Business in Vancouver writer Frank O’Brien outlines an interesting story to watch-what is happening with those assignment sales of uncompleted highrise developments in the Vancouver area. Imagine-87 per cent of the 8,955 concrete units commenced in 2016 were pre-sold in advance of construction. And imagine-these units are exempt from assignment and foreign buyer tax payments, so it would be assumed there would be value added for people wanting to invest in a little Vancouver condo concrete.
The interest in pre-sales is such that in 2016 ” a separate Urban Analytics survey found only 31 new concrete condos complete and unsold as of 2016’s third quarter, the lowest Metro inventory in five years.”
“Assignment sales are exempt from B.C. anti-flipping legislation. Enacted in May 2016, it stipulates that sales contracts can’t be assigned without the written consent of the seller and that any profit from an assignment goes to the initial seller. The legislation does not apply to new developments, including pre-sale condos, even if a licensed realtor sells the assignment, according to Ministry of Finance spokesman Jamie Edwardson.”
Land value for Vancouver land has increased by 260 per cent based upon assessments, with some property now being purchased at $1,000 per square foot. This elevated land cost has meant that there has been a flurry of assignment sales of units in sold-out not yet occupied towers, with investors wanting to cash out.
O’Brien cites Strathcona Village, on East Hastings Street, “where one-bedroom condos originally sold two years ago for $450 per square foot to $497 per square foot. The condos are now being advertised as assignments for $770 to $787 per square foot. The Independent project at Main Street and East Broadway, a Rize Alliance tower that sold out in 2015 at an average price of $672 per square foot, has assignments being offered at more than $900 per square foot.”
Pre-sale condo assignments are exempt from the B.C. foreign-buyer regulations enacted in August which are based upon the transfer of title. Buying a pre-sale condo and selling it during construction means there is no Provincial registry recording the transaction as either a buyer or a property owner. Of course the “original investor is required to report the transaction to the Canada Revenue Agency, and may be required to pay income tax on the profits.” The assignment flipper is also exempt from property purchase tax, as it is the owner of the unit at the time of completion of the building that pays that tax.
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Reblogged this on Sandy James Planner.
Sandy et al,
BC’s “Presale Culture” is a VERY important (and positive) factor in the supply of new housing.
Because our legal system in BC upholds the concept of “Specific Performance”, Developers can finance new construction on the strength of presale contracts. People who pre-purchase a unit MUST complete and if they do not, the developer’s recourse is not limited to just the deposit – they can seek damages and ‘specific performance’ of the contract.
Balancing this, we have the Real Estate Development Marketing Act that provides protections for purchasers, and sets out the responsibilities for developers who pre-sell.
With enforceable presale contracts in place, banks and developers can de-risk projects (and risk gets priced in your new unit: less risk means a developer can get cheaper financing and accept a narrower profit margin. The reason that the inventory of completed and unsold apartments is so low is because banks will not fund construction until 60% or more of the units are pre-sold. This is – in effect – a dead-man’s brake on our housing market. It is very hard for new supply to significantly demand. Developers can take on larger projects and create more supply, confident that they will not go bust with completed and unsold units sitting in their inventory. This is a good thing for developers AND for consumers.
In the absence of presales, banks are much less inclined to lend, and if they did, it would be at much higher interest rates – significantly increasing the end cost of housing.
In places where there is no presale culture and where the concept of specific performance is not upheld in the courts, developers must essentially build “on spec” – my view and my experience is that developers will manage risk by building in smaller increments, by taking on smaller projects, and ultimately constraining the supply of new housing. London UK is a classic example of this. In that primate city of 9 million people. developers build less housing annually – on an absolute basis – than we do in Greater Vancouver! They do not have a strong and enforceable pre-sale system. Some developers end up with all of their profits tied up in the last few units that have not sold … while paying property taxes and operating costs on this inventory – sometimes for months and years. Not an ideal situation.
Speculative flipping for profit IS a problem, particularly when people attempt to hide this income and evade taxes. Undeserved and unearned riches.
My understanding is that any capital gain on a flip of a pre-sale contract IS subject to capital gains tax and that people who don not report such profits are engaging in criminal behaviour. Capital gains exemptions are only for primary residences where people have lived in the unit as a primary residence for more than a year. There are no exemptions for pre-sale flippers.
I think that our senior levels of government can dis-incent speculative flipping for profit by requiring that pre-sales must be legally registered with the province. It would take some pretty simple legislation – fund it out of the Property Transfer Tax bucket, which earns BC more revenue than all our natural resource royalties combined! If we really want to disincent flipping, the government could INCREASE the capital gains tax to capture most of the profit generated by a pre-sale flip (and redirect it to affordable housing!).
Excellent commentary, Michael. One for the archives.
CRA has often taken the position that the gain from flipping pre-sale condos is actually an income gain and not a capital gain, and therefore fully taxable rather than being 50% taxable, since the condo was bought with the intention of re-selling it rather than occupying it or renting it out.
EDIT
This is – in effect – a dead-man’s brake on our housing market. It is very hard for new supply to significantly **EXCEED ** demand.
EDITED
Indeed evading profits on pre-sale flips is criminal …. subject to the recourse of Canada Revenue Agency.
But don’t throw the baby out with the bath water.
My thoughts on Pre-Sales here:
BC’s “Presale Culture” is a VERY important (and positive) factor in the supply of new housing.
Because our legal system in BC upholds the concept of “Specific Performance”, Developers can finance new construction on the strength of presale contracts. People who pre-purchase a unit MUST complete and if they do not, the developer’s recourse is not limited to just the deposit – they can seek damages and ‘specific performance’ of the contract.
Balancing this, we have the Real Estate Development Marketing Act that provides protections for purchasers, and sets out the responsibilities for developers who pre-sell.
With enforceable presale contracts in place, banks and developers can de-risk projects (and risk gets priced in your new unit: less risk means a developer can get cheaper financing and accept a narrower profit margin). The reason that the inventory of completed and unsold apartments is so low is because banks will not fund construction until 60% or more of the units are pre-sold. This is – in effect – a dead-man’s brake on our housing market. It is very hard for new supply to significantly exceed demand. Developers can take on larger projects and create more supply, confident that they will not go bust with completed and unsold units sitting in their inventory. This is a good thing for developers AND for consumers.
In the absence of presales, banks are much less inclined to lend, and if they did, it would be at much higher interest rates – significantly increasing the end cost of housing.
In places where there is no presale culture and where the concept of specific performance is not upheld in the courts, developers must essentially build “on spec” – my view and my experience is that developers will manage risk by building in smaller increments, by taking on smaller projects, and ultimately constraining the supply of new housing. London UK is a classic example of this. In that primate city of 9 million people. developers build less housing annually – on an absolute basis – than we do in Greater Vancouver! They do not have a strong and enforceable pre-sale system. Some developers end up with all of their profits tied up in the last few units that have not sold … while paying property taxes and operating costs on this inventory – sometimes for months and years. Not an ideal situation.
Speculative flipping for profit IS a problem, particularly when people attempt to hide this income and evade taxes. Undeserved and unearned riches.
My understanding is that any capital gain on a flip of a pre-sale contract IS subject to capital gains tax and that people who do not report such profits are engaging in criminal behaviour. Capital gains exemptions are only for primary residences where people have lived in the unit as a primary residence for more than a year. There are no exemptions for pre-sale flippers.
I think that our senior levels of government can discourage speculative flipping for profit by requiring that pre-sales must be legally registered with the province. It would take some pretty simple legislation – fund a registry out of the Property Transfer Tax bucket (which earns BC more revenue than all our natural resource royalties combined!). If we really want to disincent flipping, the government could INCREASE the capital gains tax to capture most of the profit generated by a pre-sale flip (and redirect it to affordable housing!).