Canadians’ dream of owning a cottage or other piece of recreational property just won’t die, regardless of the state of the economy, rising taxes and interest rates, and more stringent mortgage requirements.
In the annual 2010 Royal LePage recreational property report, almost half of Canadians said they believe that buying a recreational property will improve their lifestyle in spite of concerns they have about rising taxes, interest rates and new mortgage regulations that require higher down payments on second homes.
But fewer people this year than last believe buying recreational property is a good investment.
“Canadians are generally confident about buying recreational properties because they see a payoff in terms of improved quality of life,” said Phil Soper, president and chief executive of Royal LePage Real Estate Services.
“Tightening of lending requirements for second homes coupled with an increase in taxes and expectations of higher interest rates may have a dampening effect on the recreational property market.
However, there continues to be strong demand for second homes and Canadians appear prepared to make significant investments in order to enjoy their leisure time.”
Cottage prices in general have increased over the last year.
“The brave bargain hunters who purchased during the depths of the recession in 2008-2009 have been rewarded by appreciating prices this year,” Soper noted.
Typical 1,000-square-foot, three-bedroom houses on 100-foot lot properties in B.C., Ontario and New Brunswick could sell for over $1 million.
Nationally, the average price for a piece of recreational property ranged from as low as $65,000 to $1.5 million, or more.
While buying a cottage might be a great lifestyle move — a way to get away from everyday working life and relax — is it a good investment?
With a second property come additional costs such as taxes, utilities, insurance and maintenance, not to mention the cost of gas to get there, wear and tear on your vehicle, food and other living expenses. As well, there’s no guarantee your investment will go up.
According to the survey, only 43 per cent now say they would buy a vacation property because it is a good investment, down from 64 per cent in Royal LePage’s 2009 survey. Forty-nine per cent are concerned about new tax rules such as the harmonized sales tax on new-construction homes and 46 per cent are concerned about increasing property taxes.
Further, while one third said they will not have to make any financial or lifestyle changes to afford their “fun in the sun” property, one quarter said they plan to rent out the property for part of the year, up from 13 per cent the previous year.
And then there’s the whole question about transferring the property to the next generation. Transferring the cottage may sound like a good idea, but it can have some difficult tax implications.
Unless it is transferred in the name of your spouse or can be classified as your principal residence, you will be deemed to have disposed of it at a fair market value when you die, which could trigger significant capital gains tax. Unless there are enough liquid assets in the estate to cover the taxes, your heirs may be forced to sell the property just to cover the taxes.
No matter how you slice it, a second property is an expensive proposition. Before buying one, you should sit down and analyze all the costs — financial, personal and familial -— before deciding whether to take the plunge into recreational real estate.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at firstname.lastname@example.org.