The Liberal government’s planned removal of the GST for first-time homebuyers could have the unintended effect of leading to higher prices for new homes, according to an economic analysis by Desjardins.
The government has introduced legislation eliminating the GST on new homes valued up to $1 million and reducing the GST on new homes between $1 million and $1.5 million, building on a promise the party made during the last election campaign.
The report by Desjardins economist Kari Norman says builders may push up prices to cover higher materials and labour costs, with an assumption that the overall housing price would still be lower due to the GST removal.
Homebuyers could also rush to purchase homes in anticipation of higher prices due to the policy, which could increase short-term demand and raise prices further, the report said. However, because some areas of the Canadian housing market are facing lower demand, the GST removal could help clear out homes that have yet to be sold.
“As with any policy that increases demand, it risks accelerating price inflation if supply can’t keep up,” Norman said. “To build a more resilient and inclusive housing market, affordability interventions must address both sides of the equation—buyers and builders—with all levels of government rowing in the same direction.”
The GST rebate must be mixed with other policies that streamline permitting processes, address labour shortages, and improve zoning flexibility to “accelerate the pace and quantity of residential construction” to ensure housing demand does not increase faster than the supply, Norman said.
The report estimated that 85 percent of new homes built in Canada over the program timeframe would be eligible for the full GST savings of up to $50,000.
A recent report by the Parliamentary Budget Officer (PBO) found that more than 71,700 new builds under $1.5 million would qualify for GST relief in Canada. In total, first-time homebuyers would save an average of $26,832 due to the GST removal.
While the federal government has estimated that the GST removal would cost $3.9 billion over five years, the PBO report said it would cost $1.9 billion over six years. The PBO had initially estimated the policy would cost approximately $2 billion back in April, but said its new estimate was $100 million lower due to the program starting later and involving different eligibility rules.
The report by Desjardins suggested the $2 billion discrepancy between the government’s prediction of how much the program will cost and the PBO’s numbers is due to Ottawa overestimating how many Canadians will buy new homes that qualify for GST relief.
The Desjardins report said the popularity of the program could spur additional housing construction to meet higher demand, while the PBO said it does not include any possible behavioural responses to the program in its analysis.
