Housing affordability is becoming a crisis, according to Benjamin Tal, CIBC’s deputy chief economist. Ottawa is now taking proactive steps to address the issue by increasing rental property construction and finding solutions for affordable housing. Tal believes that all three levels of government have a role to play in tackling this crisis and should work together to find solutions. The recently announced plan to eliminate the GST from purpose-built rental construction is estimated to cost the budget $4.565 billion over six years. While this may require cuts elsewhere, Tal believes it is necessary to solve the housing crisis.
Purpose-built rental units, such as apartment buildings and student housing, are the most needed housing types to address affordability. Tal has advocated for the removal of the GST on purpose-built rental construction. The Conservative party also proposes eliminating the GST on new homes with rental prices below market value. Removing the GST would provide tax relief for homebuyers, with a two-bedroom rental unit valued at $500,000 receiving $25,000 in tax relief.
Rachel Battaglia, an economist at RBC, notes that the 5 percent GST on new rental construction has discouraged developers from building purpose-built rentals. However, eliminating the tax may not immediately lower rents. Condo developers can shift the GST burden onto homebuyers, unlike rental developers who cannot pass it on to tenants. The Canadian Home Builders’ Association (CHBA) supports the elimination of the GST for rental construction and emphasizes the need for provincial governments to follow suit and reduce their own housing taxes.
The Conservative party also plans to incentivize municipalities to build more homes by linking federal infrastructure funding to housing construction targets. Cities that fail to meet their targets would have their funding withheld, while those that exceed the targets would receive bonuses. The Conservatives argue that Canada built fewer homes in 2020 than it did in 1972, despite its larger population. Despite the specific policies, Tal stresses the importance of better coordination among all levels of government to address the housing crisis.
The cost of rent and mortgage interest has been increasing, with Canadians paying more in August 2021 compared to July 2021. The housing affordability crisis is partly attributed to high and unstable inflation rates. The housing market is especially sensitive to changes in interest rates. Housing starts in August decreased by 1 percent compared to July, further exacerbating the supply deficit in the housing market. Economists predict that 3.5 million new homes will be needed within seven years to make home ownership more affordable. Lower interest rates are seen as crucial for boosting construction activity, but they are not expected until 2024. House price appreciation in August was at its slowest pace in five months, indicating a cooling trend in the housing market.