Common Sense or Nonsense?

I have been trying to figure out how a 5% sales tax rebate makes homes more affordable. I haven’t been able to because it just doesn’t work. Homes sell at a market price. If that market price is $1.0 million dollars, the only party to benefit from the $50,000 rebate will be the seller because that home will still sell for the same $1.0 million. Even if somehow government controls ensure the rebate went to the purchaser it would result in more demand driving prices higher. And, a new bureaucracy to apply the new controls! So common sense or nonsense?

Economics 101

Whoever is behind this policy skipped day one of Economics 101. I have written about this before. The problem is supply, not demand. So, governments should stop spending money stimulating more demand. The objective has to be on increasing supply. Governments need to collaborate to make some rule changes:

• Ban exclusive zoning for single-family houses 
• Allow increased residential density in every neighbourhood
• Develop Government owned lands
• Grant air rights over government infrastructure
• Designate all transport oriented sites as high density. 
• And put development approvals on steroids

Increased density and dramatic increases in developable land will lead to increased supply and home prices will self-regulate downwards.

Real Estate Development 101

And the policy wonk flunked Real Estate Development 101. Builders cannot build if cities can’t provide the required infrastructure. So here’s a great idea! Cut infrastructure funding in favour of increasing demand that can’t be satisfied because there are no roads, no water, no sewers, no transit. It is far better for municipal governments to get money to invest and build robust infrastructure that supports new housing development leading to increased housing supply.

The Sales Tax and Purpose-Built Rental

I supported the abolition of sales taxes on purpose built rental – because it addressed the supply issue. I have spent hours and hours looking at budgets for new apartment buildings. Pre-tax costs were such that the projects could just about pencil out at market rents with an allocation of some units at CMHC-defined affordable rents. Sales taxes added on – no profitability, no available financing. Projects died in the board room. So removing the sales tax got projects off the drawing board and into production.

The 5% – More About Political Messaging

Voters identify with the 5% / $50,000 that supposedly reduces the price of the $1.0 million dollar home. The benefit of funding infrastructure to allow for the development of new homes is more remote and a harder political message. So I asked the question: Common Sense or Nonsense?

On the political level, the 5% promise makes sense. But in reality it is nonsense.