Sean's Market insight Volume 9
Sean Zahedi
Executive Sales & Marketing Strategist - New Developments/ Philanthropist / Columnist/ Speaker
NO GST on New Homes up to $1M.
In Volume #7, I suggested that “new home buyers need a rebate program that truly delivers.” I am now happy to see that the leader of the Conservative Party is proposing to eliminate the federal sales tax on new homes, claiming this will help lower mortgage costs and speed up homebuilding. He stated that, as prime minister, he would remove the goods and services tax on new houses sold for less than $1 million. He estimates this tax cut could save Canadians a total of $40,000, or $2,200 per year in mortgage payments on an $800,000 house, while facilitating the construction of 30,000 new homes each year.
To fund this initiative, he would scrap the Liberal government's Housing Accelerator Fund and the Canada Housing Infrastructure Fund, projecting an overall savings of $8 billion for the government over several years.
In Canada, homebuyers only pay the GST/HST when purchasing a new house directly from a developer, while sales of used homes are usually exempt. He believes that without the tax on new homes, businesses will pass those savings onto consumers.
The Greater Ottawa Home Builders’ Association welcomed the proposal, noting that new townhomes in the capital would become eligible for a full GST rebate. The association estimates that government-imposed taxes and fees, including the HST, account for about 20% of the average new home cost in the capital.
Experts consider the removal of the GST an “incredibly bold measure” to improve housing affordability and stimulate construction. If implemented, homebuyers could potentially receive up to $50,000 back in GST for newly constructed homes. The proposal is seen as likely to make buying new homes more attractive and could lead to an additional 30,000 homes being built each year, according to claims from the Conservative Party.
Call for Another 50 Basis Points Rate Cut from Bank of Canada Grows Stronger
The Bank of Canada has made a significant move by implementing a 50 basis point interest rate cut, bringing its benchmark lending rate below 4% for the first time in two years. This marks the fourth consecutive cut since June, when the rate was at 5%. Typically, the Bank prefers smaller, incremental cuts of 25 basis points, but it can opt for larger reductions, known as "jumbo" cuts, when there are urgent concerns about economic growth.
Larger cuts have historically been used in response to severe economic downturns or crises, such as during the COVID-19 pandemic and the 2008 financial crisis. These moves indicate rising downside risks in the economy, though current conditions do not suggest an imminent contraction.
Looking ahead, there is speculation about whether the Bank of Canada will make another jumbo cut in December. While some economists believe a further 50 basis point reduction is likely, others anticipate a return to smaller cuts of 25 basis points. Factors influencing future decisions include economic growth forecasts and potential risks from external events, such as U.S. election outcomes or changes in population growth estimates.
The GDP annual growth rate in Canada is projected to reach 1.50% by the end of this quarter, based on Trading Economics' global macro models and analyst forecasts. Looking ahead, the long-term outlook suggests the growth rate will trend around 2.10% in 2025 and 2.50% in 2026, according to economists.
Q3 New Condo Market Snapshot: Sales Plummet and Inventory Surges
The Q3-2024 Condominium Market Report for the Greater Toronto Hamilton Area (GTHA) highlights a recent decline in new condominium sales and construction:
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Toronto Rents Drop Amid Record Condo Completions, But Supply Squeeze Ahead
Average condo rents in the Greater Toronto and Hamilton Area (GTHA) fell 3.8% year-over-year to $4.04 per square foot, although they remain 4.7% higher than two years ago and have risen 17.4% over the past five years.
So far this year, 23,473 condos were registered, a 132% increase from last year and a 67% rise over the 10-year average. Condo listings for rent in Q3 reached 22,939 units, a 52% annual increase, while lease transactions hit a record 17,327, growing at a slower pace, resulting in a leases-to-listings ratio of 76%, the lowest for a Q3 outside of COVID-19.
In Toronto, average condo rents dropped 4.8% to $4.18 psf, whereas rents in the 905 region rose 0.5% to a record $3.69 psf. Studios saw the largest rent decline of 7.3%, while one-bedroom rents fell 3.9% and two-bedroom rents decreased 3.7%.
New purpose-built rental units in the GTHA also experienced a 2.2% annual rent decline. The vacancy rate in these units was 2.7%, unchanged from the previous quarter but up from 1.8% a year ago.
Construction of purpose-built rentals dropped 40% year-over-year in Q3, with zero starts in Toronto, and overall rental starts have decreased significantly compared to previous years. Currently, 22,199 purpose-built rentals are under construction in the GTHA, reflecting a 7% decline from the previous quarter.
Capital Gains Tax Rise Likely to Yield Less Than 40% of Projected Liberal Revenues
Canada's increase in the capital gains inclusion rate is projected to generate significantly less revenue than expected, according to a report by the C.D. Howe Institute. The change is anticipated to add only C$3.3 billion ($2.4 billion) to federal revenues over five years, far below the C$8.8 billion forecasted by the government.
The discrepancy is attributed to differing assumptions about personal income tax revenues and the cyclical nature of capital gains realizations. The parliamentary budget officer has also estimated that the new tax will contribute just C$5.8 billion to personal income tax revenues.
In June, the government raised the inclusion rate for gains over C$250,000 from 50% to 66.67%, a move that has faced criticism from business groups amid concerns about its impact on investment and productivity. The Liberal government defends the tax increase as a measure to ensure wealthier Canadians contribute to funding new programs aimed at housing affordability and youth support.
The C.D. Howe paper suggests that while estimates for corporate income tax proceeds from the changes appear plausible, the lack of clarity on personal income tax assumptions complicates the understanding of revenue projections. Factors such as previous economic conditions, the newly reformed alternative minimum tax, and taxpayer behavior in response to the tax changes may further impact revenue outcomes.
Public opinion is divided; a Nanos Research poll found that 45% of Canadians believe the tax hike will reduce investments and harm the economy, while 38% view it as a fair measure to address inequality.
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