A Burning Question I’ve Been Pondering!

Published on 28th December 2017

As I had some more head space to think over the holidays and shoot my whacky video about giving you 7 crazy predictions for the GTA real estate market in 2018 (in case you missed it, you can catch it by clicking here), ONE question really had me scratching my head. Literally!

Back in the Spring of 2017, when the government was implementing their interventions to cool the housing market, a lot of people thought the world was going to end. Well, that soon proved to not be true at all.

It’s happening all over again with the new stress test coming into effect on January 1st, 2018. During this intermediary time, I felt that a lot of my clients were afraid and worried that prices will plummet, not knowing what kind of effect the new mortgage rule will have. As a result, this led to a strange frenzy of buying and closing before the new year..

That, of course, was what was on the surface, but what really has my brain on hyperdrive is this.

Instead of asking how these rule changes are going to affect myself and all of you, the question I asked was: “Why? Why are we seeing all these government changes?”

The obvious and simple answer is that the government is trying to “cool the real estate market”. However, if you ask why again, you’ll get more than just the surface level answer.

In the past, in order to quickly combat crazy increases in real estate prices, the government had to just simply raise interest rates. However, rather than raising interest rates in December, we got more mortgage rules instead.

So why isn’t the government taking the easy approach? Well, the answer is because they simply can’t just take the easy way out. Increasing interest rates will ultimately affect the entire economy, not just the real estate sector. With all of the debt accumulated and a weak economy right now, they just can’t afford to further increase interest rates.

I don’t see interest rates increasing that much or even at all in the next year. This may sound crazy, and I know it probably does given that we just had 2 interest rate hikes this year. When interest rates stay low (they are still historically low right now), the price of assets like real estate, stocks, and even crypto currencies increase.

In real estate, with increasing demand, lack of supply, growing population and low-interest rates, would you agree that prices are likely to increase? I’m not saying prices will jump >10% a month like we saw in the spring; I’m really hoping they won’t because that wasn’t sustainable. I’d rather have consistent growth and stability.

If we dig deeper, the question becomes more intricate. If the government is not increasing interest rates, and are just implementing mortgage rule changes (which in turn will still keep real estate prices high), then why does the government keep saying they want to cool the real estate market and continuing to pump out mortgage rule changes?

This may all sound like a conspiracy theory, but since you’ve already read this far, please do hear me out.

With our government in so much debt, one of the main sources of revenue for the government is taxes in the real estate sector. Let me name a few big government cash cows for you:

-Land transfer tax (2 of these taxes in Toronto!)
-Property tax
-Development charges
-Education charges
-Airbnb licenses
-Rezoning permits
-Parkland levies
-…and many more!

All of these revenue sources (a.k.a., taxes), increase and decrease with the price and demand of real estate. If housing prices stay high, then the government will continue to reap the benefits of these high prices in the form of the above government revenue sources.

So on the surface, it seems like the government is continuing to intervene with mortgage rule changes. However, at the end of the day, the government’s best interest (given the high debt levels) is not to lower their revenue stream from taxes collected from the housing sector. Hence, this conspiracy theory. What is the government really trying to accomplish here?

What is the incentive for the government to cool the market when they’re trying to balance the ledger?

-Public perception?
-General interest in our ability to own our dream home?
-Winning the next election?

We’ll never really know unless we’re on the inside of the boardroom where the political leaders are talking about these exact strategies. As an investor, it is best to stick to your principles of investing. Do not let factors that are not under your control impact you. You do you!

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