Starting July 1, 2010, Ontario’s tax harmonization plan will add 8% to the price of new homes over $500,000.
(22.7% of new homes sales in Ontario were over $500,000 in 2008.)
Homes under $400,000 will not be subject to the tax.
We asked various lenders if they expect to allow borrowers to finance the new tax (as is the case with the GST now). Most expect it to be possible, but no one knew for sure.
If homebuyers do finance the tax, it will raise mortgage payments hundreds of dollars a month for buyers of new $1/2-million+ homes, costing several thousands in extra interest over a 5-year term.
The new tax will also increase the cost of Realtors' commissions, appraisal fees, home inspections, and legal fees by 8%.
More from CP and CBC…
What about homes between 400k and 500k ?
400-500k home buyers get a partial tax credit
I like your site and appreciate your commentary. However, your statement that this will add 8% to the price of homes is highly misleading at best, and patently false at worst. (At least you’re not alone, many people have made the same mistake.)
The fact is that the new 8% GST is replacing the old 8% retail sales tax (RST). This old retail sales tax applied to virtually all tangible personal property inputs that a builder puts into a new house. As this tax is non-recoverable by the builder, it simply increases the cost of the house to the builder. Thus, the 8% RST is currently embedded in the price of new houses. This embedded 8% RST will not exist once the new 8% GST comes in.
So, like when the GST replaced the old manufacturers’ tax, what this change is really doing is moving the tax from the manufacturer/builder level to the consumer level. It is not creating an entirely new cost that was never there before.
Thanks very much for the post. Your point assumes builders will reduce the price of a new home in relation to their “savings” on input taxes. Personally, I think that is idealistic at best. It seems highly improbable that tax harmonization will be anywhere near a wash for new home buyers.
LOL. Martin it is completely absurd to think builders will do buyers a favour and pass along lower prices.
see this quote from tax lawyer Alan Kenigsberg –
“New homes worth over $400,000 will be subject to a significant increase in tax under the harmonized sales tax. While RST currently applies to building materials used in the construction of homes, real property is not subject to RST. Thus, a builder building a new home currently must pay unrecoverable RST on many of its supplies (which Ontario estimates to be 2 to 3% of the final sale price of a new home), but does not charge RST on the sale of the new home. Under the HST, while the cost to build a new home will decrease, since builders can claim credits for the sales tax on their inputs, new homes will now be subject to an additional 8% tax. Ontario has proposed a rebate of 75% of the Ontario portion of the HST (i.e. 6%) for new homes sold for under $400,000. This, combined with the decrease in the building costs, which Ontario assumes will be passed on to customers, means that new homes sold for under $400,000 should be effectively taxed at the same rate under the HST as they were under the RST system. However, the rebate begins to be phased out at $400,000, and disappears entirely at $500,000. Thus, assuming again that the builder passes the 2% savings on to the purchaser, under the new system new homes sold for more than $500,000 will be subject to an additional 6% tax. This does not include the additional taxes that will now be payable on the legal fees, inspection fees and real estate agent fees.”
Like anything, the savings will be passed on to consumers if consumers don’t pay the inflated prices.
Given the housing market right now, I’d say it is extremely likely that the savings do get passed on to consumers as builders & developers do their best to entice buyers back into the market.
To Bob – HST is not taking effect until 2010. By that time the housing market will presumably be more stable. The people above who said buyers will not see any offsetting benefit are right on. Show me one time in history where big ticket items went down in price after the removal of a government tax. This is free profit for homebuilders!
It will allow for lower prices during competitive times (which is most of the time). Builders, like anyone, will make the best markup they can. If they’re competing for business, this will allow them to reduce their prices further without hitting their basement margin. If it’s booming and they can’t build fast enough, prices will be the highest the market allows, regardless of the tax.
Adam is correct – it will have to do with the elasticity of the housing market at any given point. If it’s highly elastic (lots of competition), then the builders will have to eat all or most of the tax.
Prices won’t come down because the HST will save builders very little. PST on building materials adds just about 2% to the cost of building a house. The new tax is 8%.
8% – 2% = 6% minimum price increase.
If builders keep the 2% then prices will go up the same amount as the new tax. 8%
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