Ottawa homebuyers policy has unintended consequences warns Desjardins' Norman

The Canadian government recently announced a plan to lower the upfront cost of buying a new home and boost construction; no GST on new builds up to $1 million and a reduction of the tax for homes priced from $1 million to $1.5 million.

This will save up to $50,000 on the price of a new home, but the program is only available to first time homebuyers and a Desjardins economist says this should be extended to all buyers of newly built homes.

Kari Norman acknowledges that there is a wider GST discount already available for all qualifying new-home buyers as part of the New Housing Rebate, but this only applies up to a $450K price tag, which has been in place for a long time and fails to recognize the sharp increase in prices since.

While some developers charge the GST upfront, others include it in the overall price that is rolled into the mortgage principal and in those cases the reduction in monthly mortgage payment is around $240 on a $1 million home.

But Norman wants to government to offer a more rounded solution to address some potential unintended consequences.

“As with any policy that increases demand, it risks accelerating price inflation if supply can’t keep up,” she said. “To build a more resilient and inclusive housing market, affordability interventions must address both sides of the equation—buyers and builders—with all levels of government rowing in the same direction.”

Among the scenarios that could emerge is that builders may push up prices to cover higher materials and labour costs, knowing that the overall price will still be lower due to the GST relief. This would limit the benefits of the program, especially in higher priced markets.

First-time home buyers may rush to buy, fearing that the policy will push prices higher over time. This could see a short-term spike in demand which could impact prices. However, some sectors of the market, such as Toronto condos, are softer currently so the GST relief may simply help to absorb unsold supply.

“Moreover, given that the rebate applies neither to repeat buyers nor to investors, the increase in demand may be mild enough to have little influence on prices,” Norman says.

On balance though, Norman’s report says that “to mitigate the risk of demand outpacing supply, the FTHB GST Rebate should be bundled with other housing policies—particularly those focused on streamlining permitting processes, investing in innovative practices, addressing skilled labour shortages and improving zoning flexibility—in order to accelerate the pace and quantity of residential construction.”