Raising threshold for GST on new homes
Poilievre picks up on a good idea
Costs set a floor on prices: just like anything else, it’s not sustainable to sell a condo for less than it costs to build. When the market-clearing price drops below that floor, the market locks up. Sales come to a halt, unsold inventory piles up, and people stop building more. This is happening now in the GTA and in Metro Vancouver: there’s lots of unsold condos.
In October, Mike Moffatt proposed that the federal government raise the thresholds for GST rebates on new housing: One simple way the federal government could save Canadian homebuyers nearly $2 billion a year.
Housing affordability remains a crisis in Canada, and any solution to that crisis requires driving down the costs of building a new home. The vast array of taxes, fees, and charges are among the largest and fastest-growing cost drivers of new home construction, making up an estimated 31 percent of the cost of home construction in Ontario, so tax reform must be at the heart of any affordability agenda.
The majority of these taxes and charges, from land transfer taxes to development charges, are out of the direct control of the federal government, but there is one completely in their control: the Goods and Services Tax (GST).
They do have the option of eliminating the federal portion of the GST altogether on new ownership housing, as they did with new rental housing. Given that this would be the federal portion only, it wouldn’t require any compensation to provinces, making it easy to implement. At a fiscal cost of $6 billion a year, the full-elimination option is likely off the table for the current and future federal governments. A less expensive option would be to recognize that home prices have more than tripled since 1991 and to adjust the rebate thresholds accordingly.
Raising the lower threshold from $350,000 to $1,000,000 and the upper threshold from $450,000 to $1.5 million would nicely mirror the federal government’s recent changes to insured mortgage rules. Our GST New Housing Rebate calculator estimates that this would return an additional $1.7 billion to homebuyers each year—a more manageable sum for any federal government.
This graph from Sightline illustrates how reducing costs (orange) brings more projects above water. Dan Bertolet, Yes, red tape and fees do raise the price of housing.
The key thing is making sure that local governments don’t just hike their fees in response, raising costs back to the same level.
Poilievre: waive GST on new homes selling for under $1M
Last week Pierre Poilievre picked up on this idea: Poilievre pledges to remove GST from purchase of new homes sold for under $1M. I think what doesn’t make sense is how he’s planning to pay for it:
Poilievre said he would pay for the plan by cutting two government programs — the Housing Accelerator Fund and the Housing Infrastructure Fund — programs the Conservative leader described as costly bureaucracies.
The Housing Accelerator Fund is basically a one-time payment, while waiving GST is an ongoing expense. (The Liberals point out that there’s Conservative MPs advocating for Housing Accelerator agreements with their local communities.) Same thing for the Housing Infrastructure Fund.
Mike Moffatt likes Poilievre’s proposal, describing it as a huge positive step forward, but has some suggestions:
Enhancing the rebate will not only make homes more affordable by essentially giving a 5 percent discount, but it will also increase the number of homes built. At any given time, there is always a set of housing projects that are on the borderline of economic viability, where some get built, and some do not. By reducing costs by 5 percent, it pushes more of these projects into being viable, causing them to be built.
The plan is not without its drawbacks. Although rebating 100 percent of GST paid is bold, the $1 million cutoff means that most newly constructed starter family-sized homes in the Toronto and Vancouver markets will not be eligible for a rebate since very few sell for under this amount. Phasing the rebate out between $1 million and $1.5 million, rather than a hard cutoff at $1 million, would address this shortcoming, though it would increase the cost of the proposal by 10 percent.
The Conservatives propose paying for it by eliminating a number of housing programs, including the Housing Accelerator Fund and the Canada Housing Infrastructure Fund.
Cancelling these programs would be a mistake. Conservative criticisms of these programs have merit. Some municipalities have been wholly disregarding their requirements; for example, the infrastructure fund sensibly requires some municipalities to freeze development charges. The City of Ottawa has blatantly disregarded this requirement by hiking development charges twice in the last six months, causing them to rise by over 20 percent.
The core idea behind these programs, however, is sound. Municipalities need infrastructure money to build housing-related infrastructure, but in return, municipalities should create the regulatory conditions to allow for new housing construction. Eliminating these programs is throwing the baby out with the bathwater, as they can be reformed.
A Globe editorial makes similar points. Pierre Poilievre’s simple slogans alone won’t build the homes. “Mr. Poilievre is bang on when he declares, build the homes – but some of his proposed policy details are problematic. And in his call to rescind some existing plans, he is wrong. Canada needs an all-of-the-above approach. The best ideas have no partisan fealty.”
Of Mr. Poilievre’s good-mixed-with bad ideas, this week is the most recent example. He proposed to eliminate the GST on new homes sold for less than $1-million.
This is good and was lauded by builders, including non-profit developers. It will cost Ottawa billions in dollars in revenue and smartly follows the Liberals’ decision last year to eliminate the GST on new rental apartments through 2035. Mr. Poilievre’s plan also fits the need to cut government taxes, at all levels and across the board, on new housing.
But Mr. Poilievre paired his good idea with a bad one. He plans to pay for the GST cut by scrapping Liberal programs, the housing accelerator and $6-billion for infrastructure. The accelerator money, which ends in 2028, is paid in chunks to cities to ensure rules and processes are reformed. Ending it early undermines those important changes.
Revoking much needed infrastructure money is a bigger mistake. New sewers, watermains and the like are essential to literally underpin new housing for generations ahead. Further, that federal cash is contingent on reforms such as density and freezing local development charges for three years. It’s good policy.
Great read as always. Its always nice hearing an unbiased perspective.