GST cut for new homebuyers could mean price hikes, bank warns

OTTAWA — The federal government’s plan to eliminate the GST on first-time homebuyers’ purchases of most new homes may actually lead to higher prices, a new report says.   The report, by Desjardins Economics’ Kari Norman, found that the federal policy to eliminate or reduce the GST on newly built homes priced up to $1.5 million for first-time homebuyers may cut upfront costs. But without a corresponding increase in the supply of homes to quell the housing crisis, the bank economists say, the federal policy may just boost demand and the home prices that the government intends to help suppress.   The report also warns that the rebate could distort the market because homebuilders might anticipate homebuyers’ increased purchasing power and simply raise sticker prices on new homes. Another possible problem is that the rebate might encourage first-time buyers to rush purchases in anticipation of rising prices, Desjardins says, leading to a short-term sales spike that would likely be followed by a slump.   “While the policy is intended to improve affordability, in the near term it may instead inflate prices or compress inventory,” the report said.    With the federal Parliamentary Budget Officer set to release an assessment Wednesday on the fiscal costs of the GST rebate on first-time homebuyers, Desjardins voiced concern that the policy will also mean that the benefits to buyers may be partly offset if the increased demand for homes leads to an increase in the costs of labour and building supplies.   “This could dilute some of the intended benefit, especially in overheated markets,” the report said.   Instead, Desjardins suggests that Ottawa mitigate the risk of demand outpacing supply by bundling the GST rebate with policies that would accelerate the pace of home building. The report says those other policies include streamlining permitting processes, investing in innovative practices, addressing skilled labour shortages and improving zoning flexibility.   Paul Smetanin, the president of the Canadian Centre for Economic Analysis, said he agrees with Desjardins’ concern about the GST rebate because the policy will increase demand and prices and give developers the chance to simply increase profits.   Smetanin said Canada’s housing crunch is a supply problem that needs supply solutions. In particular, he said, the three levels of government need to work together to address the infrastructure deficits — namely water, sewer, electricity — that exist in many communities lacking homes.   “On its own, it’s not going to work,” he said of the GST rebate plan.   Despite that, Smetanin said he appreciates Ottawa’s attempt to cut the taxes on housing developments, which he has calculated to be about 36 per cent on a new $1 million home. The primary taxes are development charges, property transfer taxes and sales taxes.   The federal government’s proposed policy, a key piece of its response to the political grenade that the housing crisis has become, is to eliminate the GST on newly built homes up to $1 million for first-time buyers and reduce the federal tax for those same buyers on homes priced up to $1.5 million. If the policy, which was introduced as legislation June 5, doesn’t spur an increase in the housing market, the GST rebate would reduce a home buyer’s mortgage by about $240 per month on a $1 million home.    The legislation, part of a broader package that includes an income tax cut, would take effect July 1. It would apply to homes bought between May 27 of this year and 2031.   The Desjardins report says that about 85 per cent of all new home purchases would qualify for the full rebate, while 95 per cent of new builds in most major centres would fit under the $1.5 million ceiling. That figure drops slightly in the country’s two most expensive major markets, 92 per cent in Toronto, and 75 per cent in Vancouver.    According to a study conducted by the Parliamentary Budget Officer during the recent federal election campaign, the proposed rebate would likely add about $2 billion to federal debt over the next five years. Those figures, however, don’t account for the increased spending that would likely occur if there were more new homeowners spurring additional construction and the consumer purchases that go with it.   The Liberals also vowed to make the housing market more affordable by simplifying national building codes and investing in prefabricated construction.   National Post   Get more deep-dive National Post political coverage and analysis in your inbox with the Political Hack newsletter, where Ottawa bureau chief Stuart Thomson and political analyst Tasha Kheiriddin get at what’s really going on behind the scenes on Parliament Hill every Wednesday and Friday, exclusively for subscribers. Sign up here. Our website is the place for the latest breaking news, exclusive scoops, longreads and provocative commentary. Please bookmark nationalpost.com and sign up for our daily newsletter, Posted, here.