The Liberal plan to give first-time homebuyers a tax break on a newly built home could have substantial impacts on housing affordability — with a few caveats — a new analysis finds.
The Liberal government introduced legislation on June 5 to eliminate the GST portion from new home sales of up to $1 million for first-time buyers, which works out to as much as $50,000 off the cost of a new build or a substantially renovated unit.
For homes sold above $1 million, the GST relief is phased out as the price tag nears $1.5 million.
Desjardins Economics said in a report released Monday that first-time Canadian homebuyers could save up to $240 on their monthly mortgage payments if they were to buy a new home with an all-in, tax-included price of $1 million. The required down payment would also be somewhat smaller.
Some developers charge the sales tax upfront, so it's not rolled into the mortgage principal at the time of purchase.
"For these homes, eliminating the GST will help prospective buyers reduce upfront closing costs, helping them get their foot in the door sooner," said the report, authored by Desjardins economist Kari Norman.
She argued the impact on housing affordability will be "particularly strong" for buyers in Canada's more expensive markets, like Toronto and Vancouver, where homes are routinely priced above the $1-million mark.
The new policy takes a big step beyond the existing New Housing Rebate, which is open to more than just first-time buyers but has long been capped at homes priced up to $450,000.
Norman estimates that nearly 85 per cent of new builds in Canada would quality for the full $50,000 GST relief in the new proposal.
Roughly 92 per cent of new builds in Toronto are expected to qualify for full or partial tax relief for homes priced up to $1.5 million. Only 75 per cent of new units in Vancouver would qualify, however, as many top out of the qualifying price range.
Desjardins recommends that the new policy index the price of qualifying homes to inflation to avoid future erosions in affordability.
The federal government predicts the GST rebate will cost about $3.9 billion over five years, while the parliamentary budget officer estimates the price tag is closer to $2 billion over the same time frame.
Desjardins said the discrepancy between the figures could indicate the federal government anticipates more new buyers taking advantage of the rebate, and a bigger boom in homebuying and construction as a result.
It's possible that increased demand spurred by the policy also leads to a surge in new building in Canada, the report said.
The rebate also comes at a time when the Canadian construction industry faces serious obstacles to getting shovels in the ground: high financing and construction costs, regulatory delays, an aging workforce and uncertainty among buyers and builders tied to Canada's trade war with the United States.
The report also warns that some developers, foreseeing increased buying power, could raise their own costs for materials and labour in response to the policy, which would undermine any gains in affordability.
Higher demand for housing tied to the GST break could, in the near-term, push up home prices if not coupled with other efforts to boost supply and the pace of construction, the report said.
This might be the ideal time to introduce a policy that stokes demand for new builds, however, as Desjardins noted a particularly soft condo market in cities such as Toronto could benefit from an increase in buyer appetite.
Parliament has yet to pass the legislation, which would apply to homes bought between May 27 through to 2031. Construction on qualifying homes would need to start before 2031 and finish by 2036.
The measure, one of a suite of proposals included in the Liberal platform during the spring federal election, is packaged in the same legislation as the promised income tax cut, which is set to take effect July 1.
Picture Courtesy: AP Photo/Tony Gutierrez
