[Mike in TO]

It's a huge tax increase from 2% PST embedded into the price of a new home or condo (PST is charged on materials, but wasn't charged on land, labour, overhead, sales and marketing, profit etc - it works out to about 2% of the home price under current the current system) - essentially a 6% tax increase on new homes and condos over $500,000 with a phased in increase for new homes/condos between $400k & $500k.

A bit over 50% of the GTA market is under $400,000 with another approx one quarter between $400k & $500k with the remaining 20% or so over $500k.

Tax implications are significant. A $400,000 new home/condo receiving the 75% provincial portion of the sales tax rebate will pay $8,000 in provincial sales taxes under harmonization (which is roughly what is paid now, but it's embedded in the price of a new home/condo - so it works out evenly pre & post harmonization).

However a new home/condo priced at $500,000 will pay $40,000 in provincial sales taxes under a harmonized sales tax regime (basically $30,000 in brand new taxes)... this is a pretty serious tax increase - especially when you consider that a $100,000 jump in price results in a $32,000 increase in provincial sales taxes payable.

Lastly as a VAT (value added tax) it's a tax on a tax - so if for example you are buying a new home in Brampton you have about $40,000 in development charges embedded in the home price, plus various other taxes, charges and fees - the HST isn't another tax built into the price - it's a VAT meaning that the purchaser is paying 13% sales tax (8% PST + 5% GST) on not only the actual home and land, but the tax on the other taxes.

 

[unimaginative2]

The market will make sure that this new tax will almost certainly not cost homebuyers a nickel. New homes make up a small portion of the housing market, so there's no way that developers can just increase their price by 8% without driving people to choose an already-built house. This will come out of developers' profits, and considering the windfalls they already get from zoning changes and other government actions, it's more than fair.

Remember, this is simply a tax on the value added by the homebuilder. They'll be able to deduct the cost of all of their inputs so it's really simply a tax on the difference between what it costs to build a house and how much they sell it for.

 

[Mike in TO]

Wow - interesting comment, somehow a value added tax increasing taxes on new homes and condos will have no impact on prices and consumers...

The result of harmonization will compound the problems in the marketplace right now and I guarantee you 8% won't come out of "windfall profits" - we may see a long cold winter for new housing and condos as projects are pulled off the market. Also zoning regulations are often intentionally 'downzoned' and in many areas of Toronto haven't been updated since the 1960s - not really a fair comment when there is a planning process in place to protect the public good and long-term provincial and municipal growth objectives.

To address you comment on 8% having no impact and only coming out of profits:
1. Developers currently don't have the margins to absorb the additional tax implications
2. Lending institutions require specific net proceeds to ensure project viability - otherwise they will not finance projects
3. Once those net proceeds are reduced beyond a certain threshold, equity requirements are increased.
4. Equity is next to impossible to raise right now and is currently tied up in inventory (GTA 20,000 condo unit inventory) - essentially it is a capital situation in which capital is tied up in projects that may or may not be viable depending on how transition rules are set up for the new tax regime.
5. When capital is tied up in existing projects other projects going forward are threatened and significant tax increases have implications for all future pro-formas (your suggestion that 8% increase in taxes has no effect is ridiculous)
6. Depending on transition regulations, developers will not be able to absorb 6% taxation increases on inventory units (market currently won't accept 6% price increase either) - this has massive implications for consumers that already purchased and wouldn't be subject to HST themselves as the new tax implications threaten viability and therefore financing of entire projects in the pipeline - entire projects could be threatened.

Essentially many current projects on the market may be unviable for construction if transition is not set up properly and many future projects in the planning pipeline will require a serious review as to whether or not they are economically viable.

You also suggested the new housing market is 'small'...
- 2008 Ontario MLS - 181,001 sales
- 2008 new housing starts - 76,076
- 2008 New Housing Economic Activity $14.4 billion
- 2008 Employment New Housing - 140,000 people

Then think of each new home/condo - it needs a refrigerator, it needs doors and door knobs, it needs an oven, it needs manufactured hardwood floors etc and then people go out and buy furniture and a TV also most materials used in construction such as wood, steel and aggregate for bricks etc are locally sourced materials... essentially it's one of the most important industries to the GTA economy (Mayor Miller was even quoted last month as saying the development industry was the most important industry to Toronto's well-being).

The net new taxes on a $500,000 new home/condo will be $30,000 - that has huge implications for consumers, developers, employment and government.

* point of clarification - while HST results in 8% being added in taxes, there is already about 2% PST embedded in the price of a new home/condo - so the tax increase is actually about 6%

 

[Hydrogen]

Thanks for that Mike. Very informative.

 

[kEiThZ]

Mike. Are you housing starts statistic just for Ontario or for all of Canada?

 

[afransen]

Wow - interesting comment, somehow a value added tax increasing taxes on new homes and condos will have no impact on prices and consumers...

The result of harmonization will compound the problems in the marketplace right now and I guarantee you 8% won't come out of "windfall profits" - we may see a long cold winter for new housing and condos as projects are pulled off the market. Also zoning regulations are often intentionally 'downzoned' and in many areas of Toronto haven't been updated since the 1960s - not really a fair comment when there is a planning process in place to protect the public good and long-term provincial and municipal growth objectives.

To address you comment on 8% having no impact and only coming out of profits:
1. Developers currently don't have the margins to absorb the additional tax implications
2. Lending institutions require specific net proceeds to ensure project viability - otherwise they will not finance projects
3. Once those net proceeds are reduced beyond a certain threshold, equity requirements are increased.
4. Equity is next to impossible to raise right now and is currently tied up in inventory (GTA 20,000 condo unit inventory) - essentially it is a capital situation in which capital is tied up in projects that may or may not be viable depending on how transition rules are set up for the new tax regime.
5. When capital is tied up in existing projects other projects going forward are threatened and significant tax increases have implications for all future pro-formas (your suggestion that 8% increase in taxes has no effect is ridiculous)
6. Depending on transition regulations, developers will not be able to absorb 6% taxation increases on inventory units (market currently won't accept 6% price increase either) - this has massive implications for consumers that already purchased and wouldn't be subject to HST themselves as the new tax implications threaten viability and therefore financing of entire projects in the pipeline - entire projects could be threatened.

Essentially many current projects on the market may be unviable for construction if transition is not set up properly and many future projects in the planning pipeline will require a serious review as to whether or not they are economically viable.

You also suggested the new housing market is 'small'...
- 2008 Ontario MLS - 181,001 sales
- 2008 new housing starts - 76,076
- 2008 New Housing Economic Activity $14.4 billion
- 2008 Employment New Housing - 140,000 people

Then think of each new home/condo - it needs a refrigerator, it needs doors and door knobs, it needs an oven, it needs manufactured hardwood floors etc and then people go out and buy furniture and a TV also most materials used in construction such as wood, steel and aggregate for bricks etc are locally sourced materials... essentially it's one of the most important industries to the GTA economy (Mayor Miller was even quoted last month as saying the development industry was the most important industry to Toronto's well-being).

The net new taxes on a $500,000 new home/condo will be $30,000 - that has huge implications for consumers, developers, employment and government.

* point of clarification - while HST results in 8% being added in taxes, there is already about 2% PST embedded in the price of a new home/condo - so the tax increase is actually about 6%

It's not all bad news. I would expect a windfall for existing homeowners of high value properties, since they will be competing against new homes which had a relative increase in price of 8%. This will tend to increase the price for comparable existing homes.

 

[Mike in TO]

Mike. Are you housing starts statistic just for Ontario or for all of Canada?

Ontario stats as that is where harmonization applies to.

re: afransen & existing home values

It will likely have an upward pull on existing home values over the long-term, but in a down market the other effect will be an even larger gap between existing and new home prices, which puts new at a competitive disadvantage... which has public policy implications in terms of improving energy efficiency, intensification and job creation.

 

[Automation Gallery]

The tax policy is especially punishing in the GTA, as only new homes priced under $400,000 will be spared the tax increase. You would be hard-pressed to find a single detached home under $400,000 while a third of highrise condos exceed that amount. The tax directly targets the "move up" buyer in the GTA.

http://www.thestar.com/comment/article/614683

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.

http://www.urbantoronto.ca/showthread.php?t=8862&page=2

 

[Mike in TO]

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.

jmckellar@schulich.yorku.ca - James McKellar is professor of real estate and infrastructure at the Schulich School of Business, York University.

 

[Automation Gallery]

I can see two things happening before July 2010, the Ontario Government dropping this tax harmonization on properties up to 800 000 dollars, or a mad rush for individuals looking for a property before the tax deadline.

 

[afransen]

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.

jmckellar@schulich.yorku.ca - James McKellar is professor of real estate and infrastructure at the Schulich School of Business, York University.

For a professor of real estate, he doesn't seem to understand how this substitution effect will drive up the price of existing housing relative to new build. This guy isn't too clever.

Furthermore, the idea that homebuyers will accept inferior homes just to get under the $400,000 line is rather silly. The clawback begins at $400,000, but obviously it is not as if you have to pay HST on the entire amount once you hit $400,001. To be fair, the HST is applied on the full amount by the time the amount hits $500,000, which probably is distortionary. If they are going to exempt homes under $400,000, they should only tax the sale price above $400,000.

All this said of course, the guy sounds like he's ranting without really understanding how this change will affect the industry.

 

[MisterF]

The tax policy is especially punishing in the GTA, as only new homes priced under $400,000 will be spared the tax increase. You would be hard-pressed to find a single detached home under $400,000 while a third of highrise condos exceed that amount. The tax directly targets the "move up" buyer in the GTA.

Maybe the amount should be indexed to the median price in each municipality.

 

[Mike in TO]

The clawback begins at $400,000, but obviously it is not as if you have to pay HST on the entire amount once you hit $400,001. To be fair, the HST is applied on the full amount by the time the amount hits $500,000, which probably is distortionary. If they are going to exempt homes under $400,000, they should only tax the sale price above $400,000.

Actually the full amount will be taxed at $400,001 (at a reduced rate of 5% until one hits $500,000 where the full 8% rate kicks in). Currently the province intends to tax every dollar on a new home over $400,000 rather than the price above $400,000 - which is a rather regressive approach to taxation. A $450,000 home will pay $13,500 in new taxes due to harmonization (3% overall tax increase from approx 2% to 5%).

re: inferior homes.

People are going to start thinking more carefully about upgrades and green features if they home they are purchasing is hovering around that $400k or $500k mark - of course if they are way over or way under than it isn't as much of a concern. But there is already plenty of talk among builders & developers of downspecing homes in that $400k range and backing away from some of the green feautures that have started to be offered as standards the last 2 or 3 years.

 

[Mike in TO]

Harmonized tax will hit housing hard, builders say
TERRENCE BELFORD

From Friday's Globe and Mail

E-mail
May 1, 2009 at 12:00 AM EDT

Ontario Premier Dalton McGuinty and Finance Minister Dwight Duncan may wake up one morning a few years from now and have one of those "What was I thinking?" moments.

They will look out of their Queen's Park windows and see a Toronto changed for the worse. Two-bedroom and larger condominiums will be significantly less affordable and the Greater Toronto Area's supply of family-sized rental apartment suites will be sinking faster than the Titanic.

The GTA will be turning into a metropolis of small one-bedroom and one-bedroom and den suites. Only the rich will enjoy condos more than 800 square feet in size and even they will be looking at paying a premium of at least 6 per cent more than today's prices — before factoring in any rise in construction costs.

That is how the building industry sees the future of the GTA if the province goes ahead with its plans to combine the 8-per-cent provincial sales tax and the 5-per-cent federal goods and services tax on July 1, 2010.

The GST component will have a neutral impact. Builders already pay it and receive rebates depending on the selling price of a new home. They just pass the cost through to buyers in their sales price.

The PST is the problem. Currently, builders pay PST on materials that go into construction. Today's PST adds about 2 per cent to the total selling price of a new home.

For the first time, however, the PST component of the harmonized sales tax would apply to the selling price of the home and not just to the materials that went into it. The HST kicks in at $400,000 on a sliding scale rising to full rate at the $500,000 mark.

If the PST component continues at the 8-per-cent rate, that means 6 per cent more in taxes on the price of those new homes.

"The way the HST is structured means a significant increase in the price of any new home over $400,000," says Stephen Dupuis, president of BILD, the group that represents GTA home builders. "It is really a back-door way to raise taxes and is certain to deeply affect the GTA's growth."

While Mr. Duncan would not grant an interview, spokeswoman Alicia Johnston acted as a pinch hitter. She points out that the new HST would not affect 75 per cent of new homes being built in Ontario. They average well below that $400,000 mark, and in the GTA it would not have an impact on affordable homes.

Why tax housing at all? The province needed to find ways to make up for the hundreds of millions of tax revenue lost through planned cuts in personal and corporate taxes and to pay for the costs of economic recovery plans, she said. It chose to place the burden on the shoulders of those buying expensive homes.

"We are going to lose $2.6-billion in revenue over the next four years," Ms. Johnston says.

BILD estimates the tax on new housing will raise $800-million a year for the province.

But as George S. Kaufman once quipped: One man's Mede is another man's Persian. What may be a luxury home outside of the GTA is basic accommodation in many of its submarkets.

While the average selling price of a new condo in the GTA was $344 a square foot at the end of February, it was more than $500 in eight of the 18 submarkets tracked by RealNet Canada Inc. The average cost of a new condo is already more than $400,000 in 10 of those submarkets and just $5,000 less than that mark in an 11th.

If the HST were introduced today, that would mean instant price increases on all of them. If the new HST started at 2 per cent on suites above $400,000 and ranged up to 6 per cent on anything greater than $500,000, then price increases on those being sold today would range from $8,400 on the average suite along the Etobicoke waterfront to $72,000 in the Bloor-Yorkville area.

Want a condo in downtown west? It will instantly cost $30,000 more as will the average suite in North Toronto.

Howard Cohen, president of Context Developments Inc., which built Radio City on Jarvis Street and has Market Wharf behind the St. Lawrence Market under way, says costs for new projects are already nudging higher than the $500-a-square-foot mark.

"That means anything over 800 square feet in size will be affected. These aren't luxury suites. These are family homes," he says.

The new HST will also have a distinctly negative impact on the supply of rental stock. Mr. Cohen points out that 98 per cent of all rental apartments built in the GTA since the mid-1980s have come from investors buying condos and then renting them out.

"Between 20 per cent and 25 per cent of all new condos have traditionally gone to investors," he says.

But as prices for new suites climb, the economics of investing diminishes. Investors can't charge enough in rents to cover both their mortgage and monthly maintenance costs.

"The HST nudges those costs even higher, which means we are looking at real supply shortages, very low vacancy rates and significantly higher rents down the line," he says.

"The HST may be great tax policy but it is lousy housing policy."

 

[Eug]

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.

Absolutely correct.

In Toronto, a $600000 home is usually not for the rich. $600000 homes are for middle-income families. The rich prefer to live in homes north of $1 million.