Tag Archives: tactic
Underground renos to surge with HST
Stephen Dupuis – Toronto Star
The underground economy in Canada’s renovation industry grew as if it were on steroids after the federal goods and services tax (GST) was introduced in 1991 and there’s no reason to believe it won’t grow as quickly after the HST kicks in on July 1, 2010. Unfortunately, that’s not the only downside of the pending tax increase on this key strategic sector.
While the provincial government has substantially mitigated the impact of the HST on new homebuyers through the rebate framework, the renovation sector was left outside the rebate structure, compounding the sin of omission by the federal government when the GST was introduced in 1991.
According to a report released by the Canadian Home Builders’ Association last week, the residential renovation sector accounts for some $53 billion in spending in Canada, roughly two-thirds of which is paid to contractors.
Provincially, Ontario homeowners spend about $20 billion on renovation with $14 billion of that through contractors.
Drilling down further on the Ontario numbers, the $14 billion is split roughly two-thirds labour and overhead, which is currently PST-exempt, one-third materials, which is subject to PST. The PST on materials works out to 2.6% of total cost of a typical reno.
By applying the HST to labour and overhead, it’s obvious that we are looking at an instant cost increase of 5.4% (PST is 8%) with no value added. The CHBA/Altus report calculates the impact of that increase to be $757 million and that’s a huge number that has legitimate, professional renovation contractors rightfully discouraged.
As one contractor said to me when the HST was brought forward, “prior to the 7% GST, I had clients who would ask if I would consider a 10% discount if they paid cash. After the 7% GST came into effect, clients changed tactics. They disliked the GST as much as anyone and would ask if they could pay cash to avoid it. Bingo! The underground renovator no longer had to give a discount for cash – henceforth the government would do it. Clients were now happy simply saving the hated 7%. On July 1, 2010 that incentive to pay cash will jump to 13%!”
Unfortunately, foregone sales tax revenues are just the tip of the iceberg as far as the problems with cash deals go.
Contractors operating in the underground economy are also avoiding everything from income tax to workers’ compensation premiums to building permit fees.
A 2008 report by the Ontario Construction Secretariat estimated that the federal government lost between $225 million and $298 million in GST revenues annually between 2003–2005 due to underground activity in the renovation sector.
Meanwhile, both levels of government are losing upwards of $1.6 billion in income taxes, and this is all before the HST kicks in.
The CHBA/Altus Report points out many other pitfalls of harmonization, including the fact that the tax increase undermines the federal Home Renovation Tax Credit and the federal/provincial home energy retrofit programs.
The report further notes that the HST will likely reduce the volume of reno activity, costing precious jobs, while exposing homeowners to the liabilities and risk of conducting renos without a contract.
The simple solution put forward by the CHBA is to maintain the tax rate on all professional renovations, not just “substantial renovations” as defined under the GST, at the revenue neutral level of 2.6%.
We’re calling on federal Finance Minister Jim Flaherty to heed that call and urge him to use this window of opportunity to get the HST right from a renovation standpoint.
Stephen Dupuis is president and CEO of the Building Industry and Land Development Association. The views expressed are those of the president.
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Preparation can ease stress of bidding war
Mark Weisleder – Toronto Star
Multiple offers. Bidding wars. These typically take place in a seller’s market, when there are more buyers than available properties. Yet we are seeing bidding wars even today, when the market is more balanced. It is very important that buyers are properly prepared for this extremely stressful process.
Comment: Except that we do not have a balanced market right now. I have no idea why anyone says that, there is nothing to support that. We have low listings and high sales, classic definition of a sellers market. Bidding wars all over the place, houses selling the day they are listed. More signs of a sellers market. Buyers being pressured to jump, no time to think, barely able to see two houses before one sells. All signs of a sellers market. Do not let anyone tell you otherwise.
In my view, one of the main problems with the multiple offer process in today’s real estate market is that there are very few rules for how the bidding will be conducted. The process is essentially unfair to buyers. This is not like a silent auction where you get to see what everyone else is bidding and then make a decision as to whether you want to make a higher bid. The seller does not even have to accept the highest bid. For example, a seller may prefer a lower offer, that has no conditions attached to it, to a higher offer that has conditions about financing or home inspections.
Comment: Here I do agree, there are a lot of problems with the way we do this. We need a lot more transparency to make the system work better. Maybe not with prices, but there should be some sort of system to record the agents involved so we all know what we are up against. And even once the deal is done, release the other bids. Not during the process, but after the seller has chosen one, the next day we should all be able to see what everyone offered. A system like this is sure to keep everyone honest.
The seller cannot give out the personal information of the bidders or the amounts being bid and only has the obligation to tell all buyers in the process the actual number of bids received. Sellers can require that all buyers fax in their offers to the seller’s real estate salesperson. Many buyers prefer to present their offers in person.
There are also unscrupulous sellers who falsely claim that they have received other offers in order to fool an unsuspecting buyer to bid higher. It is very hard for a buyer to check this out after the fact, without commencing an expensive lawsuit.
Comment: This really does not happen, more of an urban myth. If you are ever in doubt, ask for the name(s) of the other agent(s) involved. Give them a call and confirm they are bidding on the property. Very easy to confirm, so there should never be any talk of fake offers. If you do not take the time to double-check, then you forfeit your right to complain. And if you lose a bidding war, it is more likely due to underbidding, not because of anyone playing games. And if you think you paid too much, you were the one in control of your own offer, no one forced you to pay that amount.
If you are competing on a property, I recommend that you take the following steps:
Research the general area that you are looking at moving to in advance, so that you can obtain general information about schools, parks, demographics and crime rate.
Walk the streets that interest you and start talking to the neighbours, to get a sense if this is the kind of friendly area that you would like to move your family.
Visit with your lender or mortgage broker in advance to obtain a clear understanding as to what you can afford to spend in order to buy a property, without having to dramatically change your standard of living. It is wrong to sacrifice everything just to afford a more expensive home. You want a home that will create happy memories for a lifetime.
Comment: All of the above should be done regardless of multiple offers.
Work with a professional buyer salesperson. You need to know in advance the real market value of any property that becomes available. Many sellers deliberately list their property for a price that is 5% to 10% below market value, in order to generate interest from many buyers to drive up the price. You cannot be fooled by this tactic. You also need an objective third party to guide you through the negotiating process.
Always make your purchase conditional on a home inspection. In most cases, sellers will permit a buyer to conduct a home inspection in advance of submitting an offer, so that they can make their offer unconditional. The problem here is that a buyer may in fact pay for the cost of a home inspection report, but not have the seller accept his or her offer, as the seller can still choose any offer that he receives.
Comment: In multiple offer situations, it is almost always the offer with no conditions that is accepted. While I would never ever recommend a client remove any offers, they have to in order to win the bidding war. I hate that it is so, but that is simply the way it works these days. Put that condition out and you lose the house, period. And no seller will allow you to conduct a home inspection before you make an offer, trust me.
If you are at all suspicious as to whether there is in fact a competing offer, consider inserting a clause that states that your offer is being submitted on the basis that it is part of multiple offers and that if the seller does not receive another offer, you will have the option to either cancel or revise your offer. You can also include in your clause a requirement that the seller provides the name of the competing real estate brokerage that submitted the other offer. Buyers should consult their own real estate buyer salesperson or lawyer in preparing this clause to ensure complete protection.
Comment: A great idea – except that the listing agent has a legal obligation to reveal the number of offers being made. Thus you should hold onto your offer until you know for sure how many there will be. If you send it in thinking you are the only one, and others arise, then you will be given a chance to revise your offer. It might be better to stay low and use the later chance to revise upwards, rather than the other way around.
Buyers, being prepared for bidding wars will provide you with maximum protection, even as you participate in this very stressful process. Next week, I will discuss how sellers can set the stage for potential bidding wars on their own property.
Mark Weisleder is a lawyer, author and public speaker for the real estate industry who is a regular contributor to Real Estate News.
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First timers weigh benefits, risks
By Ann Perry, Toronto Star
To buy or not to buy?
That is the question facing potential first-time homebuyers who are weighing the benefits and risks of jumping into the housing market in the midst of the recession.
Until recently, many first-time buyers were priced out of real estate markets in major Canadian cities by frenzied bidding wars that sent prices into the stratosphere.
But the global recession has brought many housing markets back closer to earth and, in the process, presented opportunities for first-time home buyers. House prices have fallen in many cities. So have mortgage rates. That means that buying a house has become more affordable. But buying and borrowing costs aren’t the only factors potential homebuyers have to consider.
The recession has sent spasms of fear rippling through the job market. Canadian employers have shed 357,000 net jobs since October, pushing the unemployment rate to 8%, a seven-year high. Economists are warning the jobless rate will likely continue to rise, with some forecasting 10 per cent unemployment by next year.
Comment: Except that we saw 36,000 new jobs created in Ontario in April. But of course, that is just a blip, a mistake, the world is still going to end. Why is that commentators, pundits, talking heads and the press will give acres of coverage to bad news, but when there is a bit of bright light, it is buried under the obituaries on the back page? Isn’t good news good?
That has left potential homebuyers in a dilemma. Can they afford to pass up a chance to get into the housing market? At the same time, can they afford to make the biggest purchase of their lives when few jobs seem secure?
Comment: When have jobs ever been secure?
The best way for first-time buyers to assess whether they can comfortably afford to buy in the price range they are considering is to apply for a pre-approved mortgage, said Karen Leggett, head of home equity financing at the Royal Bank of Canada. That process involves taking a close look at your down payment, household income, debts and liabilities, estimated monthly housing costs and spending patterns.
In this uncertain employment environment, potential homebuyers also should make sure they have built up an emergency fund to cover their mortgage costs if they lose their jobs, Leggett added.
“I think if you’ve covered off those bases, then you should be able to relatively comfortably and confidently be able to proceed with your purchase.” Leggett said.
Leggett said that she has been hearing anecdotally that “a lot of first-time buyers are using this as an opportunity to get into the market.” But she acknowledged that growing job insecurity is keeping some potential buyers on the sidelines.
“At the end of the day, if you don’t really have employment certainty, whether it’s the best buyers’ market there ever has been, that probably doesn’t change your decision.”
“But if you do have some employment certainty, you have a reasonably good credit profile and you have your emergency fund, and you’re sort of secured for a normal course of events and even somewhat a downturn in events, then reasonably you have to continue to live your life and move forward,” said Leggett said. “It is a good time to buy if you can create some certainty around those parameters.”
Leslie Fallaise, an outside mortgage agent with Northwood Mortgage Ltd., said first-time homebuyers are feeling “stressed and pressured” by conflicting messages.
On one hand, “they’re hearing great low interest rates – this is the time to do it, you’re never going to see this again,” she said. But some are also wondering if the housing market has really bottomed out yet.
Comment: The Toronto market bottomed in December. Sales volume was down 45% in November, 55% in Decemeber, 45% in January, 20% in February, 10% in March and around 7% in April. Follow the numbers, we went down and then headed back up. I cannot for the life of me see sales volume dropping 50% from where we are now, which is what would have to happen for the bottom to still be ahead of us.
Stock markets are up in North America, our dollar is up, job loss has slowed (or even ended with new jobs being created in Ontario last month for the first time since last year), real estate sales and prices are rising. The weather is good, people are feeling better. Unless this is all some big illusion, mistake, blip… then how is bottom still ahead of us?
By the same token, many mortgage lenders are apprehensive and are tending to err on the side of caution., Fallaise said.
“I do know that there are no slam-dunk deals right now for first-time homebuyers,” she said.
Comment: Except that is you have a decent job, a down payment and go after a house that is properly priced – then you will have no problem. I have not had a financing issue yet this year, in quite a few deals. Anyone who is on the line, who is questionable, then they may have an issue as has been the case before. Nothing new here.
Janet Freedman, a financial planner with Toronto-based Finance Matters, cautioned that first-time buyers shouldn’t be overly worried about missing a buying opportunity.
“I think they should be far more concerned in making sure they’ve got all their ducks in a row before they start looking for real estate,” she said.
The most important consideration is how secure your job is.
Comment: And how does anyone know that? Before I got into real estate, I worked for years in the internet industry. Through the dot com boom, when we were all paper millionaires, did any of us think our jobs were secure? A handful of stock options one day and a company out of business the next. This is not the 1960s, there are no more jobs for life. Not having job security is nothing new, no matter how much people try to portray it that way.
“That is something that people really need to look at very carefully,” Freedman said.
Like Leggett, Freedman counsels people to have money in the bank to cover mortgage payments in the event of job loss.
Freedman also advises people to have a minimum 20% down payment, and to take advantage of the federal government’s Home Buyers’ Plan. The plan allows first-time home buyers to withdraw up to $25,000 tax-free from their registered retirement savings plan to purchase a home. Any withdrawal must be repaid within a 15-year period, starting the second year following the year in which a withdrawal was made.
Comment: With the average house price in Toronto around $365,000 these days, I am sure there are a lot of first time buyers who have $73,000 laying around to use as a down payment. Even with $25,000 from an RRSP, that means almost $50,000 in cash. Plus closing costs. A nice thought, but nothing close to reality.
First-time buyers also need to be very careful not to get carried away.
“Even if the bank tells them that they’ll lend them a certain amount, they need to look at what their actual costs are going to be – the mortgage costs, the property taxes, which we all know are going up by leaps and bounds, utilities, and repairs and insurance, and all those things, and really work out whether they can afford it in their budget,” Freedman said.
Comment: Property taxes went up 4%, hardly leaps and bounds. Gas and hydro have even dropped. Easy on the scare tactics please. But budgeting should take into account costs other than just the mortgage.
She also warned that recessions can be followed by long recoveries.
Comment: Can be followed… can be. The last recession in the early 1990s took 7 quarters to recover – which was the longest in some time. That is not even two years. Right now, depending on who you talk to, we are 6 quarters into recovery. Or even if the bottom was December, 7 quarters takes us to September of next year. Hardly a long time. Things just are not as bad as many people think, or want you to believe.
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Contact the Jeffrey Team for more information - 416-388-1960
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