Sean's Market insight Volume 4

Developers have drastically reduced their participation, causing an indefinite pause in 60 condo projects in the GTHA.

Although there has been some improvement in the housing market, the new condominium sector in the Greater Toronto and Hamilton Area (GTHA) remains notably slow. This is mainly due to developers significantly reducing their involvement, as they observe a lack of willingness or capability among buyers to make purchases. According to Urbanation's Q1 report, only four new condo projects were introduced to the market in the GTHA during the first quarter of 2024. These projects collectively comprised 958 housing units, with three located in the 905 Region.

Additionally, first-quarter sales nosedived, sinking to 71% below the most recent 10-year Q1 average (4,978 sales) and experiencing an astonishing 85% drop from the Q1 peak of 2022 (9,723 sales).

As for new construction, there was a significant downturn in the quarter. In Q1-2024, the commencement of construction for 2,361 new condominiums in the GTHA represented a 52% annual decrease.

A rate cut in July is now fully anticipated…

Earlier this month, the Bank of Canada opted to maintain its benchmark interest rate unchanged, acknowledging the possibility of a rate cut in June as inflation shows signs of abating. This decision keeps the central bank's policy rate at 5.0 percent for the sixth consecutive announcement.

Economists widely anticipated the hold, considering indicators of easing price pressures, stalled economic growth, and a softening labor market. In its updated monetary policy report released on Wednesday, the central bank hinted at inflation cooling at a quicker pace than previously anticipated. While the forecast still predicts inflation reaching the Bank's two percent target by 2025, it now projects a cooling to 2.2 percent by the end of 2024, down from the earlier expectation of 2.4 percent.

Additionally, the Bank of Canada's favored measures of core inflation have recently begun to ease, with levels hovering above three percent in February. Traders adjusted their expectations for the likelihood of a 25-basis-point rate cut in June, reducing it to 56 percent from 84 percent prior to the announcement, according to Reuters. However, a rate cut in July is now fully anticipated after briefly falling below 100 percent in expectation following the rate decision.

Capital Gain Tax, the talk of the town

The recent federal budget suggests prioritized spending measures aimed at fostering intergenerational fairness, with a focus on having the wealthiest individuals bear the financial burden. However, a more effective approach to funding new initiatives would involve addressing Canada's growth and productivity challenges. Unfortunately, the budget fails to do so, and instead, its decision to raise the capital gains inclusion rate from 50 to 66 percent for corporations, trusts, and individuals with gains exceeding $250,000 annually is likely to exacerbate these challenges.

It's crucial to acknowledge the critical role capital gains play in promoting entrepreneurship, investment, and economic expansion—key areas Canada should be concentrating on. There are several reasons why increasing the inclusion rate is ill-advised.

The assumption that capital gains primarily benefit older, wealthier individuals is flawed. This budget, ostensibly aimed at generational equity, overlooks the reality that many young people are also risk-takers, striving to innovate and create disruptive businesses. Consequently, many young individuals will soon feel the impact of this tax hike, while others will reorganize their finances to circumvent it.

1.?A significant portion of the larger capital gains subject to the higher inclusion rate result from long-term asset holding—spanning 10, 15, or 20 years—where much of the return merely offsets inflation-induced purchasing power erosion. While indexing capital gains to inflation theoretically addresses this issue, practical implementation proves challenging. A more pragmatic, albeit equitable, approach is to lower the effective tax rate on gains to adjust for inflation.

2.?Individuals are mobile entities, not just capital. Those most affected by the new tax are likely those with the greatest mobility. Canada risks losing a portion of its entrepreneurial talent to other jurisdictions. Young business leaders contemplating capital formation for future gains may opt to grow their assets in jurisdictions offering more favorable treatment, potentially resulting in talent drain.

3.?Taxing capital gains upon realization creates a "lock-in" effect, prompting investors to delay asset sales to evade taxation. This distorts investment decisions, misallocates resources, and hampers efficient diversification, ultimately impeding economic growth.

Lowering capital gains taxes stimulates entrepreneurship by enhancing the potential returns from successful ventures. High earners, often pivotal in funding startups and growth firms as angel investors or venture capitalists, play a crucial role. Conversely, raising capital gains taxes discourages such investments, stifling innovation and economic vibrancy.

?

Much more housing supply is needed in Ontario

Canada needs to fundamentally reconsider its approach to housing supply, necessitating a substantial overhaul of the housing sector, government policies, and processes. An inclusive and concerted effort is required to ramp up housing supply to align with growing demand.

The accompanying chart illustrates a concerning trend: the housing stock-to-population ratio is declining in Ontario. Given that a significant portion of Canada's population resides in Ontario, this decline raises alarms. It underscores the urgent need for a substantial increase in housing supply within the province.

Sources:

1. CMHC Canada Mortgage and Housing Corporation
2. Urbanation
3. Global News
4. Financial Post
5. Toronto Star
6. BNN Bloomberg
7. Toronto Real Estate Board (TRREB)

?