How an HST Rebate Could Reshape Canada’s Housing Market
The economics behind the HST rebate and its limits in today’s market
For years, the Missing Middle team has advocated for reducing the tax burden on new construction. With pre-construction sales down 95% in some GTA markets, the industry has hit a wall where it simply makes no financial sense to build.
In this week’s episode, we answer some of the questions and misconceptions we’ve read online about the new HST rebate on new homes.
Beyond the rebate, they explore bigger structural challenges like land costs, zoning, and competition in development. The key question remains whether this policy can meaningfully increase supply in a market that is still not functioning normally.
If the goal is to improve affordability, the HST rebate may help, but it is only one part of a much larger housing problem.
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Below is an AI-generated transcript of the Missing Middle podcast, lightly edited.
Mike Moffatt: Housing starts have been in freefall in Ontario, and pre-construction home sales are down as much as 95% in some GTA markets. Home prices have fallen in recent years, which is great news for affordability. But the cost of building homes hasn’t dropped.
This has created the awkward condition where homes are still too expensive to buy, but not expensive enough to build.
Cara Stern: The federal and Ontario governments are trying to address that, and they’ve made two big housing announcements in the last ten days, one on HST and one on development charges. And those can actually get more homes built soon. And both of them are areas that Mike and the Missing Middle team have been advocating for since day one.
They’re big moves that are meant to move the dial on supply, especially in the kind of market we’re seeing right now, where it makes no financial sense to build homes. Today, we’re addressing the most common questions and misconceptions we’ve seen online about the new HST rebate. So first of all, how does this new HST rebate even work?
Mike Moffatt: Well, the important thing to recognize about the HST is that it only applies to new homes, not to resale homes. So, because of that, it acts as a tax on housing construction. And in Ontario, it’s a tax that is paid to both the federal and provincial governments. Hence the “H” for harmonized in HST. These rebates aren’t a new idea. They’ve existed in one form or another since the GST went into effect in 1991. What changed last week were some of the details, and it’s not the first time that things have changed. For example, the Trudeau government recognized that the HST was a barrier to building rental apartments. So back in 2023, they instituted a 100% HST rebate to builders of purpose-built rentals, with Ontario following suit. And these were moves that contributed to Canada’s rental apartment boom.
Cara Stern: But that was just for rental housing, not ownership, right?
Mike Moffatt: Correct. Yeah, and there have been ownership rebates for decades as well. The province of Ontario, for example, has a couple—the HST new housing rebate, which is for people purchasing new homes that they will live in as their primary residence. And the new residential rental property rebate, which is for landlords who purchase new homes and rent them out, so long as they meet qualifying criteria around, like not flipping the home, not putting it on the short-term rental market and so on.
Now, the problem with these rebates is that they only cover a small portion of the HST paid on the home. And for the federal versions of these rebates, they only cover homes priced under $450,000, which means that in most of Ontario, nobody ever qualifies for that federal rebate.
Cara Stern: Why is that cutoff so low?
Mike Moffatt: Well, the federal government has never indexed it for inflation, so it’s stayed at the same level since 1991, which would be fine if home prices were at 1991 levels.
Cara Stern: If only! We first saw this change last year with the introduction of the first-time homebuyers rebate.
Mike Moffatt: Exactly. So the Carney government introduced a 100% HST rebate for homes priced under $1 million and a partial rebate for homes priced between $1 million and 1.5 million. And the province of Ontario matched these changes, which reduced the price of new homes, in some cases by over $100,000.
Cara Stern: That was only for first-time homebuyers, not for everyone. And then I hear the criticism that first-time homebuyers often can’t afford new builds.
Mike Moffatt: And that’s a really valid complaint. It missed some very important groups, including seniors who want to downsize their homes and what I call second-time homebuyers, which are typically couples in their 30s who bought a small condo a few years ago. They want to upgrade into something larger, so they want to upsize, but they can’t qualify for a mortgage because prices are too high. Now, some of them will be able to own a new home, which will help them move into something larger while also getting more homes built.
What the federal government in Ontario have done here is update those HST new housing rebates and the new residential rental property rebates I mentioned earlier, and given them the same 100% rebate as the first-time buyers.
But this initiative is only for one year and is currently only in Ontario, though I certainly hope we see it expanded to other provinces like British Columbia. The federal government has set aside money for housing initiatives in other provinces, but those negotiations are still ongoing. And to date, no other fed-prov deals have been announced.
Cara Stern: As you know, I am annoyingly addicted to Reddit, and I’ve seen a lot of chatter online, and there are quite a few people who think this is either just not going to work for them, or really that it’s just meant to line developers’ pockets. So I’ve read a lot of comments there, and I thought maybe we can use some of that to unpack it together. So here we go. Here’s one from Redditor /u/thefringthing. Maybe a Breaking Bad reference there.
Mike Moffatt: Now this is something I hear all the time and not just on Reddit. Even governments more often than not, in my view, get this wrong. There’s a fundamental difference between measures that increase the demand for pre-existing assets, like resale homes, and measures that lower the cost of building new assets. Because the HST only applies to new homes, it acts like a tax on construction. It is ultimately a supply-side tax. Reducing the HST on housing construction is a supply-side measure, so it shouldn’t be compared to something like changing mortgage amortization, which increases the demand for new homes and resale homes alike. So this is fundamentally different.
And this is not about increasing the demand for resale homes. HST rebates on housing actually reduce the demand for resale homes because it creates new supply, which competes with resale homes. So it has the exact opposite effect of what this Redditor and, frankly, a lot of politicians suggest.
Cara Stern: So what you’re saying is it increases supply. So it is increasing demand for new supply. But hopefully, by adding new supply, it will reduce the demand across the board, lowering prices across the board. Is that about right?
Mike Moffatt: So new homes compete with resale homes, right? So if the government put in some measure to build more Fords, that’s not going to help General Motors. In the same way, if you create more new homes, it’s not going to help the demand for resale homes.
And governments won’t admit this, but measures like these rebates actually put downward pressure on the price of resale homes, and those politicians will never admit that because they don’t want to say our public policy is going to lower your property value.
And this downward pressure on resale happens because demand is shifted away from resale to new. But it also increases the supply of resale, as some of those new home buyers will be putting their existing homes on the market.
Now, there can be complex second-order effects here. So, for example, it can spur infill construction. And that infill construction can increase the cost of land in specific neighbourhoods, and the price of certain homes in certain neighbourhoods can rise. But on average, this puts quite a bit of downward pressure on the resale market.
Cara Stern: So, a follow-up to that is: Some people worry that prices will just go up exactly the rebate price. Like developers, they could theoretically raise prices 13%, and they can give that money back. In the end, they’re making the same amount of money. Or they could be more sneaky. They could raise prices 5%, and then they’re like, you’re getting a discount, and you’re getting 8% off the original price, but it’s still not the full 13%. How do we know they’ll actually pass along all 13% and not just bake it into a price increase?
Mike Moffatt: Yeah, this is a good question and a legitimate concern. I would say that, right now, if developers had that kind of pricing power, pre-construction and condo sales wouldn’t be down like 97% in Toronto. But legally speaking, the rebate goes to the buyer.
There’s a concept in economics known as economic tax incidence, which recognizes that the benefit of any change is split among a variety of factors. And it’s not just home buyers versus developers. Trades workers can reap some of the benefits here through higher wages. Drywall manufacturers can benefit from extra demand for drywall and so on. So there are a lot of different actors in the system, all of which can benefit to a certain degree.
But the benefits tend to flow disproportionately to the group with the most negotiating power and that holds the most scarce asset. Right now, home buyers are the scarce asset. They’re what’s in short supply, so they should reap the largest share of the benefits.
Cara Stern: Right now, home buyers are in short supply, but that hasn’t been the case for most of my adult life. And I wonder what happens when we’re not in such a terrible market for sellers and builders.
Mike Moffatt: Yeah. So we’re not in such an ice-cold market. Often, the scarce asset isn’t builders and developers because there’s a lot of competition there. It’s actually in development land. So, who benefits from reducing construction taxes can sometimes be the owners of that development land. So changes in tax policy can end up boosting development land prices. So that’s why land reform is so important to make sure that those groups aren’t capturing the benefits here.
Cara Stern: What kind of land reform?
Mike Moffatt: Well, really anything that creates competition in land markets, and that includes, but is not limited to, things like zoning and approvals reform. So really, anything that creates competition in land markets, including but not limited to zoning and approvals reforms to allow for the ease of building a variety of different housing types, both on greenfield and infill sites. We need to make sure that developers have access to sufficient utilities, from water to electricity. Nobody’s going to buy a home if they can’t turn on the lights or flush the toilet. We also need to make sure that urban growth boundaries are adjusted to keep up with population growth and changes to our immigration systems.
Cara Stern: So, should this rebate — and frankly, the development charges reduction that was announced for only three years — should they only exist when it’s a buyer’s market?
Mike Moffatt: I understand the logic of the question, but the short answer is no. Unless you like really expensive homes, because there’s no world in which governments could charge $300,000 or $400,000 in taxes and development charges for a home, and have those homes be affordable to the middle class.
A typical family in Ontario, when they buy a new home, are now paying more in just taxes and fees than I paid for my entire new home back in 2004. When I bought that home a couple of decades ago, I paid about 16 grand in taxes and fees. That included everything—development charges, GST, PST, land transfer tax, you name it, 16 grand. So my question is, why did governments have to collect 10, 15, 20 times that amount today? Why are governments treating Gen Z so much worse than they treated Gen X?
If you go on Twitter, you’ll find some Boomer who paid like $0.38 in taxes on the home they built in 1986, and they’re now complaining that young people’s new home taxes are being lowered to only $200,000. And they’re crying that young people are getting subsidized. It’s a bit much.
Now, that said, yeah, we have to worry that reducing taxes on housing construction will simply cause land values to go up. But the solution to that is through land competition, rather than taxing young people out of home ownership.
Cara Stern: The provincial press release said the expanded 13% HST rebate could stimulate an additional 8000 housing starts in Ontario next year, supporting up to 21,000 jobs and boosting Ontario’s GDP growth by $2.7 billion.
Mike Moffatt: Yeah, it’s really hard to know how many homes will get built due to this HST rebate. To get that kind of estimate, you need to be able to estimate what economists call price elasticity. That is, how much do sales change in response to a price reduction? Now economists estimate price elasticity based on historical data. But the historical data doesn’t tell us much here because we’re operating in a market unlike anything we’ve seen in decades. So I don’t find any of these estimates particularly instructive. I know why governments do it, but it’s like trying to calculate how long it would take a monkey with a wooden leg to kick the seeds out of a dill pickle. Like, it’s just a hypothetical question. And there’s no data to be able to to get that kind of answer.
Cara Stern: Are there from other countries?
Mike Moffatt: You run into the same problem that the conditions in other countries are so unlike what we have here. We really do lack a map to all of this, because we really haven’t seen a market like this arguably since the early 1990s. And that was a much different world and a much different housing system back then.
Cara Stern: So why did they go with a one-year time limit on the HST rebate?
Mike Moffatt: I expect it will get extended, but there are two benefits to it being such a short period of time. First, we could treat it as a pilot. As I mentioned, we don’t know how well this is going to work, so why not test it out? And secondly, the time limitation creates a sense of urgency. So you’ll get new buyers coming into the market due to a fear of missing out.
Though I will say this undermines the effectiveness of this as a pilot, because if we have a bunch of sales that happen, we won’t really know if that continues if we extend the program or if people were just acting out of a sense of FOMO.
Cara Stern: That makes sense. If you know you can get a big rebate, then it makes sense to act quickly. But at the same time, how can we know whether, if it were going to be indefinite, we would always see that increase?
Here’s another question from a Redditor. This one is /u/petpet0_0.
Mike Moffatt: Now, the way that Redditor phrased it is funny, but they’re not actually wrong. This policy benefits new home buyers naturally, but it also benefits people who are buying resale homes because it opens up those existing homes that are sold by seniors downsizing and by second-time home buyers.
Now, I’ll leave it to those home buyers to determine whether or not these new homes are — I won’t use a term that they used. I’ll just say, poopy.
Cara Stern: Should it apply to people who bought last year but haven’t closed? Because I’ve seen some people online who are upset. They may have heard rumours this was coming, or they just decided, “I should take the plunge now and buy a place.” And I understand the argument that they didn’t need the help to spur construction. They were able to afford it before this came in. But, it does kind of suck if you bought and then your next-door neighbour gets 13% off the same unit.
Mike Moffatt: Yeah, I’d be annoyed too. But the point of this is to create new supply. So if you’ve already bought the unit, you’re not really creating new supply. And frankly, how far back do we want to go? Can I get some of the $16,000 I paid in 2004 back?
There has to be a cutoff point here, and there will always be buyers who are just on the wrong side of that point, which is really unfortunate if you are one of those people, but it is inevitable. There’s not much you can do about it.
Cara Stern: Thanks so much for watching and listening. Our producer is Meredith Martin, and our editor is Sean Foreman.
Mike Moffatt: If you have any thoughts or questions about monkeys and dill pickles, please send us an email to the [email protected].
Cara Stern: And we’ll see you next time.
Additional Reading/Listening that Helped Inform the Episode:
Doug Ford And Mark Carney To Expand HST Rebate To All New Home Buyers
Doug Ford And Mark Carney To Expand HST Rebate To All New Home Buyers: r/canadahousing