Five Questions the Federal Government Must Answer When Designing the Enhanced GST New Housing Rebate
Designing a system to help restore the dream of homeownership
Highlights
The federal government needs to restore the dream of homeownership to young, middle-class Canadians.
The best single tool they have to do so is an enhanced GST New Housing Rebate
There are five questions the government must answer when implementing this rebate:
When will it go into effect?
Who will qualify?
How will the phase-out work?
Will there be regional variations?
Will provinces be encouraged to match the cut?
The enhanced GST New Housing Rebate is the federal government’s biggest tool in restoring the dream of home ownership
We said it yesterday, and we will say it again today: The federal government needs to restore the dream of homeownership by increasing the supply of both condo and non-condo ownership homes.
Governments can use several policy levers to boost the supply of owner-occupied homes. Most of these levers are outside the direct control of the federal government, though the feds can incentivize other governments to use them through programs like the Housing Accelerator Fund.
The federal government does have direct control over one of the biggest ownership policy levers: the GST. Because the GST only applies to new housing, it acts as a tax on housing construction, similar to a development charge. This tax raises the cost of new homes, lowers their supply (by making some projects unviable), and thus also raises the value of existing homes by slowing the construction of new homes. The federal government recognized the negative impact the GST has on housing construction when it eliminated the GST from purpose-built rental apartments.
The Liberal platform contained a commitment to eliminate the GST for first-time homebuyers for homes up to $1 million. As the federal government goes to implement such a promise, there are five questions it must ask itself. We believe that as the government works on implementation, it should go back to the drawing board on a few details to get the biggest bang for the buck from the reform.
1. When will it go into effect?
The federal government needs to act as quickly as possible on this, as potential buyers of new homes will stay off the market until the cut goes into effect. The flipside, of course, is that the government should also spend the time to get the details right. One way the government could resolve this tension is to announce, up front, that the details will not be resolved for a month or two, but any changes will be made retroactive for any house that closes after May 13th (or some other date). That does not create complete certainty as some buyers will not know if they will qualify, but it at least sends a signal that the federal government is concerned about unnecessarily stalling the market.
2. Who will qualify?
As we said in the Ten Thoughts on the Liberal Housing Plan, limiting the enhanced GST New Housing Rebate to first-time homebuyers limits its usefulness, even to first-time homebuyers:
The Liberals have limited their plan to first-time homebuyers. In our view, this is a mistake. The goal should be to increase the supply of housing, and such a restriction limits the effectiveness of the program. For example, the existence of the GST on housing discourages seniors from downsizing from their larger suburban homes to smaller, newly constructed senior-friendly housing. By eliminating the GST on housing, we can get more of these senior-friendly homes built and free up larger suburban homes for the next generation of families.
We would advocate keeping the qualification criteria the same as the existing GST New Housing Rebate, which requires that applicants “must buy or build the house for use as your or your relation's primary place of residence”.
There is a case for further extending the rebate to all buyers, not just primary residents, to help re-capitalize the pre-construction condo market. In our view, the government should first answer the question, “How should the construction of condos be financed?” and design policy around that answer before extending the rebate to non-primary residence buyers.
3. How will the phase-out work?
Here’s where we get into specific details of the promise. The exact wording in the Liberal Platform is as follows:
Cut the GST for first-time homebuyers on homes up to $1 million. Canadians will save up to $50,000, allowing more young people and families to achieve their dream of homeownership. This will lower upfront costs so Canadians can keep more of their hard-earned money.
In recognition of the high costs of homes in more expensive housing markets, we will also lower the GST on homes between $1 million and $1.5 million for first-time buyers.
No details were given on how much of a rebate buyers of homes valued between $1 million and $1.5 million will receive. It could be structured like the existing federal rebate, where the dollar amount of the rebate is phased out on a sliding scale, until it reaches $0 at $1.5 million. They could also structure it like the provincial rebate, where the rebate “maxes out” at $24,000, which happens for homes valued at $424,850, and homes valued above that receive the same $24,000 rebate, regardless of how much PST the buyer pays. There are a few different potential models here.
4. Will there be regional variations?
The inclusion of the phrase “homes in more expensive housing markets” in the policy description has caused some to wonder if the federal government will have GST qualification criteria that differ across markets. Spending $1.3 million in many parts of Canada will get you a Mansion, while in York Region, you’ll have trouble finding a starter home at that price. Given that the federal government isn’t looking to make mansions cheaper, we understand the appeal of a GST rebate that takes regional price variations into account.
However, we believe a location-specific GST rebate model would cause more harm than good. At a time of fraying national unity, having a $1.2 million home qualify for a rebate in Toronto but not qualify in Calgary is a non-starter. Now, it may be possible to avoid cutting the GST on mansions in a more nuanced way by, say, requiring the home to be less than 3,000 square feet in size. Enforcing that, however, would bring extra complications and difficulty. We would suggest having a single standard across the country, with no additional criteria beyond the primary residence restriction.
In short, the government should follow their playbook from the GST cut on purpose-built rental, and avoid introducing complex conditions. Blunt is better.
5. Will provinces be encouraged to match the cut?
The federal government will get more bang for the buck if provinces like Ontario that charge taxes on new homes match the federal rebate. What would it take for provinces to follow suit? Is moral suasion enough, or should it be a requirement to qualify for federal housing programs?
We need to have this conversation, and we need to have it quickly
Reasonable people can disagree about the answers we provided to these questions; we are not even certain we got all of them right. However, we need to have this conversation. We hope whoever is announced as Housing Minister will think through these questions, consult relevant stakeholders, and implement as quickly as possible.
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