Developers Hail GST Freeze on Rental Builds as a ‘Big Move,’ but Will It Solve Shortages?

Developers Hail GST Freeze on Rental Builds as a ‘Big Move,’ but Will It Solve Shortages?
Deputy Prime Minister and Minister of Finance Chrystia Freeland and Minister of Housing, Infrastructure and Communities Sean Fraser announce a bill to remove GST from rental developments and amend Canada's competition laws, at a press conference in Ottawa, Sept. 21, 2023. Patrick Doyle/The Canadian Press
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Housing industry players are divided over the Liberals’ new plan to speed up rental builds by freezing related GST surcharges, with some calling it a “game changer” and others saying it won’t make a dent.
 “The intent of it is to increase supply. It won’t,” Paul Smetanin, president and CEO of the Canadian Centre for Economic Analysis (CANCEA), told The Epoch Times.
The Liberals tabled Bill C-56, the Affordable Housing and Groceries Act, on Sept. 21. The legislation will, among other things, put a seven-year moratorium on GST in a bid to tackle rising affordability woes in Canada, especially in the rental housing sector where major markets like Toronto and Vancouver are chronically undersupplied.
The GST freeze is retroactive to Sept. 13 and expires Dec. 31, 2030, provided projects are delivered within five years of the latter date.

“There are just too many other factors that get in the way,“ Mr. Smetanin said. ”That’s not going to change the business model or the appetite for developers and investors to increase the volume of purpose-built rentals. It’s very small and it reduces the costs by about three percent. It really is just a token gesture.”

Diminishing homeownership and rental affordability in Canada have been front and centre in recent years, and as the country grows at a rapid pace and the problem worsens, it’s become a political hot potato. The Liberals have responded with supply-side solutions, but waning affordability appears entrenched.

Conservative leader Pierre Poilievre has consistently criticized Prime Minister Justin Trudeau over a national housing crisis exacerbated under his stewardship.

‘Big Move’

Richard Lyall, president of the Residential Construction Council of Ontario (RESCON), welcomes the suspension of  GST surcharges on purpose-built rental construction but says it falls short.

“The GST move is a big move for rental,” Mr. Lyall said, adding, “There shouldn’t be a time limit on it of seven years, that doesn’t make any sense.”

Michael Cooper, president and chief responsible officer of Dream Unlimited Corp., which develops purpose-built rentals, welcomes the moratorium and says it will reduce outlays by around seven percent depending on the Dream rental project.

“It actually does add up to a big difference,” Mr. Cooper said.

Dream has 1,000 units planned across two rental developments in Ottawa—one a net-zero community, 40 percent of the others comprising affordable rental suites. Mr. Cooper says the developments were effectively shelved due to poor building economics but should Bill C-56 pass, the projects will proceed as planned.

“We would have been able to start if the math worked, and until this, it didn’t work. So we’re really happy about that; it really makes a big difference,” he said.

Financing

Carla Guerrera is CEO and Founder of Purpose Driven Development, a Vancouver-based real estate developer and planning firm that often partners with governments, First Nations communities, and non-profits. She says the confluence of rising construction material costs and interest rates has in recent years rendered rental construction economics unpromising.

“It’s especially a game changer for affordable housing and affordable rental housing, because this removal of GST will go directly into lowering rent levels to make housing in our cities more affordable for everyone,” she said.

The Liberals announced on Sept. 26 that Canada Mortgage Bond annual funding would increase by $20 billion to $60 billion and prioritize “low-cost” large-scale rental construction. The feds estimate it will create 30,000 additional rental units per annum.

“It’s financing, which means you still need to have rent levels that will cover the cost of the financing required to make the projects financially viable,” Ms. Guerrera said.

However, it can be used in tandem with certain Canada Mortgage and Housing Corporation rental construction financing programs that can, if criteria are satisfied, trigger 50-year amortizations and improve pro formas.

“This is just expanding financing that’s available for more projects at that lower rate and more favourable financing,” Ms. Guerrera said, adding, “It’s more available to more groups and more projects than have been available in the past.”

The GST moratorium and the Canada Mortgage Bond top-off do not amount to a complete solution, according to Mr. Cooper, who believes persistently high interest rates are the real spanner in the works.

“On its own, it’s not enough,” he said. “I do worry that none of this will be enough if interest rates keep going up and construction costs keep going up.”

Mr. Lyall welcomes both measures but says issues hampering rental housing are systemic and municipal. He has long been critical of municipal tax regimes imposed on developers.

“The approvals process has to be modernized, streamlined, digitized,” he said, adding that as-of-right zoning would also help shorten construction timelines, which are typically long and expensive.

Mr. Smetanin agrees, citing a June 27 CANCEA report that concluded 31 percent of a new home’s purchase price in Ontario is production and sales taxes. Of that percentage, the federal government receives a 39 percent share despite investing only 7.1 percent toward public infrastructure.

“As a result of this inflated growth benefit-to-cost ratio, the federal government is 9.7 times better off than the province and 6.9 times better off than Ontario municipalities,” the report said.

Mr. Smetanin is also critical of the government’s unilateral decision to keep increasing Canada’s annual immigration quotas and averting responsibility to house them while imposing high taxes on builders.

“Housing is basically taxed twice as much as the rest of the economy,” he said. “The real question is why?”