Will removing the GST from new build rentals increase affordability?

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Despite record-high interest rates, Canada's real estate landscape continues to grapple with high real estate prices and increasing demand. In other words, housing affordability isn't really getting any better for those who wish to own homes.

While a housing market crash doesn't appear imminent, the government is taking steps to address affordability issues by bolstering housing supply on the rental side. Rents have been highly impacted by increased interest rates and lack of rental supply. One of the latest measures, announced on September 14, 2023, is the Enhanced GST Rental Rebate for purpose-built rentals. In this blog, we'll explore the details of this rebate and its potential impact on the housing market.

Will Removing GST Boost Rental Supply?

As part of the government's efforts to enhance housing affordability, a new tax rebate has been introduced to incentivize builders. Contrary to popular belief, the rebate does not help homebuyers. It was put in place to incent builders who have been lagging in taking on purpose-built rental projects. The Enhanced GST Rental Rebate completely eliminates the GST (Goods and Services Tax) for purpose-built rental units, with a focus on increasing the supply of long-term rental properties nationwide. While we won't see the impact on this rebate for a few years, it is intended to bring a fresh supply of units to cope with increasing demand.

A Look at the Enhanced GST Rental Rebate

Under the proposed legislation, the GST will be waived for all new purpose-built rental units completed between now and 2035. To put this into perspective, consider a two-bedroom rental unit valued at $500,000 – this rebate would translate into a substantial $25,000 in tax relief for developers.

Fostering Long-Term Rental Units

This incentive is designed to encourage developers to build properties with at least 90% of units designated for long-term rent. What's more, unlike previous tax rebate programs with price thresholds, this new measure imposes no price ceiling on qualifying units.

The Impact on Housing Affordability

While the intent behind these supply-stimulating measures is to alleviate housing affordability challenges, their real impact remains to be seen. The ultimate goal is to strike a balance between supply and demand in the housing market. Current projections suggest that despite these initiatives, "affordability will remain elusive" due to surging demand. While increased interest rates had a cooling effect in 2022 and part of 2023, the Bank of Canada's pause on rate hikes, and the potential for rate reductions in 2024, adds an element of uncertainty to the equation.

As we navigate these changes, it's clear that the road to affordability in Canada's housing market may be a complex journey.

Stay tuned for updates and insights as we continue to monitor the evolving landscape.

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