Just as the real estate market seems to be showing signs of recovery, lawyers who practise in that area are bracing for another downturn that could impact their livelihood.
Beginning July 1, 2010, all new home purchases in Ontario will be subject to the combined 13-per-cent harmonized tax.
While resale home transactions won’t be taxed at the new 13-per-cent rate, all the related services involved - from real estate commissions to home inspections and legal fees - will.
For the time being, the province has acquiesced to the construction industry and agreed to waive the 13 per cent for new homes costing less than $400,000.
Coupled with the new tax, some lawyers expect that by next year, interest rates will indeed go up, thereby dousing any spark that may have ignited signs of a vibrant market following a slow and uncertain winter.
“The practice of law at the consumer level is a highly competitive area,” says Murray Miskin of Miskin Professional Corp. in Whitby.
“Ultimately, the lawyers will probably end up making less money because for one thing, there will be fewer deals in the purchase and sale of homes, so they’ll be doing less volume of work. But also, they may have to make concessions to clients because of the competitive nature of fees.”
Miskin’s real estate practice includes residential home sales throughout the GTA and into cottage country via his firm’s office in Peterborough.
He worries not only that the HST will stymie any possible resurgence of home sales but also that the construction industry could suffer due to the higher tax rate on new home purchases.
From his vantage point in Whitby, he was front and centre during the uncertainties swirling around the Oshawa General Motors plant.
Without any confidence in jobs and the economy, people stopped buying property.
“Last winter was bleak for the real estate market. Real estate agents weren’t making any money. Real estate lawyers weren’t making any money,” he says.
“A lot of lawyers had to lay off their real estate staff and they’re just starting to come back again. So this past year has been very difficult for real estate practitioners until the market started heating up again.”
He suggests that if the economy continues its recovery, the Bank of Canada will have no choice but to raise rates by next summer, which would coincide with the new tax.
While he acknowledges “the real estate market is a very volatile market,” he says lawyers might need to become creative and offer clients deals or discounts to get them in the door.
That’s exactly what his firm is doing.
“What we’re saying to our clients is if they come to us with a deal that closes after the HST is in effect, we will adjust our fee so they don’t have to pay extra,” says Miskin.
“With new homes, there’s often a delay in closing, so we’re trying to give the client some stability where even if there is a delay, they won’t have to pay us more. We want to get the deals in and offer some help to the clients who are hurting also.”
But within the city of Toronto, Miskin isn’t optimistic that the market will easily absorb the tax.
“It may put a permanent damper on the market just like the Toronto land transfer tax has put a permanent damper on the Toronto market,” he says.
“The Toronto land transfer tax has been good for the GTA, anywhere outside of Toronto where it’s less expensive to purchase because of the land transfer tax, and I think people will factor all of these taxes into their decision-making process.”
According to the Ontario Real Estate Association, the HST will add between $1,747 to $2,297 to a typical sale for a new home costing less than $400,000 in the following areas: $470 for mortgage insurance; $80 for legal costs; $32 for home inspection; and $1,150 to $1,700 for real estate commission.
Still, Steven Pearlstein, a real estate practitioner at Minden Gross LLP, says the market in Canada has been showing signs of recovery compared to the United States.
“There are a lot more buyers out there, and the thing that’s driving the market right now is the historically low interest rates,” says Pearlstein.
“Employment is important in driving the market as well and here, employment is higher, it has ticked up, so it has not been as much of a problem.” He adds that “the housing market is more active than the commercial side.”
But while he expects the new HST “will have some impact on the cost of real estate commissions,” he doesn’t think lawyers’ fees will deter homebuyers from pursuing a good deal in the resale market.
“Everybody in the deal makes only a few dollars here and there, and for lawyers it’s an extra $80 on the legal fees, which is so minimal.”
To date, his firm isn’t providing homebuyers with any discount on fees.
His main concern surrounds the ramifications for the construction industry, which could affect the province’s employment rate. “The construction industry is a job creator,” and with the HST added to purchases over $400,000, “now there’s a disincentive to buy a new house.”
But while he adds that sales of both new and resale homes would indeed be dampened by a rise in interest rates as well, so far he’s taken a wait-and-see attitude.
“What we’ve seen [is that] to some degree with rates coming down, it isn’t impacting sales yet. Either people are buying to close before next July or, because rates are low enough, they want to get in on those mortgage rates,” he says.
“But some are worried that in a year from now, rates are going to be higher, which could make a bit of a difference.”