Har­mo­nized tax a worry for analysts

Eric Lam, Finan­cial Post

Canada’s slump­ing hous­ing mar­ket is show­ing signs of sta­bi­liz­ing, but the com­ing Ontario har­mo­nized tax will cause prob­lems for builders and prospec­tive home­own­ers alike, ana­lysts say.

Toronto’s usu­ally over­sat­u­rated con­do­minium mar­ket has also begun to tighten, the first hints of a turn­around in 2009.

“The rise in demand, com­bined with fewer new list­ings, has restored a bet­ter bal­ance to the mar­ket,” Sco­tia­bank ana­lyst Adri­enne War­ren wrote in a new report on Cana­dian real estate trends.

Ms. War­ren noted a healthy pickup in home sales through the first part of the year, cou­pled with a drop in the national new-listings-to-sales ratio to 2.2 in March from a peak of 2.7 last Novem­ber as rea­son for cau­tious optimism.

Ms. War­ren has also cut Scotiabank’s 2009 expected hous­ing starts to 140,000, down from 155,000 in February.

“Buy­ers, espe­cially first-time, are being lured by his­tor­i­cally low mort­gage rates, greater afford­abil­ity and [over­all] increased sup­ply,” she wrote.

As well, Ms. War­ren sug­gests the “win­ter deep-freeze” in new condo sales is begin­ning to thaw.

“Sev­eral major devel­op­ers, includ­ing in both Toronto and Van­cou­ver, reported sharply higher sales vol­umes in March,” she wrote. “This mir­rors the improve­ment in the broader real estate market.”

TD ana­lyst Pas­cal Gau­thier also expects Toronto’s con­do­minium mar­ket, in the midst of a “cycli­cal down­turn,” to sta­bi­lize and begin to recover before the end of 2009.

“Is the Toronto condo mar­ket either expe­ri­enc­ing or headed for a crash? Our short answer would be no,” Mr. Gau­thier wrote.

While many ana­lysts believe there are too many con­dos under con­struc­tion in Toronto, Mr. Gau­thier says the num­bers are falling back to rea­son­able levels.

Some 24,000 units were built in 2008, but the city is only on pace for about 18,000 units this year.

Mr. Gau­thier expects that fig­ure to top out between 11,000 and 13,000 units.

Mean­while, the new Har­mo­nized Sales Tax (HST) intro­duced by the Ontario gov­ern­ment in its bud­get in March is also a major cause for concern.

The pro­posed tax, which will merge the PST and GST into a flat 13% rate, is set to be intro­duced on July 1, 2010.

“[We are] likely to see a front-loading of new condo sales between now and then, in effect dis­plac­ing some sales that would have oth­er­wise occurred later,” Mr. Gau­thier wrote.

How­ever, BMO Cap­i­tal Mar­kets ana­lyst Dou­glas Porter sees the HST hav­ing even more far-ranging effects on the market.

“Rais­ing taxes on a prod­uct that is often con­sid­ered an invest­ment, such as hous­ing, is sim­ply not good pol­icy,” he wrote in a spe­cial report on the new tax.

Cur­rently, new homes face a 5% GST but no PST. There is also a 1.8% GST rebate for houses less than $350,000.

Begin­ning July 2010, the HST will be applied on all new homes. Hous­ing cost­ing less than $500,000 will be eli­gi­ble for as much as 6% in tax rebates, but any­thing priced above that gets the full 13% tax.

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