Het up over the HST

Darren posted today about trying to understand the HST. Personally, I’m not really one to get all up in arms over new taxes, and like him, I’m really just trying to understand what’s going on.

I am concerned, though, about the tax’s impact on the new housing market – it sounds like new homes that are already barely within reach of most buyers are about to get a LOT more expensive. Of course, people care most about what impacts them, and Neil and I are casually looking for a 2nd property to purchase as a rental, so this will certainly affect that decision.

I know not everyone needs to buy a brand new or significantly renovated home. Except it’s going to be harder to purchase them, because I think they’re about to get a lot more expensive as demand for non-new (therefore non-HST applied) houses grows. I can’t see this new tax structure being any good for the struggling construction industry, or plans to increase density in the city with construction and renovation.

According to the BC Gov’s Q&A page on the HST (scroll way down) the average home under $400,000 won’t have any tax impact, and homes over that will receive a flat $20,000 rebate.

The Globe & Mail Article Darren quoted claims that homes for sale in Mission BC for $700,000 will cost an extra $18,000 tax.

Both the Government and the Globe are using some very shady math to come to their conclusions.

The actual tax rate and rebate consumers can expect to see is a 5% rebate, up to $20,000.

Currently the GST is at 5% – so rebating 5% means there is actually a 7% tax on new homes. The Gov’t claims that there is an “embedded 2% PST surcharge on new homes now” because PST is paid on many construction materials.

They fail to acknowledge that new home prices are not simply Cost+Fixed Margin; a new home will sell for whatever the market can bear, so the embedded 2% can’t fairly be taken into consideration when a consumer is purchasing. The buyer of a new home (especially a condo in Vancouver) can’t exactly say to the builder “show me all your materials invoices and choose certain products so I can make sure I’m getting that embedded 2% off the actual value of this place.”

The reality is, consumers are paying 7% tax on the purchase price of new homes up to $400,000.

After $400,000 it get much, much more frightening.

I have no idea what kind of math the Globe & Mail was doing (perhaps more “embedded tax” and the inherent value of the genies built into your walls?), but tax on a brand new $700,000 home looks like this:

Purchase Price: $700,000
HST (12%): $84,000
Max. Rebate: ($20,000)
Total Tax Paid: $64,000

Currently, with just the 5% GST, the purchase tax on that $700,000 home is $35,000

The HST will mean a tax increase of $29,000 – a far cry from the $18,000 the Globe & Mail quoted.

Embedded taxes be damned, speaking for myself, I don’t take them into consideration when looking at real-estate. And I doubt the bank is going to qualify me for a more expensive home based on them either.

What do you think? Have I missed something here, or is it really that bad?

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10 thoughts on “Het up over the HST

  1. Darren

    That looks good to me, though math sometimes hurts my head. And by ‘good’ I mean ‘bad news for home buyers’.

    It’s also worth mentioning that there used to be a GST exemption for first-time home buyers (which I know you’re not, but I just mention it). I wonder if that will go away under the HST?
    .-= Darren´s last blog ..I’m Trying To Learn About BC’s Harmonized Sales Tax =-.

  2. peechie Post author

    Yah, not sure where that goes. I know the first-time buyer’s GST rebate is only for the first few thousand dollars on a home not exceeding the value of a patch of land under the Knight Street bridge. Meaning I don’t know anyone who’s purchased anything bigger than a studio in the past few years who’s qualified for it – but every little bit counts!

  3. Susan Low

    Doesn’t this all kind of assume that you’re going to be buying a NEW home? Lots and lots and lots of people don’t. Sure, there will be more demand for non-new homes now with new-homes having this extra 7% tax added to it, but demand is insane already, what with low interest rates. It’s kind of a crapshoot getting into the real estate market no matter if you’re buying new or used.

    I appreciate your math though.
    .-= Susan Low´s last blog ..Hoppee burfday to mee =-.

  4. peechie Post author

    Susan: You already said it. I think it’s going to significantly increase demand for non-new homes, which you mentioned is already high.

  5. peechie Post author

    The way I read the government’s webpage, the $400K threshold doesn’t imply the point after which they start charging tax – they count the $20K rebate and the “embedded 2% PST” as the factors needed to equate to a zero change in taxes the government will collect for houses under that price.

    So I calculated HST for the full price of the house, minus the $20k rebate.

    I’m no math whiz, but I’d argue I’ve interpreted the equation more correctly than the Globe did. Though it’d be nice if someone would prove me wrong.

  6. Sebastian Albrecht

    This HST came as a surprise to us all. It’s really unfortunate that the provincial government didn’t consult those of us directly impacted before implementing the tax.

    In any case, I didn’t want to comment on your numbers so much as on the impact of the tax. I agree with you that the implementation of the HST on new construction will affect the resale market. I expect that we will see resale prices rise 7% in order to balance out with the costs of new construction once the HST is in place.

    We are already paying a hefty provincial tax on purchasing property in British Columbia (the PTT which is 1% on the first $200,000 and 2% on the balance). Adding the PST to this tax (albeit only for new construction) only exacerbates the affordability issue in BC (and particularly in Vancouver).
    .-= Sebastian Albrecht´s last blog ..Vancouver Laneway Housing Permits Now Available =-.

  7. WestCoastLass

    I’m glad Sebastian mentioned the property transfer tax (PTT). Given the escalation in property prices across the province over the last decade or two — especially in the Lower Mainland — the PTT should have been a huge tax windfall for the provincial government — but what have they done with it?

    Also, given the underhanded way in which the tax was presented to us — with no consultation, no warning, no opportunity for the voting public to weigh in — it almost doesn’t matter to me how it affects my bottom line. I actually don’t believe it will be good for consumers at the end of the day — if it would obviously result in a tax cut for the average joe, then presumably the government would have been willing to present it transparently and to make it an election issue. That they didn’t makes me suspicious of everything else they have said about it, other than the announcement that it looms!
    .-= WestCoastLass´s last blog ..Hurray for Former Premier Vander Zalm =-.

  8. Ken Simpson

    Any way you slice it, the HST is a major transfer of the tax base from income to consumption. This is a good thing, IMHO, because the tax is only applied when people consume things. So if you’re a cheap ass like I am, then you end up paying less tax over all.

    The GST rebate will provide a rebate for HST for poor people, which means they’ll end up paying zero HST effectively. The one exception would of course be people who are so poorly resourced that they can’t file a tax return. Efforts to make sure these people file and get their credit would be a sound thing for any progressive elements to be pushing for.

    The gripes from new home owners about the HST are pure whinging. The housing market gets more government pork than any other sector (think about the enormous amount of government backed insurance that is provided by CMHC, without which home prices wouldn’t be nearly as high). I for one am glad that HST is going to start recouping some of that ridiculous largess from a sector that is already far too distorted by government incentives.

    I also think that food should be HST taxable. Before the GST (and the GST exemption for groceries), restaurants and grocery stores shared about 50% of the food market each. Now restaurants have only 39% – probably because people have to pay a tax to eat in a restaurant. I don’t understand why there is this distortion. If HST is charged at restaurants, then it should be charged at the grocery store as well. The extra tax collected on groceries could fund food banks and other mechanisms to help the poor feed themselves, while restaurants would be back on fair ground providing the awesome economically sound service of providing prepared meals in an efficient way to a hungry public.

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