The Federal Budget saw a number of proposed changes to real estate and in a market like British Columbia and Vancouver in particular this could make a big difference.
Join local realtor and real estate investor James Knull as he shares his thoughts on the impact the Federal budget proposals will have on BC.
Francois: We have James Knull from Mogul Real Estate Group. We're talking about the BC federal budget impact and market update as well. James, what is going on in BC?
James: I can't wait to talk about what's happening and how the budgets are impacting real estate. Vancouver, BC, lovely Vancouver. It's beautiful weather today. This photo is pretty much what it looks like right now in Vancouver. Allow me to introduce myself to everybody. First, my name is James Knull. Basically, we just took new team photos. It gives me an opportunity to show off our new photo. I'm pretty excited about it. I'm the CEO of the Mogul Realty Group.
We've been in business for over 15 years in Western Canada. We've got an office in Edmonton for our Alberta headquarters. Our British Columbia headquarters is in Vancouver. We do about 250 to 280 real estate transactions per year. And about 200 to 220 of those are for investors specific clients. Whether it's small projects like condos, Airbnb's secondary suite houses, flips, medium-sized projects like fourplexes, duplexes, development, redevelopment, or large scale projects like land assembly, multi-family, commercial or even larger developments.
We have realtors licensed in our team who operate all of those different levels. We're with Exp Realty, best brokerage if you ask me and we are really excited to come speak today. Really great opportunity. Love The REITE group. You guys are a fantastic club and it was just thrilled to get the invitation to come share. What's going on out West with everybody? Thanks for having me. I hope that some of the information I have inspires some of you guys to take a little bit of action, explore investing out West, or otherwise just helps you in your investing out East.
We know that the federal budget just got released. Here's a picture of our wonderful leadership at that budget announcement. Talking about what's going on. I'm going to talk about the effects on BC real estate. It might spill over into a little bit of Western Canadian impact, but I'll try to keep it BC specific, even more so Vancouver specific, but some of these implications, like I said, they're going to affect everybody.
Whether you're investing in Ontario, Central Canada, Western Cape, these are impacts. The first thing that got changed was just an increase of the first time home buyers credit program. Now, for those of you that don't know what this is, you can get up to a $10,000 tax credit rebate for the purchase of a first home, and you can pull up to $40,000 from an RRSP and TFSA.
We're all investors here. Why does this matter? It matters because there is a chance that in your life, maybe it could be a niece, nephew, child, friend of the family, somebody who's a first time home buyer. What do first time home buyers get to take advantage of this program? In addition to that, what do homeowners get to do? Put 5% down on their properties? In the crazy expensive markets like Vancouver or Toronto, where affordability is tough as an investor, it allows you to take advantage of a great tax program and put 5% down on an income property.
Know that you have a tenant. You can count on who's more reliable than your business partner, living in the house. The win for the first time home buyer is getting to partner with somebody who can lend them capital and borrowing power. Ultimately there's a joint venture opportunity here in the major urban centers to have a huge win-win for you as the investor financier. For the first time home buyer who now can get into a property with a little bit of help from you as an investor.
There's deals to be had here and in the Vancouver market where it's really tough to get in because of the high price points. This is great news, and it's just a friendly reminder of a strategy that can work. Next, an end to blind bidding. What does that mean? Blind bidding is a practice across Canada, where if you are in a multiple offer situation, a bidding war, every offer that gets submitted is not disclosed to every other party to that bidding war.
What used to happen back in the good old days or not. Good old days realtors could say, oh, it just so happens. Another bid could come in and the improvement that the Canadian real estate association made at that time is that any realtor who has a bidding war has to disclose the name and brokerage of every realtor who's party to that bidding war, to every other realtor that will you can't just make up and pretend a bidding wars happening.
Great progress forward. This move is meant to increase transparency in the bidding process because a lot of consumers, a lot of buyers are stressing out because they're saying how do I know if I bid $5,000 more than the next closest bid or $250,000 closer to the next closest bid. This lack of transparency. Some say it is creating properties, getting bids up higher than the other ones. We're going to see how this shakes out, because on the flip side of the coin, there's a bidder out there who knows that if they're only getting a bid by 10,000, they might keep going where they otherwise may have stopped.
This is a James Knull take, but my personal opinion is that for some bidding wars, this will cause the winning price to be lower for some bidding wars. It's going to push up the bidding price higher, but ultimately from a consumer perspective, I think it's going to be a positive change because it's going to add transparency to the bidding process. That everybody who is bidding knows what's going on with the bidding process.
Why does this impact BC? Because BC is the land of the bidding wars, especially Vancouver, for those of you guys out East in Toronto. Next, reducing foreign demand. There is historical context to this because every time the Canadian real estate market and here's a tip about the Canadian real estate market. Whenever anybody says Canadian real estate market, they really mean Vancouver and Toronto because the lion's share of Canadian real estate, the value and the trends are dictated by those two major markets.
That's where a lot of foreign capital gets invested. From a Vancouver perspective, what have we seen in the past? Foreign buyers, tax. Vacancy tax, which means that if you're letting your property sit vacant for speculative purposes, you pay an additional tax. Did that stall the market? No, it just chilled it out for about three months. This is the next step in that attempt to pump the brakes on the market. I'm not anticipating anything resembling a market collapse. However, what it's going to mean is that non-Canadian citizens and non-Canadian commercial enterprises are prohibited from purchasing non recreational properties.
Are you guys seeing the loopholes as wide open as I'm seeing the loopholes here, like this is only probably going to stop the least resourceful of foreign buyers from buying Canadian real estate. But hey, if 5% to 10% of foreign buyers can't buy for a little while, that will have an impact on tapping the brakes on the market. These things make sexy headlines and you've probably seen sexy headlines about some of these changes, but when the rubber hits the road, that's the real impact of what's going to happen.
It's just a bundle of little changes, all meant to slow the market incrementally. They're not trying to freeze the market. Nobody wants Canadian real estate to collapse, but a couple of little measures like this will cause some people to step out of the market for a little bit, which will have a slight slowing effect. When you see double digit growth in one year in a market like Vancouver, a little slowing doesn't hurt anything, especially when we're in a world of heavy inflation right now.
Next, the anti flipping tax. This is probably the sexiest headline of the ball. If you don't take time to read the article, you're going to think, oh my God, house flipping is under attack. It isn't, let me explain what this means. The way the system worked before is that you, as a consumer, when you are selling a property, have the option to claim whatever kind of tax you want to claim.
If it is a flip, you should be paying full income tax and claiming it as such. If it is a sale of a rental property, you will be paying capital gain tax or if it's a sale of a primary residence, you pay no tax. What's happening? The average person can claim whatever they want. If you're sneaking through a few pre-sales, if you're sneaking through a few good old fashioned renovations, flips calling it capital gains, when it is actually full income tax and you sneak it on through good for you.
There's probably a few on this call. I'm not asking you to put up your hat or anything like that but if you got a bit of a tax break, cause you were a little sneaky. The burden of proof was on the CRA to say, hey, this looks a little fishy. We're going to investigate this person. There's so many people doing it, especially in markets like Vancouver, that it's hard to keep tabs. The change that they're making is now that if you resell a property within 12 months of purchasing it is automatically subject to income tax. It's not like there's this brand new anti flipping tax.
There's a new mechanism to enforce the tax that was in place the whole time. It's going to be a little tougher to sneak them on through now. Homeowners can't apply for an exemption. If you bought a place with the honest to goodness truth of intending it to be your primary residence and you need to sell it before 12 months is up, of course you're not going to pay tax on that. But for the average pre-sale buyer and flipper of which there are many in the Vancouver market.
This change is going to make it a little bit trickier to avoid paying income tax when you're supposed to. Will this be a market killer? No, but will the odd person think, man, maybe I won't do another presale this year because if I have to pay full income tax. It doesn't make as much sense for me personally, maybe so will that slow the market down? Maybe a little sliver of a slowdown, but for the most part, all it's going to do is make sure more people pay the tax they were supposed to in the first place.
The one that's getting no press, in my opinion, is the biggest deal that you should be getting the most excited about a program that I personally taking advantage of and building property with right now is the CMHC-MLI Select program. Now, what I will do is anybody who wants to reach out to me to talk about utilizing this program, feel free. I'll have my contact information at the end. This is a huge deal.
The Canadian government wants to increase energy efficiency. They want to increase accessibility, which means building properties that are accessible for people with mobility issues, things like wheelchair ramps, elevators as easy examples, just different accessibility and affordability. The market in Canada is going way up. There's a bigger and bigger demand for Canadian affordable housing and CMHC is making very huge contributions to people that are investing in one or all three or two of these categories. For example, if you want to build a rental apartment building, the one that I'm building and you're willing to rent it at a percentage of market. It's 85% of the market.
We're making an affordable housing initiative. Opening up the bank on this, you can get up to 50 year amortization. You read that right, 50, not a typo. 95% loan to value, very easy to apply for 95%. We're talking 5% down. Here's where things get interesting. If you're developing, that 5% down can be the equity upside in the process of development, which means if you build something for 900,000 and it ends up being worth a million. There's a million dollars in equity there that can form your 5% equity for your 95 loan to value. That's a big flipping deal.
Next, 25% personal offset for rent for your personal guarantee. The way commercial financing works. I'm not going to go down a rabbit hole with you guys here, but the way commercial financing works, is that you have to provide what's called a personal guarantee, which means that if everything goes to heck in a handbasket, and you get foreclosed on, you're personally liable for a percentage of the money that you borrow.
If you borrow a million bucks and you have an 80% personal guarantee. They can come after you for $800,000 personally, you can't hide that in a corporate veil. Most conventional lenders do a 65% to 80% personal guarantee offset, sometimes as low as 50. CMHC is willing to do as low as a 25% personal guarantee offset. That just de-risks your project even more because if things go horribly awry, you're only on the hook for 25% of the money you borrowed instead of 60% to 80%, that's huge.
Finally, interest free seed capital. We know that getting a project off the ground, seed capital for all of the expensive soft costs, permitting, architectural, and project management. That's money that you have to spend as a developer before you start getting money back from your lender in tranches. They're also giving opportunities for industry seed capital for projects that meet these requirements.
This will work for either new development or substantial renovation to old projects. If you buy an old rickety haunted hotel and you're going to repurpose it into affordable housing. That's the kind of stuff that fits this program. It's the rental construction financing initiative. MLI Select, I know a lot about it because I'm doing a couple of projects using this sweet capital from CMHC. It's already been in place for about a month. There's already a backup of applications, but if you're a commercial person and you want to chat more about this. Anybody who's a friend of The REITE Club is a friend of mine. I'm happy to chat with you about it.
Interest rates in the cooling periods. This wasn't part of the budget, but it is a thing that's happening. I do feel obligated to talk about it. If we look at the graph right here. We have the pre COVID levels. The post COVID level is the same as the pre COVID level. It's not like interest rates are rising to some unprecedented, super high, terrible amounts.
There's just going back to where they were before COVID. However, anytime interest rates shift, anytime amortization changes. Anytime, we have a new stress test, for those of you that have been real estate investors for a while, a lot of these things I'm talking about are things that should sparkle in the back of your mind as things that have happened in the last five years, what happens? People pause and go into a wait and see mindset for a little bit. These interest rate changes are going to have the same effect.
It won't really affect prices. It won't really affect affordability. What it will affect is the amount of people buying because they want to wait and see. This is where the really good news starts to come in for Vancouver for BC. This is why I saved it because it's the best for last. That MLI select program is pretty darn sweet, but the best for less is what's happening in the Vancouver market. We know that the Vancouver market. We know that the BC market is on an upward trajectory. That makes anybody who has ever bought property here. Smile from ear to ear.
Every so often that upward trajectory has a meeting of factors that are meant to cool the market. That's why we're in this cooling period. We've got the foreign buyer thing. People are going to wait and see, we've got the flipping thing. People are going to wait and see the interest rates. People are going to wait and see, not just a hangover from like meteoric growth over the last 18 months.
What are we seeing in the market? Let's look at the cold, hard data. When we look at the price, these are all the major BC markets. I went full BC here. I think I was supposed to do Vancouver, but I got excited and went for the whole darn province. Here's greater Vancouver. We look across the province, double digit increases in property prices in the last 12 months, March to March 25, 23, 22 ,20.
I think South peace is like a weird little outlier. I don't know what happened there, but Powell River 40. Oh my gosh. Vancouver island, Victoria. That's great. That is growth, but this is what the wait and see looks like. What wait and see means isn't the prices are going to plummet, but it does open up a buying window because there are fewer people buying. Let's look at the amount of active listings on average. Listings are down 12% from March of last year to March.
This year on average, the absorption rate is down about 10%, 67% absorption to 58% absorption. What does that, and when April stats come out, don't be surprised if this is an even more significant change. What this means is that fewer people are listing their houses. If your people are buying the houses that, and less houses are selling, when they get. I'm not anticipating, this is going to be winding the clock back of values, but it is going to limit the amount of bidding wars.
It is going to limit that stampede of, oh my gosh, I have to go unconditional and compete against 20 other people with a massive deposit. And oh my God, it's probably going to allow people to make offers below list price. It's probably going to increase the days on market so you can view a property on Monday, run the numbers, think about it and put an offer in on Wednesday. Now the best of the best properties that are the best prices.
They're still going to go into bidding wars, but we're going to have a little bit of breathing room and we know that the BC market, that the Vancouver market is one of the hottest real estate commodities on the planet. Vancouver is not a Canadian real estate market. It is a global real estate market. And so with that global look at the market, there are forces that extend beyond Canada's borders, driving the value of properties up.
Whenever there's just a chill period to get in, take advantage of it, I'm personally going to be doing some acquisition into the late summer fall when the full effect of the cooling takes into place. Buying in a 20 offer bidding war surprise. It's a little stressful. That's what's going on in Vancouver. That is what the real look at exactly is the major highlights of the Canadian budget. It's a real look at exactly how that's going to impact Vancouver real estate.
It's a little bonus because the Toronto market, so similar, it's going to affect the Toronto market as well. Now, like I said, you want to talk, MLI select, you want to talk Vancouver, you want to talk real estate, get a hold of me. And because I'm a big nerd for social media, I'm going to snap a little pickier. I can hype up the REITE club on my mobile social media page. Hold on big smiles. There we go. Boom. Thank you very much for that.
We'll make sure we tag you guys and for all of you who are building your social media brand and making sure that you're tagging yourself as spending your Wednesday night as a real estate event, instead of hoopla around, that's the kind of stuff that attracts joint venture partners, people. Make sure you take that social media pick, make sure you tag hashtag real estate. Make sure you add REITE, make sure you add that Mogul Realty group. All of that attention. Could be that next little slice of staying top of mind, that gets you one step closer to doing your next deal.
Own the fact that you're a real estate investor, be proud of it, let people know you're doing it. And most importantly have fun in the process. Please do reach out. That's my email (james@mogulrg.com). If you want to hop on our mailing list to stay up to date with what's happening out West, we'll put you on the mailing list too. Not trying to spam you. Just try to keep you up to date. And with that back to you Francois.
Francois: Thank you. This was James and his presence in the real estate industry is really multifaceted. He's an investor himself, as you've heard James has acquired over 300 rental units in his portfolio. Are you at 300 now or 600?
James: We're building this building will get me into the low three hundreds once it's complete.
Francois: There you go. Thanks, first of all, and you've done a lot of joint ventures as well, bringing in partners together to acquire properties through social media or many other ways.
James: I like attracting attention to myself as far as real estate goes. Social media is one of those ways. I'm excited for networking events to come back into full force. There's going to be a lot of that but yeah, a big chunk of my portfolio. I'd say of those 300 units, probably 270 of them are with joint ventures. I love joint ventures.
Francois: It helps you, it helps others. It's win-win for everybody and you have unlimited capital as well. It's just a great strategy. Awesome information.
James: Thanks.
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