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Throughout October UrbanToronto is featuring a special State of Housing editorial series to examine the pressing housing challenges facing Toronto and the Greater Golden Horseshoe.
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What can each level of government do to assist the currently weak housing market in Canada? And why should they intervene? The government of Canada has set a goal of building 500,000 new homes annually across the country. We need a coordinated consistent approach to achieve this goal. The realistic annual total currently is around 200,000+/-.
First, it must be recognized that Canada, being geographically broad, consists of several distinct real estate markets. Atlantic Canada is performing well. Alberta, Saskatchewan, and Manitoba are performing ok. Quebec is somewhat stronger than British Columbia and Ontario, which are experiencing difficulties with projects not launching, being cancelled, and sales at only a fraction of the levels achieved a few years ago. Unless the supply continuum continues, there will be a severe shortfall and lack of supply in the coming years. At that point, demand will have significantly increased, and prices will inevitably rise sharply without intervention once current inventory is absorbed.
Federal/Provincial
Eliminate the HST/GST on all new homes for 36 months. Planning and executing a new development requires considerable time. In Ontario, this policy change could reduce costs as follows:
Assuming land costs at 15% of sale price and hard and soft costs at 75% of sale price, 13% of 70% equals 9.75%. Assuming all the other provinces match the federal government reductions it would result in a savings of about $80,000 on the 800,000-dollar purchase price. As well by limiting the time of application of this measure it would provide a strong incentive to consumers who are currently on the sidelines.
On Wednesday, September 17th, the Bank of Canada reduced the Bank Rate by 25 basis points, from 2.75% to 2.5%. There is current discussion and momentum suggesting the likelihood of two further cuts of the same magnitude over the next few months, which could provide additional stimulus to the housing market.
A reduction in interest rates of 0.75% over the next few months could translate into homeowner mortgage savings as follows: On an $800,000 house with an 80% loan-to-value mortgage, this equals $640,000 × 0.75% = $4,800 per year. Over a five-year mortgage term, this would amount to $24,000, or 3% of the original cost of the home or condominium.
Notwithstanding the fact that “interest rate” policy is outside the control of the federal government, the Federal Government could remove the current stress test requirements as market conditions have changed dramatically since their introduction and they are no longer necessary. This would definitely allow more buyers to qualify for mortgages.
Eliminate the PST, either separately or in conjunction with the Federal Government, as noted above. Reduce the Land Transfer Tax (LTT) on all new homes by 1% for 36 months.
Municipal
Reduce or eliminate development charges and levies for 36 months. Although it is difficult to determine an exact amount, a conservative estimate based on a review of several large municipalities would be $45,000. On an $800,000 residence, this represents 5.625%.
Summary
9.75% + 3% + 1% + 5.625% = 19.375%.
This represents a simple yet realistic approach to reducing the cost of a new home by 20% to 30% for a defined period and allow more buyers to qualify for a mortgage. Such measures would encourage more projects to launch and succeed, create employment opportunities, and prevent a future shortage of supply—thereby strengthening the economy in multiple ways.
We are at a crossroads and a moment of time when governments must have the courage to lead. We have a choice to resolve the looming challenges or suffer the consequence of job losses and lack of much needed housing supply, which would surely lead to a spike in prices once current inventory is sold.
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C. Hunter Milborne is the Chairman and Broker of Record at Milborne Group, a condominium marketing consultancy and pre-construction sales agency he founded in the 1970s. The firm is Canada's leading marketer of urban, masterplanned, multi-phase communities.
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UrbanToronto's research and data service, UTPro, provides comprehensive data on construction projects in the Greater Golden Horseshoe—from proposal through to completion. Other services include Instant Reports, downloadable snapshots based on location, and a daily subscription newsletter, New Development Insider, that tracks projects from initial application.
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Thank you to the companies joining UrbanToronto to celebrate State of Housing Month.
