Thursday, August 17, 2006

How the GST cut affects housing prices

By Peter Diekmeyer ?

For most Canadians, the one-per cent cut in the Goods and Services Tax, or GST, that came into
effect July 1 is unlikely to be as big a deal as politicians are making it out to be. On a $3
hamburger purchase, the cut will save you a grand total of 3 cents. Worse, on items that have the
GST already included in the price, there's no guarantee that these savings will be passed on to

But for prospective home buyers, the tax cut could mean thousands of dollars in their pockets.
That said, it's a complex matter, and the implications vary depending on whether you are buying a
new or used home. And strange as it may seem, in theory at least, if you are selling an existing
home, the GST cut could eventually end up costing you money.

Buyers of new homes are big winners

The good news is that the GST cut provides a major benefit to new home buyers, says Dave Benbow,
president of the Canadian Home Builders Association. "The action improves housing affordability
for many Canadians," he says. "It's also good news for owners who are considering home

The bad news is that for many home buyers, the GST cut will not be as generous as it appears at
first glance. That's because buyers of new homes whose houses cost less than $350,000 already
benefit from a 36 per cent rebate of the GST they pay on their properties. This rebate is phased
out gradually for buyers of new homes priced between $350,000 and $450,000, and there is no
rebate at all for buyers of homes worth more than $450,000.

The upshot is that the more expensive the home you buy, the greater your savings, both in dollar
and percentage terms. For example, a buyer of a new home costing $350,000 will save $2,310, which
works out to one per cent of the home price, less the 36 per cent of the rebate. However, if you
buy a home costing $500,000, you'll benefit from the full one-per cent cut and will save a cool

Mixed news for the existing home market

Unlike buyers of new homes, people who purchase existing homes don't pay GST. But that doesn't
mean that they don't benefit from the cut. "Reducing the GST rate will have the effect of
reducing the costs associated with buying or selling a home," says Pierre Beauchamp, chief
executive officer of the Canadian Real Estate Association, or CREA. "It would also have an impact
on the associated costs of moving a house."

Last year, CREA commissioned a study from Clayton Research, which listed many of those costs.
Among those cited were renovations, as well as the purchase of furniture and major appliances.
Real estate agents' fees will also cost less as a result of the cut.

In fact, the GST cut will likely lead to downward pressure on the prices of existing homes,
despite the fact that no GST is charged on them. That's because existing homes and new homes
often compete for the same pool of buyers. And although the process is informal at best, price
changes in one category tend, over time, to be mirrored in the other.

But what is good news for existing home buyers could end up being bad news for sellers of
existing homes. That's because the houses they are selling compete with builders' new offerings,
which are now cheaper due to the GST cut. As a result, existing home buyers will be unlikely to
command as much for their homes as they would have if the GST cuts had not been introduced.

On the other hand, sellers of existing homes have seen their property values rise considerably in
recent years due to other factors that provide direct benefits to existing home demand, such as
cheap interest rates and the strong economy. As a result, most are unlikely to worry too much
about the indirect effects the GST cut may have.

Another cut to come

The key point is that however complex the differing implications of the GST cut are on various
types of homes, the savings are real and could get better.

That's because the recent one-per cent GST cut is only half of what the Harper government
promised during the election. Although a time table for the second cut, which would bring the GST
down to five per cent, has yet to be announced, the good times just may continue to roll.

Peter Diekmeyer is a Montreal-based business and economics writer.

No comments: