First National Financial LP

QUARTERLY REPORT – April 2024

  • First National Financial LP

The new federal budget has been dominating discussions in the mortgage and housing markets.  In the weeks leading up to the April 16th budget announcement the prime minister and members of his cabinet roamed the country pledging some $8.5 billion in new spending for programs to tackle Canada’s housing crisis.

Effectiveness Questioned

The opposition Conservative Party is not supporting the budget, saying it is inflationary and irresponsibly increases the federal deficit.  On the housing programs, specifically, the Conservatives accuse the Liberal government of failing to deliver on similar promises in the past.  The Conservatives say spending to get more homes built faster will drive up the cost of housing.

Market watchers are skeptical of some of the programs as well, pointing out that only a limited number of home buyers will be able to take advantage of them.  They cite the extension of the amortization period from 25 to 30 years for some buyers as an example.

Show Me the Money

A key question that lingered in the run up to the budget was:

“How will the government pay for these programs?”

Ottawa is making a number of assumptions about how improving economic growth will deliver more tax revenue. The one concrete thing the government did to raise money came in changes to the, so-called, inclusion rate for the capital gains tax.

Right now, capital gains such as profits made on the sale of stocks or non-exempt property are 50% tax free.  If a seller makes a $100,000 dollar profit on such a sale, tax is only paid on $50,000.  The same is true for capital gains realized by corporations.

Under the new rules corporations will have to pay tax on 66.7% of all their capital gains.  Individuals will pay tax on 66.7% of the portion of their capital gains that exceed $250,000 a year.  This is likely to affect many people who sell a recreational or other secondary property.

Capital gains on the sale of a primary residence remain tax free. The change is set to take effect on June 25th. 

Boosting the Home RRSP Withdrawal Limit

On the home-purchasing side of the ledger, the budget increases the amount first-time buyers can draw from their Registered Retirement Savings Plan to put toward a home.  The tax-free withdrawal limit goes from $35,000 to $60,000 for individuals, and from $70,000 to $120,000 for couples.

Encouraging Inflation Report

The latest Statistics Canada inflation report came out earlier in the day on April 16th, and was quickly overshadowed by the budget.

The March inflation numbers are widely seen as good news and keep the Bank of Canada on track for interest rate cuts this summer.  Headline inflation, or the Consumer Price Index, ticked up one notch to 2.9% from 2.8% in February, and remains within the Bank’s target range.  More encouraging is that core inflation, the Bank’s preferred measure, dropped from an average of 3.05% in February to 2.95% in March.  Core inflation excludes volatile items like food and fuel prices from its calculations.

Moderate Increases Ahead

The Canadian Real Estate Association and Canada Mortgage and Housing Corporation have released their expectations for the housing market.  Both focus on interest rates as a key factor going forward.

In an abbreviated quarterly forecast released a few days before the budget CREA predicts markets will remain relatively quiet through the rest of this year and into 2025.  Expectations are for a 10.5% increase in the number of sales, compared to last year’s slow market, with about 492,000 properties changing hands.  The national average home price is forecast to climb 4.9%, to $710,468 in 2024.

Sales in 2025 are forecast to rise another 7.8% to 530,500 units.  Interest rates are expected to continue declining to more normal or “neutral” levels.  The national average home price is forecast to increase by 7.0% to $760,000 next year.

Housing Starts Languish

In its Housing Market Outlook, released earlier in April, CMHC expects the lingering effects of inflation and high interest rates will continue to supress housing starts through 2024 and into 2025.  At the same time, sales and prices will continue to rise due to demand driven by immigration and falling interest rates.

Affordability Concerns Persist

By 2025, CMHC says, prices could reach the peak level recorded in early 2022 and surpass it in the following year.