Ottawa is taking more proactive steps to build more rental properties and deal with the lack of affordable housing. Housing affordability has reached a crisis level, says CIBC’s deputy chief economist Benjamin Tal, and the opposition Conservatives are taking the opportunity to put forth their own solutions.
Mr. Tal also says the responsibility falls on all three levels of government and that it is incumbent on them to all work together on solutions.
A federal government spokesperson confirmed in an email to The Epoch Times on Sept. 18 that the estimated cost to the budget of Ottawa’s Sept. 14 announcement to eliminate the GST from purpose-built rental construction is $4.565 billion over six years.
This is a significant budgetary impact that is almost as much as Budget 2023’s expenditures of $5.2 billion from fiscal year 2022–23 to 2027–28 for making life more affordable and supporting the middle class.
“I think that if it means cutting somewhere else, so be it. But I think that clearly we need the rental solution to this crisis. I think that the government will basically realize that there is no choice but to do so,” Mr. Tal told The Epoch Times in a Sept. 19 interview.
Housing experts like Mr. Tal say that purpose-built rental units like apartment buildings and student housing are the type of housing most needed to ease the affordability crisis.
He added that he has been advocating for the removal of the GST on purpose-built rental construction. The Conservatives also propose to remove the GST on the building of any new homes with rental prices below market value.
“I think it's a good idea. It's a step in the right direction,” Mr. Tal said.
The Department of Finance said that for a two-bedroom rental unit valued at $500,000, the removal of GST would deliver $25,000 in tax relief.
Apartments not Condos
RBC economist Rachel Battaglia said the 5 percent GST on new rental construction discouraged developers from building purpose-built rentals, but eliminating the tax isn’t likely to lower rents in the near term.
“Developers have long preferred to build condominiums over rental housing projects on the basis of higher profitability and the possibility to reinvest proceeds into subsequent construction projects,” she said in a Sept. 15 note.
Battaglia explained that with condos, the GST is offloaded onto the new homebuyer and the developer isn’t left holding the tax bill as in the case of rentals, since tenants aren’t obligated to pay the 5 percent GST on top of regular rent.
The Canadian Home Builders’ Association (CHBA) said in a news release on Sept. 14 that it is “very pleased” to see the elimination of the GST for purpose-built rental construction and that it had been calling for this response for years.
“It will now be very important that provincial governments follow suit with their own taxes on purpose-built rental. Also very critical is the need for municipalities to reduce their development taxes on not only purpose-built rental, but all housing,” said CHBA CEO Kevin Lee.
The Conservatives also plan to entice municipalities into building more homes to get more federal infrastructure funding. In their “Building Homes Not Bureaucracy Act,” the Conservatives say cities must increase the number of homes built by 15 percent each year or see their federal funding withheld based on how much they missed their home-construction targets by.
The act will also give bonuses to municipalities that exceed the housing construction target.
“We built fewer homes last year than we did in 1972 when our population was half the size,” say the Conservatives in a Sept. 14 news release.
According to Blacklock’s Reporter in an article on Sept. 15, the 2019 National Housing Strategy Act passed in 2019 that promised more affordable housing has only seen 106,377 homes financed under the act to date. This is based on a May 5 Inquiry of Ministry tabled by cabinet.
Mr. Tal says that regardless of what the policies are, better coordination is needed between all three levels of government.
He adds that while the province is responsible for the land and the cities determine the efficiency of regulation, Ottawa controls funding and also influences demand.
“Ottawa set up immigration policy … so they impact demand in a very significant way,” Mr. Tal said.
Federation of Canadian Municipalities president Scott Pearce, in a Sept. 15 statement regarding municipal priorities ahead of Parliament’s return, said that “foremost among these issues is the national housing crisis.”
Housing Costs Keep Climbing
Statistics Canada reported on Sept. 19 that Canadians paid more for rent and mortgage interest in August than they did in July. The rent index, which rose 6.5 percent year-over-year in August, fed the rapid growth in shelter prices. The mortgage interest cost index rose 30.9 percent in August.
Mr. Tal says that the housing affordability crisis is an example of what happens when inflation runs well above target for over two years and why it is important to have low and stable inflation.
“It's never about inflation, but the costs of bringing inflation down to 2 percent,” he said.
The housing market is one of the most sensitive sectors of the economy to changes in interest rates.
August data for housing starts of just below 253,000 showed a decrease of 1 percent from July’s figure.
“This leaves building 6 percent below year-ago levels and well below the 290K annualized pace that's required to keep up with population growth, compounding the supply deficit of homes,” said CIBC economist Katherine Judge on Sept. 18.
CMHC projects 3.5 million new homes are needed within seven years to make home ownership more affordable.
Economists and the industry say lower interest rates are needed for building to pick up—which isn’t likely until 2024.
House price appreciation reached its slowest pace in five months in August, according to the Canadian Real Estate Association on Sept. 15, and economists believe housing markets are on a trend to cool.