The federal government’s removal of GST for rentals in Canada is a welcome step to create more housing affordability but its impact on rents likely won’t be felt any time soon, experts told Global News.
Prime Minister Justin Trudeau announced the immediate removal of the five per cent tax for those projects on Thursday. The idea was first put forward as a 2015 campaign pledge by the Liberals but it had never come into fruition until now.
Matti Siemiatycki, the director of the Infrastructure Institute at the University of Toronto, said Friday that the Liberals are “playing catch-up” in terms of addressing the housing crisis.
“(Cutting the GST) will increase supply, but there’s no guarantee that this is going to bring down prices and it certainly won’t do that any time soon,” he said.
“We’re playing catch-up here and trying to fill gaps that had been decades in the making.”
Siemiatycki said removing the GST is a good first step, but one that is a little late considering the time it takes to create more supply and the urgency of the matter.
He also said there could be some headwinds for affordability, such as increased demand from more immigration, inflation and interest rates. The Canada Mortgage and Housing Corporation recently predicted that Canada will be down 3.45 million homes by 2030 compared with what it needs.
The Canadian Home Builders’ Association said Thursday that the government’s action addresses a “long-standing issue” that has prevented construction of more rental housing, with CEO Kevin Lee saying it was something they had called for for a long time and would be necessary for “many years to come” to ensure more rental housing is built.
When Trudeau was asked Thursday why it has taken so long to remove the GST, he said now is the right time to do it.
“Now, given interest rates where they are, given the challenges people have in building apartment buildings, we realize it’s the right time to step up with removing the federal GST on purpose-built apartment buildings,” he said, adding it had been thought separate initiatives for funding construction would be enough to help.
Siemiatycki speculated that housing has become a hot issue these days that has put the Liberals on the defensive as other parties are making it a priority.
“It’s going to be a long road; we are so far behind (on rentals),” Siemiatycki said, noting that the building boom for rentals was in the 1960s and 70s.
Since then, developers have mostly favoured building condos because they can get returns upfront through investments as opposed to over a stretch of time from rents, which they then reinvest into other projects, according to RBC economist Rachel Battaglia.
She said the GST was a tax burden that developers couldn’t make back by displacing it into rents, whereas GST on condos is typically baked into the purchase price of the unit.
The five per cent on construction and land costs could result in millions of dollars extra the developers have to pay, according to Battaglia.
She said the removal of GST is welcome and may help encourage developers to build rentals rather than condos, but there are still other obstacles to creating rentals, such as rent control and tenant protection laws, that may still discourage their creation.
“We need a pretty substantial construction boom to move the needle on rents,” she said. “That’s just not something that I see happening.”