Harmonized Sales Tax will wound Housing Industry

Ontario's impending tax harmonization scheme spells disaster for those building, buying or selling homes.

The recently announced harmonization of the GST and PST in Ontario is about to wreak havoc on the housing industry, one of the pillars of that province's economy. It is a textbook case of poor government policy that will distort the province's housing market over the long term, with a particularly devastating impact on the building industry.

Consider the following: When tax harmonization in Ontario takes effect in July, 2010, someone buying a new condo in Toronto costing $500,000 -- the current median price in that city -- will pay approximately $40,000 in additional taxes. If the same buyer considers moving up to a $600,000 purchase, the tax goes up another $17,000, for a total additional tax burden of close to $60,000. Total sales taxes on a new home purchase will exceed the 13% tax on an imported luxury car and the 15% sin tax levied on a glass of wine or pint of beer purchased at the local watering hole. But will new home purchasers be willing to pay these sky-high sales tax increases and, if not, what are the consequences?

Hardest hit will be people living in the Greater Toronto Area (GTA). The provincial government indicates that 75% of new home purchases in Ontario fall below the $400,000 threshold. But in the GTA, 54% of new home purchases last year were predominately high-rise condominiums, and in Toronto, where the majority of new condominiums are being built, the average asking price is currently just over $500,000.

For the consumer, there is one way to dodge the tax: Buy on the resale market where PST and GST do not apply. For a $600,000 resale purchase, the tax savings would total $78,000. But the sheer magnitude of the difference in sales tax between new and resale product will distort housing markets in the long run.

Bottom line: the harmonized tax regime will curtail new housing supply in key sectors of the new homes market and will redirect demand to the resale market. In the long run, this will put upward pressure on house prices.

David Pylyp; Click on the title to read the entire piece, well written and researched by jmckellar@schulich.yorku.ca - James McKellar is professor of real estate and infrastructure at the Schulich School of Business, York University Hat Tip to the National Post.

How do you feel about the harmonized tax? Do you agree that it will push the sale of smaller home units? Will there be a mini boom of 1,150 square foot houses like built in the early 70's?

Online Petitions are available for the anti tax movement, but unfortunately No One Mobilized during the Miller Tax

Your comments are invited.