“This is definitely a step in the right direction,” says Allan Klassen, President and Managing Partner for Albi Homes Ltd and President of the Canadian Home Builders Association of Alberta.  “Homes are Canadians’ largest and most significant investment purchase and the number one issue for the new home building industry and the consumer is affordability,” says Klassen.

Effective July 1st, the rate of the Goods and Services Tax will drop from seven per cent to six per cent on all taxable items including the sale of new homes.  Taking into consideration the new housing rebate, which will remain in effect, this translates to a savings of $1280 on a $200,000 new home, increasing to a $1920 reduction on a $300,000 home and then to $5000 on a $500,000 home. *

Over the past year home prices in Calgary have skyrocketed, pricing many potential first time buyers out of the market. In fact, according to Richard Corriveau, market analyst for Canada Mortgage and Housing Corporation, the Statistics Canada New House price index is up 42.8 per cent from this time last year. The average cost of a new home this past May - more than $329,000!

“Unfortunately because prices are so high and incomes are not rising to match this increase, it is weeding out a lot of new home buyers,” says Jacqui Mulikow, AMP, Mortgage Agent with Mortgage Intelligence. Ryan Ockey, President of Cardel Homes echoes that sentiment and says that for the  past six months in the Calgary market fifty per cent of Cardel Homes’ starter product consumers have not qualified for financing. “A year and a half ago for every ten deals we wrote eight people qualified.”

So the question is how exactly is the GST reduction going to impact affordability for the new homebuyer?  According to Mulikow, when it comes to qualifying for a mortgage, the reduction will hardly be felt. “As far as qualifying the buyers or any significant change in their ability to qualify it is pretty insignificant,” she says. “If we look at an average purchase it wouldn’t turn an unqualified buyer into a qualified one.”

Mulikow says that the reduction of another percentage factor may make more of an impact because it would give something a little more concrete in the reduction of the price. She notes that the Canadian Mortgage and Housing Corporation’s (CMHC) trial 30 year extended amortization period and Genworth Financial’s introductionof the 35 year amortization plan have made far more significant inroads into qualifying borderline prospective buyers.

Klassen agrees that the GST reduction will not significantly affect affordability. “I don’t think that it is a game breaker for the most part.”

What the GST reduction does offer is a significant domino effect. Most services involved in the real estate transaction including legal fees, realtor fees, assessment services and home inspections are also subject to GST.  The potential savings from the one per cent reduction will ultimately put more cash in homeowners’ pockets. “It will give the consumer more money for tangibles whether it is hardwood flooring or furniture. People will take that extra few thousand and reinvest it back in the economy,” says Klassen.

From an industry perspective, both Klassen and Ockey, who is also the President of the Calgary Region Homebuilders Association (CRHBA), strongly advocate not only a GST reevaluation but as importantly a reevaluation of the rebate threshold. “We need to deal with the thresholds because house prices are rising so rapidly. Fifteen years ago when the GST was implemented, $350,000 was a long way away. Today it is below the average home price in Calgary,” says Klassen.

Currently the New Housing Rebate offsets some of the GST. The rebate is dependent upon the sale price of the home, condominium or town home. It works like this: for primary residences costing $350,000 or less, the consumer receives a 36 per cent rebate on the GST directly from the builder to a maximum of $8750. The rebate on homes priced between $350,000 and $450,000 declines on a proportional basis until the maximum rebate is reached. New homes selling for $450,000 or more do not qualify for a GST rebate and consumers pay the full seven per cent. Under the new budget the rebate structure remains the same; however, the maximum rebate available at six per cent GST becomes $7560 instead of $8750.

Given this information, it becomes obvious that the $350,000 threshold is no longer realistic; the average home doesn’t get the full 36 per cent rebate. “Today the threshold should be at $450,000 or $500,000,” says Ockey. In addition, Klassen  suggests that rebate thresholds need to be different across the country because there are very different market price ranges.

As for prices here in Calgary – “I believe that demand is still far outweighing supply and as long as that equation is still in place I think you are going to see increases,” says Klassen.  “Alberta is the only province that is capping building.  This is unprecedented.”

Also affecting home prices is another tax – the City of Calgary’s Acreage Assessment Fee, which was implemented this spring. The tax is incurred when new subdivisions are built and when all is said and done it will translate to about a $1900 per unit increase. Says Ockey, “It is more than we wanted to pay, but there are some benefits and in the end we think that it will be a wash for the consumer.”

The bottom line -  with house prices   increasing so rapidly  any cost relief to buyers is welcome.  Naum Shteinbah General Manager of Streetside Development Corporation perhaps sums up the general consensus about the GST reduction best. “Anytime the government reduces taxes it is good.” His advice to buyers: do your homework when you pick a builder and don’t take too much time to make a purchase decision.  Take heed - if you wait a month the price could be up another five per cent and not even a one per cent reduction in the GST will take the sting out of that.  CL


* As often there is a lag time of several months from signing the deal to taking possession, under the new budget certain transitional rules for real property transactions apply. If you enter into an agreement for a new home purchase after May 2, 2006 , the GST rate will depend on when ownership and possession are transferred. In general the 6 per cent tax will apply if both ownership and possession are transferred after June 30th.  If the agreement was entered into before May 3rd and 7 % tax was paid, but possession and ownership do not occur until after June 30th, then the consumer may be entitled to a transitional rebate.