The federal budget, released earlier this month, includes a provision to remove the HST exemption for pre-construction assignment flippers who could prove their intent to eventually live in the purchased units.
But will it make a lick of a difference?
Assignment flipping is a tool investors use that only require them to put a down payment on a pre-construction condo unit, and because the build-out is typically four to six years, their assignment’s equity grows each year. At some point between purchase and closing, when the rest of their money is due, they flip the unit to an end user or another investor who intends to become a landlord.
READ: Builders Sound Alarm as Toronto Proposes Huge Increase to Development Charges
Assignment flipping does, however, require the developer signing off on the sale, and if the latter is having difficulty selling units, they will most likely decline the request lest they end up competing with their own buyers in the marketplace.
The HST exemption expires May 7.
“I think it’s good because it gives clarity with assignment sales. A lot of the time, people wouldn’t want to pay the tax but now this is welcome in our industry because it provides a clear-cut explanation as to what the tax system really is,” Toronto-based Living Realty Downtown’s Managing Broker Isaac Quan said.
“I am hoping it would discourage a lot of people from listing on assignment because I don’t think it’s good for the market. I encourage my clients to buy pre-construction with intentions to close properly. If your intention is to buy and flip within six months or two years to make good profit on the side, it could work out for you that way, but we know how quickly the market changes. If it tanks, you lose a lot of money that way.”
Scope of Assignment Sale Market Hard to Gauge
It is virtually impossible to ascertain how many assignment sales there are in the market, but what is fairly simple to decipher is that transactions of this nature are usually speculative, and that’s almost certainly why the federal government is stepping in to make the practice more prohibitive for speculators among the sellers.
Jason Mercer, Chief Market Analyst at the Toronto Regional Real Estate Board, says only 1.5-3% of transactions in the last five years were for properties that sold twice in a 12-month period, although assignments are usually flipped after a few years of riding appreciation. Asked about the role assignment sales play in rapid price appreciation—even if incremental, wouldn’t the impact would be cumulative?—Mercer pointed to the supply-demand imbalance as the preponderant reason.
“From 2021 into 2022, we had 3,200 active listings for the GTA. The real issue, in terms of strong price appreciation, is because there aren’t enough listings in the marketplace for people to purchase, so there has been extremely strong competition in the marketplace,” Mercer said.
“As a public going over the budget document, we haven’t been presented with evidence one way or another that there are this many assignment transactions that are contributing to rapid appreciation, and that by making them more difficult, it will stop appreciation.”
Mercer is certainly correct in his assessment that paltry housing supply relative to robust demand is the reason that prices in the Greater Toronto Area, as well as much of Canada, are rising as quickly as they are. That all assignment sales will be subject to the 13% HST tax will invariably disabuse some speculators from participating in the practice, but it is unknown whether or not the impact will even be noticeable.
“In terms of whether or not it’s an effective policy, it’s too early to tell,” Mercer said. “One statistic I’ll be watching is pre-construction condo sales and whether we see some sort of structural shift downward as a result of people disappearing who intended to purchase a home as an assignment flip. It takes a bit of time for these policies to shake out in the marketplace, so we won’t know the actual impact for some time.”
Ben Myers, president of Bullpen Research and Consulting, previously headed up Urbanation and, in what was meant to be a joint report with the Canada Mortgage and Housing Corporation, tried studying the prevalence of assignment sales in the housing market. But it wasn’t easy to measure.
“It’s so hard to tell because it’s such an unknown market. The response rate I got was 2%,” he said. “I talked to developers who said they had projects with as high as 20% of units assigned and I had others who have had almost none, so it’s a pretty wide range of answers and it’s really hard to tell what kind of impact [revoking the HST exemption] will have.”
Alluding to the likelihood that assignment sales aren’t as commonplace as some might think, Myers says if price inflation weren’t so rapid, people probably wouldn’t bat an eye.
“Prices are almost triple what they were in 2011 for pre-construction units. They were probably $500 per sq. ft in downtown Toronto, and now they’re close to $1,500 per sq. ft,” he said.
“I think investors play an important role in our marketplace by funding these pre-construction projects but I don’t want people buying solely to assign because I don’t think that’s healthy. Do I think flipping assignments adds a lot to the price of a unit? No, I don’t.”
The COVID-19 pandemic has, by and large, been the least opportune time to flip a condo assignment in Toronto in years, because the city’s high-rise market took a major hit while other segments saw demand surge. But prices in the condominium market eventually resumed growing, and according to Myers, that has had more to do with external economic factors than it does with the assignment market.
“Much of the increases that have happened in the last couple of years have been cost-related -- costs are going way up and it increases the risk of the development and, therefore, the developer has to increase their prices more than they would have previously,” Myers said. “Because they sell a unit in one period and build it in another, pricing is going up so quickly that you have to give yourself a bigger buffer for cost increases because you don’t know what will happen.”
