would be like trying to kill a mosquito with a nuclear bomb.”

Woodhouse believes there’s a fundamental misunderstanding of how interest rate policy works, and according to Dr. Sherry Cooper, chief economist of Dominion Lending Centres, the largest mortgage network in Canada, the survey results elucidate yet more confusion.

“The housing market is not the Bank of Canada’s objective function; it is only supposed to be concerned about inflation,” said Dr. Cooper. “The problem is that interest rate policy is a blunt instrument and it leads to all sorts of unintended consequences. If you were to raise rates too much, you’d dampen the whole economy, which makes no sense given all the problems we still have in terms of jobs and getting the economy restarted. The Bank of Canada will never do it for that reason. It will raise rates when it thinks the economy is growing rapidly and is close to full employment.”

Interest rates are slated to rise in 2022, one year ahead of the Bank of Canada’s initial prognostication, because the economy appears healthier than anyone thought it would be at this stage of the pandemic. The Bank of Canada recently announced modest tapering of quantitative easing, signifying that it anticipates a return to full capacity sooner than expected.

“But all other things remaining constant,” Dr. Cooper said of interest rates rising quickly, “it would reduce buying power. The question is would it lead to a decline in home prices? It would take quite a tightening in monetary policy for that to happen, and tightening is unlikely.

“Even the housing market isn’t one market nationwide; it’s many, many different markets, so we could see home prices reverse in one area or one sector without seeing it happen in another. To see the overall average home price decline, which means it would have to be a widespread phenomenon outside of both Toronto and Vancouver, it’s not that it can’t happen but it’s unlikely.”

Vancouver-based rental platform liv.rent is accepting Bitcoin rent payments, the company just announced, with landlords receiving funds in Canadian dollars.

“We launched this initiative (last week),” said Matisse Yiu, liv.rent’s marketing manager. “Currently, we have a few payment options including credit cards and payment through UnionPay and now you can pay rent with Bitcoin. Renters can do it through coin-based API and a second way is through any kind of crypto wallet.”

The start-up launched in 2018 as an all-in-one rental platform where, in addition to processing payments, apartments can be listed and leases can be signed, either from Canada or abroad. Yiu says the idea to add the cryptocurrency payment option to the platform came from members of the liv.rent community and it quickly caught on.

“The Canadian rental industry is pretty slow when it comes to innovation and the adoption of technology, so we thought this was a great idea,” she said.

The Starke Realty team at PSR Brokerage oversaw Canada’s first real estate transaction using Bitcoin in 2018, and according to its team lead, paying rent with Bitcoin is not a bad idea but the cryptocurrency’s fluctuations and volatility are complicating variables.

“People should be able to pay however they want to pay. There was an RBC program that was recently cancelled that allowed people to pay their rent on credit card, and I thought that was pretty cool because that allowed people to pick up points, and I thought that’s a good direction to head in,” said Brett Starke.

“The fluctuation and volatility will be the challenges, and the way we overcame that in the past with our Bitcoin transaction was the Bitcoin amount was based on Canadian dollars, not the other way around. If rent is C$2,500, the Bitcoin amount would have to be equivalent of C$2,500 on that day.”

liv.rent can process Bitcoin payments, but the larger question of whether or not cryptocurrencies can be used in the rental market ubiquitously is muddled. For one, a direct payment from tenant to landlord using Bitcoin isn’t likely to encounter problems if an agreement is in place, but if an investor using a realty brokerage to manage their tenants were to try accepting cryptocurrency in lieu of a fiat currency, the brokerage wouldn’t be permitted to hold it in trust.

“The other challenge I see is with the first and last month’s deposit being held in a trust. If the deposit goes through a real estate brokerage, because real estate brokerages can’t hold Bitcoin in trust now—they’re not set up for it—the deposit would have to be held by a third party,” said Starke. “There might need to be the establishment of a third party company, kind of like escrow companies in the U.S.

“The challenge when we did it in 2018 was finding lawyers who create bitwallets to hold the funds. The Law Society of Upper Canada, when we were doing ours, didn’t have literature containing Bitcoin in a binding contract, so it was difficult to find lawyers to complete that transaction, and lawyers aren’t typically used in rental leases, so finding the third party would be the challenge. Where does the money get deposited?”

A great real estate agent deploys strategy in tandem with the conditions of the market, and according to Craig Proctor, today that means going off market.

“The No. 1 thing real estate agents need to get right is their offer. Are they making an offer that matches what buyers and sellers really want in today’s market?” said Proctor, who’s hosting the Craig Proctor Millionaire Agent-Maker SuperConference virtually from June 11-13. “Right now, there are hardly any homes on the market, so you need to offer buyers exclusive lists of properties that aren’t yet available on the MLS. Off-market seems to be working really well right now. Most people won’t list their house until they find their next house, and I give buyers and sellers what they really want instead of what most agents think they want.”

Proctor is a luminary real estate coach who, among other things, helps agents take their marketing to the next level, which he says is the first step towards growing their businesses, because simply deploying strategies and being a great agent doesn’t work without customers. In today’s market, selling a house isn’t difficult but buying a house is, and the biggest issue sellers have is securing a house to move into.

“In this crazy hot market, instead of doing what is traditionally done—advertising the house to attract a buyer—I’d recommend doing the opposite, advertising your buyer to get the seller to call you,” said Proctor. “Using Stonehaven Estates in Newmarket as an example, because it’s an exclusive community, if a buyer wanted to buy a house there, Id send a direct mail letter to every home in the neighbourhood advertising the buyer I have to each homeowner in Stonehaven Estates—I’d promote that my buyer client is prequalified for a mortgage, is willing to pay full market value, that they’re flexible with the closing date and working with agent Craig Proctor, so I the seller wants a fast sale for top dollar, without the hassle of listing their home for sale, they should contact us. Of 1,000 houses, I’d expect three or four sellers would get back to me.”

In Toronto’s white-hot real estate market, most listed homes have as many as 10 offers and, should a buyer’s offer be accepted, they can expect to pay $200,000 above asking price, or more. However, Proctor says that can be averted when representing your buyer using his techniques, which he will showcase at his June 11-13 virtual conference.

Speaking of Toronto’s market, it’s arguably never been this hot, but a quick search of the MLS reveals that of about 55,000 agents in the city, 38,274 have sold at least one home, 6,115 have sold at least two homes, and 4,106 have sold at least three homes.

“About 16,000 agents have not sold a single home in 2021,” said Proctor. “If you’re an agent who’s sold at least 13 homes, you’re in the top 10% of agents in Toronto.”

The first day of the Proctor SuperConference will teach agents how to market themselves and, therefore, attract a solid base of customers, while the second day will focus on leveraging technology and the third day will show agents how to build teams so that they can make more money while working less.

To register for the Craig Proctor Millionaire Agent-Maker SuperConference, click here.