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Home sales make up a small portion of real estate sales and flippers' profits are likely modest or non-existent
Published on December 2nd, 2024 • 4 minutes reading time
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Statistics Canada has shed light on the extent of home sales in British Columbia, and the results may surprise those quick to blame speculators and sellers for Canada's worsening housing affordability.
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It turns out that just over three percent of residential properties sold in British Columbia in 2021 were owned for less than a year before being resold. Not only is the prevalence of “flip” sales low, but the economic gains generated by such transactions have been negligible, suggesting that flippers are not getting away with it exorbitant ill-gotten wealth.
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The narrative that real estate investors, particularly those selling homes, are driving up home prices has gained traction in Canada. This belief has led to policy responses, including a federal measure, effective January 1, 2023, that taxes gains from real estate sold within a year as business income. The British Columbia government is following suit with a home flipping tax scheduled to be introduced in January 2025.
Home Flipping – Purchasing property with the intent to resell it quickly in a hot market – can cause price volatility and impact housing affordability. Research shows that flipping in overheated markets can drive up prices and cause instability. However, flipped properties can depress prices in a cooling market because flippers often focus on distressed assets that sell below market value.
While government intervention is justified in cases where flipping significantly destabilizes real estate markets, as was the case in the United States before the Great Recession, does flipping in Canada justify such action?
Statistics Canada has only released data on home flipping in British Columbia so far, with results from other provinces expected in the future. Even this incomplete picture suggests that Canadians may have been misled about the extent of the problem. Flipping accounts for only a small portion of real estate sales, and flippers' profits – once transaction costs, taxes and fees are taken into account – are likely modest or non-existent.
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Statistics Canada also reported that less than two per cent of homes in British Columbia were sold in 2021 were held for six months or less, suggesting that U.S.-style frequent flipping is even rarer in Canada. Urban centers like the Vancouver Census Metropolitan Area (CMA) saw slightly higher activity, with 3.2 percent of homes resold within a year. Condominiums were the most frequently exchanged at four percent, compared to 2.8 percent for single-family homes. The average length of ownership of The lifespan of condominiums in BC is 5.9 years – far shorter than the median of 13.5 years for single-family homes.
Contrary to public perception, Statistics Canada data does not show that pinball machines are exploiting the real estate market for extraordinary profits. Properties sold within a year of purchase in 2021 had an average purchase price of $565,000, compared to $610,000 in other transactions, suggesting that flippers often target undervalued homes.
The reported 20.3 percent “gross gain” from flipped properties in 2021 may seem significant, but that number can be misleading. Transaction costs such as brokerage fees, taxes and renovation costs are not included. Rising interest rates and material costs further reduce these profits. Adjusted for these factors, some pinball machines may have suffered losses.
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Statistics Canada also found that the average price of all residential properties in British Columbia increased by 18 per cent from 2020 to 2021. Thus, the economic gain for flippers – defined as the difference in price appreciation between flipped and unflipped properties – was a paltry two percentage points, barely enough to drive broader market trends.
By comparison, a study published in the Journal of Real Estate Finance and Economics by Craig A. Depken II and colleagues found that at the height of the U.S. housing boom, annual returns on homes sold exceeded 60 percent and adjusted economic gains still exceeded 20 were percent. These numbers appear to require regulatory intervention to curb excessive market volatility.
However, Canada's situation is very different. A two percentage point difference in price appreciation between flipped and unflipped properties hardly constitutes a crisis. In fact, flipping could be more of a symptom of rising prices than a cause.
Over time, Statistics Canada data has debunked several myths about the housing market – about foreign buyers, investors, immigrants and now flippers – that are said to have caused Canada's housing affordability crisis. The underlying problem remains a persistent imbalance between supply and demand.
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To tame the housing affordability dragon, Canada needs to build significantly more homes to address its chronic housing deficit. Flipping is just a small subplot in the larger narrative of Canada's housing problems.
Murtaza Haider is Associate Dean for Graduate Programs and Director of the Urban Analytics Institute at the Ted Rogers School of Management at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be accessed on the Haider-Moranis Bulletin website at www.hmbulletin.com.
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