Richard Gilbert – Daily Com­mer­cial News and Con­struc­tion Record

The fall in Cana­dian home sales in July was dri­ven by declin­ing sales in British Colum­bia and Ontario after the imple­men­ta­tion of the har­mo­nized sales tax (HST).

“Because of the hype that was going on, there was pent-up demand and peo­ple were rush­ing to buy homes before the dead­line,” said M.J. Whitemarsh, chief exec­u­tive offi­cer of the Cana­dian Home Builders’ Asso­ci­a­tion of British Columbia.

The B.C. and Ontario gov­ern­ments har­mo­nized the provin­cial sales tax (PST) with the fed­eral goods and ser­vices tax (GST) on July 1. The HST cre­ated a sin­gle com­bined sales tax rate of 12% in B.C. and 13% in Ontario.

The Cana­dian Real Estate Asso­ci­a­tion reported that sea­son­ally adjusted home sales through its MLS ser­vice across the coun­try were down 6.8% in July com­pared with June.

The report found that declines in British Colum­bia (14.1%) and Ontario (8%) accounted for 85% of the change in national activ­ity in July.

Peter Simp­son, pres­i­dent and chief exec­u­tive offi­cer of the Greater Van­cou­ver Home­builders Asso­ci­a­tion, said a num­ber of fac­tors are respon­si­ble for the decline.

“Peo­ple did accel­er­ate their deci­sions because the HST was com­ing in. The builders worked very hard to deliver houses before July 1.”

National sales activ­ity was 30% lower in July 2010 com­pared with last year’s record July.

How­ever, year-to-date trans­ac­tions are still up 5.6% com­pared to the first seven months of last year.

This gap is expected to con­tinue to shrink as the year pro­gresses, since activ­ity rose sharply over the sec­ond half of last year, reach­ing lev­els that are unlikely to be matched in the final five months of 2010.

“The sales process has also slowed because it is tak­ing the builder and the sales office longer to explain how HST will be applied,” said Whitemarsh.

“There is a mis­con­cep­tion. Peo­ple did not under­stand it and peo­ple think there is HST on the resale of hous­ing. This may exac­er­bate the prob­lem that is already there.”

TD econ­o­mist Grant Bishop agreed that the imple­men­ta­tion of the HST in Ontario and B.C. has reduced sales substantially.

He said exist­ing homes sales are not directly taxed, but some buy­ers rushed to buy them under the mis­taken impres­sion that HST applied, thus help­ing to push up prices.

“With hous­ing 10–15% over­priced, we expect a down­ward cor­rec­tion of nearly 10% in the monthly aver­age prices, fol­lowed by sev­eral years of stag­na­tion of price growth at the rate of infla­tion, in order to bring Cana­dian house prices back to bal­ance,” he said.

Com­ment: Hog­wash!

The HST increased the cost of a new house worth more than $525,000 in B.C. and $400,000 in Ontario.

When the tax was ini­tially pro­posed in B.C., the thresh­old was also $400,000.

“We told the provin­cial gov­ern­ment that $400,000 was a ridicu­lous thresh­old,” said Simpson.

“In the end, the thresh­old was increased to $525,000, which did help.”

Both Simp­son and Whitemarsh want the gov­ern­ment to find ways to mit­i­gate the impact of the HST.

To begin, they would like the $525,000 thresh­old linked to the hous­ing price index.

Simp­son said he would also like first time buy­ers to get an exemp­tion from the prop­erty trans­fer tax.

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