The bonfire of the speculators: What caused an abrupt down-shifting in the preconstruction assignment market?
John Lorinc
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The CN Tower behind a condominium development project, in downtown Toronto, on Oct. 28, 2022.Fred Lum/the Globe and Mail
In the last few years, Frank Giralico, a sales representative for Capital North Realty, was doing a brisk trade in the Greater Toronto Area’s “preconstruction assignment market,” in which investors ante up a down-payment on an as-yet unbuilt condo and then flip the rights to purchase it for a profit before the unit is constructed, never actually intending to own it.
That market hums along when prices are going up, and seizes up when they’re coming down, or when interest rates have spiked. “I focused a lot of my business on that because the market was geared that way,” he admits. Things are different now: “I’ve seen investors who are now faced with the reality that they’re either going to have to come up with extra funds because the mortgage rate has increased so much that they may not be able to close.”
The frothy trade in preconstruction assignments drove the near record growth of the condo sector in 2021, and its collapse has contributed to its abrupt down-shifting in recent months, with Urbanation reporting a 79-per-cent decline in new sales in Q3 2021. As one of the many Youtube real estate investing channels recently noted in an hour-long post-mortem featuring @Precondo founder Jordan Scrinko, Pre-Construction Assignment Sales Are DEAD In Canada.
The reasons aren’t especially difficult to fathom. Intent on breaking the back of the inflation that’s stream-rollered the economy, the Bank of Canada’s aggressive rate hikes have made it much more difficult for buyers to prequalify for loans and, in some cases, come up with adequate funds to close a deal.
But there are other drivers at work, too – a series of federal and municipal policies, several of which came into force on Jan. 1, 2023, that are designed to throw even more cold water on the housing market and its eye-popping prices. These include:
- New anti-flipping rules, which taxes 100 per cent of the capital gains on a property sold within 365 days of purchase;
- The City of Toronto’s vacant home tax, which takes effect Feb. 3 and imposes a tax of 1 per cent of market value on unoccupied homes that don’t qualify for exemptions (see sidebar);
- A two-year moratorium on the purchase of residential real estate by foreign buyers;
- New Canada Revenue Agency rules requiring investors and speculators to pay HST on profits from preconstruction assignments.
These regulations layer onto several earlier measures – e.g., B.C.’s speculation and vacant homes tax and Ontario’s foreign home buyers tax – that also sought to take some of the steam out of the market at a time when governments across the country are looking for ways to stoke the construction of new homes and affordable apartments.
Other jurisdictions have tried similar measures to take the energy out of their own properties markets: New York State passed an anti-flipping law a decade ago. California last year passed a similar law, imposing a 25-per-cent tax on homes resold within three years.
While the question of whether such policies or the Bank of Canada’s interest rate hikes succeeded in cooling the market is largely academic, there’s not much compelling evidence that anti-speculation laws have a significant impact on prices or availability.
Murtaza Haider, who studies real estate management at Toronto Metropolitan University, says the data on B.C.’s vacant home tax shows only a modest effect, and doesn’t expect that Toronto’s new vacant homes policy will free up a lot of empty dwellings. “It doesn’t mean tens of thousands of new units will be available.”
Olaf Weber, a University of Waterloo scholar who has studied such measures, adds that these moves “[show] that the government tries to do something. Many [people] will agree that international investors drive prices up. That’s a pretty simple narrative.” But, he adds, “I don’t think it will really change the market and create more affordable housing.”
Others, however, argue that the recent spate of policies haven’t gone far enough. Planner Andy Yan, director of Simon Fraser University’s City Program, observes that the federal government’s new anti-flipping rule doesn’t apply to one of the most intensely speculative sectors, which is preconstruction assignments by foreign investors. Still, Mr. Yan adds, the growing list of restrictions and taxes is beginning to look like a systemic response to a housing crisis which he describes is 30 years in the making.
Whether or not these measures succeed in tamping down speculation, the real estate industry isn’t pleased with most of the regulations, some of which will bite agents and brokers who buy and flip properties as a sideline, as well as developers looking to presell a sufficient number of units so they can secure construction loans and begin building.
But Christopher Alexander, president of Re/Max Canada, says the vacant homes tax will play an important role in the market in the years to come: “I think that’s a good move,” he says. “We have a serious inventory challenge and a supply shortage that runs deep. We are going to need every piece of product we possibly can bring on to help offset the incredible demand we’re going to continue to have for years to come.”
As for renovators, many in recent years have built thriving businesses around buying, fixing up and then re-selling homes – a practice where the government now says it will treat any resulting capital gains as business income for tax purposes, meaning that tax filers claiming the principal residence capital gains exemption will attract more scrutiny from CRA.
Lawyer Debbie Pearl-Weinberg, executive director of CIBC’s wealth advisory services, describes the 365-day anti-flipping rule as a “bright line test” but adds that renovators who wait for a few days past the deadline to list could still find themselves in CRA’s crosshairs.
“I don’t think taxpayers can expect that if they just make sure that they don’t sell within that 365-day period, that they [can] be rest assured that it is capital gain,” she said.
Thinking ahead to the next economic cycle, Mr. Giralico predicts that while prices will recover, some of the frothier corners of the industry may be altered permanently. “As a gentleman that works on commission, I’d like to make as much money as I can,” he concedes. But, he adds, “I don’t see [preconstruction assignments] being as busy as a few years ago. I don’t think we’ll hit those volumes again simply because there are a lot of things in place now where, you know, not every guy can just come in to buy, whether they can afford it or not.”
Sidebar: Toronto’s Vacant Home Tax
Earlier this year, when the City of Toronto mailed out a notification of the new vacant homes tax, printed on double-side yellow paper, many residents noticed that the accompanying website – toronto.ca/VacantHomeTax – wasn’t yet operational.
The site, which allows owners to fill out a formal declaration of occupancy, has since come on line, and indeed city officials report that as of Jan. 12, 55 per cent of all owners had submitted their declaration. A “robust public awareness campaign” is now in full swing, according to a spokesperson, and it includes a notification that will be sent out with interim property tax notices and individual follow-up reminders sent out after the Feb. 3 deadline.
The move to implement a vacant home tax dates back to 2019, and was estimated in 2021 to cost about $11-million in start-up expenses, with an outlay of about $3.1-million annually to keep it running. City officials at the time predicted gross revenues of $55-million to $66-million, based on a ballpark estimate that about one percent of Toronto’s housing stock is vacant. Staff admitted, however, that the actual number of vacant dwellings was unknown.
Also unknown: the full range of circumstances that will fall between the cracks of the bylaw, which outlines exemptions, such as vacancy due to renovations or the hospitalization of the owner. In fact, Toronto lawyers have been fielding calls from anxious clients about situations not covered by the enumerated exemptions, such as tenants that don’t have written leases, or owners who’ve been living abroad for extended periods due to the pandemic.
Even with the recent drop in real estate prices, the cost of the tax will be significant: a one-time hit of $15,000 on a $1.5-million home.
