Home is where the tax is
Ontario’s impending tax harmonization scheme spells disaster for those building, buying or selling homes
James McKellar, Financial Post
The recently announced harmonization of the GST and PST in Ontario is about to wreak havoc on the housing industry, one of the pillars of that province’s economy. It is a textbook case of poor government policy that will distort the province’s housing market over the long term, with a particularly devastating impact on the building industry.
Consider the following: When tax harmonization in Ontario takes effect in July, 2010, someone buying a new condo in Toronto costing $500,000 — the current median price in that city — will pay approximately $40,000 in additional taxes. If the same buyer considers moving up to a $600,000 purchase, the tax goes up another $17,000, for a total additional tax burden of close to $60,000. Total sales taxes on a new home purchase will exceed the 13% tax on an imported luxury car and the 15% sin tax levied on a glass of wine or pint of beer purchased at the local watering hole. But will new home purchasers be willing to pay these sky-high sales tax increases and, if not, what are the consequences?
The unintended short-term consequence is the likely delay or even cancellation of some “shovel-ready” housing projects that are in the pre-sale stage. This does not bode well for labour markets and particularly a construction industry that, according to Statistics Canada, is already suffering among the highest job losses of any industry in the country. Why is government intent on spending taxpayer money to create infrastructure jobs and bail out the auto industry, all in the name of job creation, and at the same time charting a course to bring much of the housing industry to its knees?
Hardest hit will be people living in the Greater Toronto Area (GTA). The provincial government indicates that 75% of new home purchases in Ontario fall below the $400,000 threshold. But in the GTA, 54% of new home purchases last year were predominately high-rise condominiums, and in Toronto, where the majority of new condominiums are being built, the average asking price is currently just over $500,000.
For the consumer, there is one way to dodge the tax: Buy on the resale market where PST and GST do not apply. For a $600,000 resale purchase, the tax savings would total $78,000. But the sheer magnitude of the difference in sales tax between new and resale product will distort housing markets in the long run.
How will builders respond to the new tax regime? They will pursue one or more of the following options: Get as much product below $400,000 as possible; use cheaper building materials and finishes; eliminate upgrades and even some standard finishes; eliminate sustainability and “green” features if they cost more; strip down landscaping, exterior finishes and features; and keep units small.
Ontario cities can all but forget the drive for new inner city family housing after July 1, 2010. And the province can forget its sustainability and “green” initiatives as well as its intensification targets when it comes to new higher-density housing. Builders will gravitate to projects that fall below the $400,000 threshold or jump to the luxury end where the sales tax bite will not be a disincentive to would-be buyers.
Ontario’s home builders have delivered quality product at a cost that has ranked for decades among the lowest in the Western world. But if the government refuses to move from its current position, the long-term unintended consequences on the performance and efficiency of our housing markets will be significant and long-lasting.
When it comes to home owners, the real losers in the harmonization scheme are the middle-income households that are upwardly mobile; those contemplating an expanding family; and the elderly who are considering downsizing. For the ageing couple who might consider a new $600,000 condo in lieu of the family home they have occupied for the past 30 years, why pay $94,950 in sales taxes? They will probably opt to stay put. For the household contemplating children and needing an extra bedroom, a resale unit will be a far cheaper option than a new unit.
Bottom line: the harmonized tax regime will curtail new housing supply in key sectors of the new homes market and will redirect demand to the resale market. In the long run, this will put upward pressure on house prices.
Tax harmonization is being sold on the grounds that it will benefit the Ontario economy at large. In the case of housing, it will do the exact opposite. The crippling new tax regime, announced in the midst of what may be the largest economic contraction since the Great Depression, will undermine one of the essential foundations of a strong economy — housing choices at affordable prices.
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