New Study says tax harmonization would slam door on new home buyers

Ontario’s new homebuyers would face a massive tax grab under the proposed harmonization of the federal GST and Ontario PST, a new report released today concludes.

The report on the implications for sales tax harmonization on new home buyers in Ontario was written by veteran housing analyst Frank Clayton, PhD, of Canada’s largest independent real estate consulting and advisory firm Altus Group, for the Building Industry and Land Development Association (BILD). BILD is the Greater GTA affiliate of the Ontario Home Builders’ Association.

The report looked at nine Ontario municipalities and three different home types. It revealed tax increases for single detached homes ranging from $8,957 (Windsor) to $17,049 (Ottawa) in markets outside the GTA, and from $24,566 (Mississauga) to a whopping $46,676 (Toronto) within the GTA.

“All told, harmonization of PST and GST without any offsetting measures by the provincial government would rip $2.4 billon dollars out of the pockets of new home buyers, slamming the homeownership door shut in the face of many Ontarians,” said Stephen Dupuis, President and CEO of BILD.

BILD Chair Leith Moore added that the proposal for GST/PST harmonization couldn’t come at a worse time and runs completely contrary to the Province’s efforts to stimulate spending and jobs.

"There's no point putting the gas pedal to the metal from a stimulus standpoint while braking equally hard with the other foot, but that's what harmonizing the sales tax on housing amounts to," Moore said.

Meanwhile, Ontario Home Builders’ Association president Frank Giannone said harmonization is a “poison pill” for housing. “Housing is the only product that keeps on paying property tax after it is consumed. So to cripple the new home buyer market at this time not only damages the provincial economy, it also hurts governments in terms of revenues. In addition, the HST would also add additional tax to future renovation projects, and we all know tax increases drive consumers into the underground economy and into cash deals. It makes no sense,” he said.

Dupuis explained that builders are not fighting harmonization, but fighting for fair treatment of housing under a harmonized sales tax regime.

“The reason housing gets hit so hard is that it is the biggest of the big ticket items and it’s not currently directly subject to PST, for good reason,” he said.

“As matters currently stand, builders are paying an average of two per cent PST embodied in the price of each new home and they’re prepared to keep on paying at that rate, notwithstanding all the other taxes, fees and levies they must endure.

“What home builders are not prepared to do is to sit idly by while home buyers are hammered to the tune of $2.4 billion due to harmonization. That's not on," Dupuis concluded. (CREA 11/03/09)

First Time Home Buyers, Then and Now

Last winter, when Canada’s housing market had cooled and it seemed the only real estate news was bad news, Royal LePage CEO Phil Soper said the market recovery would be lead by first-time buyers.

"Like stalled credit, the cycle of buyers and sellers grinds to a halt when first-time buyers disengage," said Soper. "It’s like sand in the gears of the real estate market."

But then came what’s been called "the perfect storm" for first-timers: houses became more affordable and interest rates dropped to near historically low levels. And first-time buyers came back to the market.

By March, Re/Max reported that "entry-level purchasers are now the engine driving home-buying activity in almost every major centre in Canada." Elton Ash, regional executive vice-president for Re/Max of Western Canada, said, "Canadian markets from coast-to-coast are ripe for a reawakening as the weather warms up. First-time buyers seem more acclimatized to economic factors, even though the barrage of bad news continues to flow. Those who are secure in their jobs, have accumulated good down payments, and have acceptable credit ratings are continuing to venture forward, undeterred by tighter lending criteria."

In May, Soper said, "First-time buyers are back in force this spring, and with them the beginning of the market recovery. While these consumers appreciate government incentives such as tax credits, greater Registered Retirement Savings Plan deduction limits and rebates on home renovations, it is markedly improved affordability that is proving to be the powerful drawing card."

Re/Max correctly predicted that the activity at the low end of the housing market would kick-start sales in the mid and upper levels of the market as well, to the point that now it looks like 2009 will be one of the best years on record for resale real estate in Canada.

So first-time buyers are getting credit for helping the country avoid a longer real estate slump, which has prompted some companies in the financial services industry to take a closer look at what first-timers are thinking about these days. According to a TD Canada Trust study, there is a "marked difference" between the attitudes of today’s 18-34 year-old buyer and that of people aged 55+ when they were first-time buyers of the same age.

Just over half of today’s first-time buyers say they feel financially ready to buy a home, while only 37 per cent of the other generations felt ready when they made the decision to buy. However, more than a third of today’s buyers say they couldn’t buy a home without the help of their family (compared to 16 per cent of those 55+), and 27 per cent of the 18-34 year-olds said they received money as a gift or borrowed from friends and family to buy their home. Only 10 per cent of the older generations had financial help from friends and family.

For those 55 and older, paying off the mortgage was the top priority after moving in, but only 49 per cent of the new generation of first-timers cites it as the top priority. Renovation work may be top of mind, because 48 per cent of new first-time buyers are purchasing houses that are more than 21 years old, and 35 per cent said they intend to renovate them.

When shopping for a mortgage, younger buyers shop around more. The older generations tended to stick with their own bank where they were already customers (62 per cent), compared to 36 per cent of the 18-34 group.

"There are so many different options available now, and easier access to information with the use of the Internet, that it’s no wonder today’s first-time homebuyer shops around a bit more," says Chris Wisniewski of TD Canada Trust. "Thirty years ago when people were looking for financing, they usually had limited choices. Now there are many options to explore with your bank including a variety of fixed-rate mortgages, variable-rate mortgages, and even green mortgages for buyers who want to lessen their footprint on the environment." Most of the recent first-timers bought a home in the city (64 per cent, compared to 50 per cent of the 55+ group), and most bought a house rather than a condo, even in the city.

About a third of the 18-34 year-olds ended up paying more for their home than they initially planned, while just 18 per cent of the older generations said they spent more than they intended.

A different survey, by Genworth Financial Canada, highlights the real reason why first-time buyers are motivated to buy. Eighty-four per cent of first-timers agreed with the statement that "owning a home provides a greater sense of emotional well-being and security."

Eighty-five per cent said that even though homeownership may mean more work and effort, they would rather own than rent. Eighty-eight per cent in the Genworth survey said they would feel more financially secure owning their own home.