*Updated* Ongoing Bank of Canada Benchmark Rate Announcements

[Leondros]

Given how ITC credits work in Canada I think it would still incentivize building. When you are running the economics for sell versus rent for these condo buildings a large component of is being able to offload the GST onto the final consumer when the sale happens. On rental properties the owner of the rental apartment is the one left holding the bag as you cannot offload GST to renters as rent is GST exempt.

I agree with the above that its likely the rental property management companies take advantage of the ITC credit and pocket it. However, it does change the economics of these projects and should encourage more units to be built regardless.

[blankall]

Maybe I'm missing something.

This incentivises building rental vs ownership properties. Don't we want more Canadians owning the property they live in?

[Ashasx]

hmmmm

Liberals drop pledge to waive GST for new rental-housing construction

The federal government is dropping a campaign pledge to waive the GST on the construction of new rental units, claiming research has shown there are better ways to boost the supply of affordable housing.

https://www.theglobeandmail.com/news...ticle36973281/

Seems like a better idea now in a higher interest rate environment.

[Fuzz]

Is that the quickest U-turn in existence? Did they not talk to anyone first?


EDIT: Oh, I C.

[pseudoreality]

I don't see how cutting the GST would increase supply or reduce demand.

[topfiverecords]

Originally Posted by Ashasx

hmmmm

Liberals drop pledge to waive GST for new rental-housing construction



https://www.theglobeandmail.com/news...ticle36973281/

Seems like a better idea now in a higher interest rate environment.

Looks like they read our posts.

[bizaro86]

Originally Posted by opendoor

Yeah, unless there's more to it than it sounds, the idea that this is going to result in anything but the properties still being sold for the highest the market will pay is laughable. Which just means developers get a huge increase in their margins courtesy of taxpayers.

I'm sure they've convinced themselves that that it'll incentivize a ton of construction, thus driving down market prices. But that assumes that there's a significant latent capacity in terms of labor and investment dollars for real estate, which is pretty specious IMO.

There is no practical limit to the amount of investment dollars that would flow into residential rentals if the returns were strong enough to justify that. The amount of investment funds looking for a home is always high, and if rental properties were more profitable than other investments the asset class would attract more money.

Labour is a different story, although I have to say bidding up construction wages to make it a more attractive career for people would probably be a good way to increase our ability to add supply over the long term.

[Ashasx]

Originally Posted by pseudoreality

I don't see how cutting the GST would increase supply or reduce demand.

If the elimination of GST can help offset the impacts of increased interest rates/other development costs, projects that were previously put on hold may now be more lucrative and should lead to increased development.

[topfiverecords]

Originally Posted by bizaro86

There is no practical limit to the amount of investment dollars that would flow into residential rentals if the returns were strong enough to justify that. The amount of investment funds looking for a home is always high, and if rental properties were more profitable than other investments the asset class would attract more money.

Labour is a different story, although I have to say bidding up construction wages to make it a more attractive career for people would probably be a good way to increase our ability to add supply over the long term.

Bidding up construction wages increases construction costs, which reduces profit, in turn causing less investment dollars flowing into residential rentals.

What we really need is thousands and thousands of workers getting paid pennies with no rights. Then you'd see costs lowered, supply increased and the overall availability and affordability of rental units at more acceptable levels.

[Leondros]

Originally Posted by blankall

Maybe I'm missing something.

This incentivises building rental vs ownership properties. Don't we want more Canadians owning the property they live in?

Supply is supply, there is a rental affordability crisis as well. More people able to rent for cheap takes pressure off of prices for people buying. Its all the same good - roof on head. Its just how you decide to finance it - lease or buy.

[Leondros]

Originally Posted by pseudoreality

I don't see how cutting the GST would increase supply or reduce demand.

Because 5% off your bottom-line drastically impacts the profitability of projects. Similar to how financing costs from 2% to 6% have stifled projects, a 5% swing to the positive offsets your increased financing costs.

[pseudoreality]

Originally Posted by Ashasx

If the elimination of GST can help offset the impacts of increased interest rates/other development costs, projects that were previously put on hold may now be more lucrative and should lead to increased development.

Is that happening? There is already a huge demand, I don't see how making things slightly cheaper for the developer really changes anything.

[Ashasx]

Originally Posted by pseudoreality

Is that happening? There is already a huge demand, I don't see how making things slightly cheaper for the developer really changes anything.

I don't work in the industry but I can't imagine they operate on huge margins to begin with. I could see GST being the difference for some projects.

[Leondros]

Originally Posted by Ashasx

I don't work in the industry but I can't imagine they operate on huge margins to begin with. I could see GST being the difference for some projects.

I consulted for a shop here in town that did multi-family projects working on their financial modeling and can tell you even 1 - 2% was material for some of the hurdle rates on projects.

[bizaro86]

Originally Posted by topfiverecords

Bidding up construction wages increases construction costs, which reduces profit, in turn causing less investment dollars flowing into residential rentals.

What we really need is thousands and thousands of workers getting paid pennies with no rights. Then you'd see costs lowered, supply increased and the overall availability and affordability of rental units at more acceptable levels.

Money is fungible. If you spend less of it on GST you can spend more on construction labour and come out the same.

[Bill Bumface]

So there's a bunch of builders sitting on the sidelines right now because there isn't enough profit to be made building housing, but this 5% will convince them to get out of bed and go to work? Funny, I didn't see it that way myself.

[blankall]

Originally Posted by Leondros

Supply is supply, there is a rental affordability crisis as well. More people able to rent for cheap takes pressure off of prices for people buying. Its all the same good - roof on head. Its just how you decide to finance it - lease or buy.

This presumes that the tax break will open up more builds and there are a bunch of builds not getting done due to cost issues. In reality, we may be at the limit of builds the current zoning/permitting will support and this might just divert builds away from ownership to rental, thus creating more renters.

[bizaro86]

Originally Posted by blankall

This presumes that the tax break will open up more builds and there are a bunch of builds not getting done due to cost issues. In reality, we may be at the limit of builds the current zoning/permitting will support and this might just divert builds away from ownership to rental, thus creating more renters.

This should be fixable. Upzone, add greenfield land, and streamline/add resources to the permitting process.

There are a bunch of reasons why we have a housing shortage, and if people decide they can't be fixed then they won't be.

[opendoor]

Focusing on rental units is also probably more effective at driving down costs, as rent prices are far more correlated with unit supply/demand and local economic conditions than selling prices are. Speculation, interest rates, ease of getting credit, etc. can drive house prices well beyond what the fundamentals support, whereas that's not normally the case with rent.

For instance, the biggest housing building boom in Canadian history was in the 1970s, where they added 35% to the housing stock in a decade where the population only increased by 14%. One would assume that that would have meant that buying a house became much more affordable because so much supply was entering the market relative to the population growth, but the opposite happened; it actually precipitated two housing bubbles in a decade. So creating a ton of new supply for sale is no real guarantee of lowering (or even moderating the pace of increase of) prices.

And it's not like the material supply/demand conditions have changed all that much compared to eras where house prices were lower. Over the last 20 years, the increase in housing stock has exceeded population growth, even after accounting for declining household sizes. And because of that, rent costs in general really only increased by a bit more than inflation, whereas purchase costs have gone up dramatically.

[bizaro86]

Originally Posted by opendoor

Focusing on rental units is also probably more effective at driving down costs, as rent prices are far more correlated with unit supply/demand and local economic conditions than selling prices are.

Rents are probably more important anyway.

Owning a home has become important financially because housing keeps going up, but it is not in any way a human need. And it isn't obvious housing as an asset class will outperform forever - much of the gains have been multiple expansion which inevitably ends.

But shelter (especially in Canada!) absolutely is. The alternatives for people who can't afford rent ranges from couchsurfing to homelessness.