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How to Save $130,000 on Your New Home in Ontario · The Missing Middle Podcast

• 0:00
  SPEAKER_00: Governments won't admit this, but measures like these rebates actually puts downward pressure on the price of resale homes.
• 0:07
  SPEAKER_00: But if you go on Twitter, you'll find some boomer who paid like 38 cents in taxes on the home they built in 1986.
• 0:13
  SPEAKER_00: And they're now complaining that young people's new home taxes are being lowered to only$200,000, and they're crying that young people are getting subsidized.
• 0:21
  SPEAKER_00: It's a bit much.
• 0:23
  SPEAKER_01: Demographics, hosted by Mike Moffitt and Kara Stern.
• 0:27
  SPEAKER_00: Housing starts have been in free fall in Ontario, and pre-construction home sales are down as much as 95% in some GTA markets.
• 0:35
  SPEAKER_00: Home prices have fallen in recent years, which is great news for affordability, but the cost of building homes hasn't dropped.
• 0:42
  SPEAKER_00: This has created the awkward condition where homes are still too expensive to buy, but not expensive enough to build.
• 1:13
  SPEAKER_01: Today we're addressing the most common questions and misconceptions we've seen online about the new HST rebate.
• 1:19
  SPEAKER_01: So, first of all, how does this new HST rebate even work?
• 1:23
  SPEAKER_00: Well, first of all, the important thing to recognize about the HST is that it only applies to new homes, not to resale homes.
• 1:29
  SPEAKER_00: So because of that, it acts as a tax on housing construction.
• 1:33
  SPEAKER_00: And in Ontario, it's a tax that's paid to both the federal and provincial government, hence the H or harmonized in HST.
• 1:40
  SPEAKER_00: These rebates aren't a new idea.
• 1:42
  SPEAKER_00: They've existed in one form or another since the GST went into effect in 1991.
• 1:47
  SPEAKER_00: But what changed last week were some of the details.
• 1:51
  SPEAKER_00: And it's not the first time that things have changed.
• 1:53
  SPEAKER_00: For example, the Trudeau government recognized that the HST was a barrier to building rental apartments.
• 1:59
  SPEAKER_00: So back in 2023, they instituted a 100% HST rebate to builders of purpose-built rentals, with Ontario following suit.
• 2:08
  SPEAKER_00: And these were moves that contributed to Canada's rental apartment boom.
• 2:11
  SPEAKER_01: But that was just for rental housing, not ownership, right?
• 2:14
  SPEAKER_00: Correct.
• 2:14
  SPEAKER_00: Yeah, and there have been ownership rebates for decades as well.
• 2:18
  SPEAKER_00: The province of Ontario, for example, has a couple, the HST New Housing Rebate, which is for people purchasing new homes that they will live in as their primary residence, and the new residential rental property rebate, which is for landlords who purchase new homes and rent them out, so long as they meet qualifying criteria around like not flipping the home, you know, not putting it on the short-term rental market and so on.
• 2:41
  SPEAKER_00: Now, the problem with these rebates is that they only cover like a small portion of the HST paid on the home.
• 2:46
  SPEAKER_00: And for the federal versions of these rebates, they only cover homes priced under$450,000, which means that in most of Ontario, nobody ever qualifies for that federal rebate.
• 2:58
  SPEAKER_01: Why is that cutoff so low?
• 3:01
  SPEAKER_00: Well, the federal government has never indexed it for inflation.
• 3:04
  SPEAKER_00: So it's stayed at the same level since 1991, which would be fine if home prices were at 1991 levels.
• 3:11
  SPEAKER_01: If only.
• 3:17
  SPEAKER_00: Exactly.
• 3:17
  SPEAKER_00: Yeah.
• 3:17
  SPEAKER_00: So the Kearney government introduced a 100% HST rebate for homes priced under a million dollars and a partial rebate for homes priced between like one and 1.5 million.
• 3:28
  SPEAKER_00: And the province of Ontario matched these changes, which reduced the price of new homes in some cases by over$100,000.
• 3:36
  SPEAKER_01: That was only for first-time homebuyers, not for everyone.
• 3:39
  SPEAKER_01: And then I hear the criticism that first-time homebuyers often can't afford new builds.
• 3:43
  SPEAKER_00: And that's a really valid complaint.
• 3:45
  SPEAKER_00: It missed some very important groups, including seniors who want to downsize their homes and what I call second-time homebuyers, which are typically couples in their 30s who bought a small condo a few years ago and they want to upgrade into something larger.
• 3:58
  SPEAKER_00: So they want to upsize, but they can't qualify for a mortgage because prices are too high.
• 4:03
  SPEAKER_00: Now, some of them will be able to own a new home, which will help them move into something larger while also getting more homes built.
• 4:10
  SPEAKER_00: What the federal government in Ontario have done here is update those HST new housing rebates and the new residential rental property rebates I mentioned earlier and given them the same 100% rebate as the first-time buyers rebate.
• 4:23
  SPEAKER_00: But this initiative is only for one year and currently only in Ontario, though I certainly hope we see it expanded to other provinces like British Columbia.
• 4:32
  SPEAKER_00: The federal government has set aside money for housing initiatives in other provinces, but those negotiations are still ongoing.
• 4:39
  SPEAKER_00: And to date, no other Fed Prov deals have been announced.
• 4:42
  SPEAKER_01: As you know, I am annoyingly addicted to Reddit.
• 4:45
  SPEAKER_01: And I've seen a lot of chatter online, and there are quite a few people who think this is either just not going to work for them, or really that's just meant to line developers' pockets.
• 4:54
  SPEAKER_01: So I've read a lot of comments there, and I thought maybe we can use some of that to unpack it together.
• 4:58
  SPEAKER_01: So here we go.
• 4:59
  SPEAKER_01: Here's one from Redditor the Frink thing, maybe a breaking bad reference there.
• 5:03
  SPEAKER_01: Oh, good.
• 5:04
  SPEAKER_01: Another demand subsidy.
• 5:05
  SPEAKER_01: Nothing brings prices down, like making it easier for buyers to pay more.
• 5:09
  SPEAKER_00: Now, this is something I hear all the time, and like not just on Reddit.
• 5:13
  SPEAKER_00: You know, even governments, more often than not, in my view, get this wrong.
• 5:16
  SPEAKER_00: There's a fundamental difference between measures that increase the demand for pre-existing assets, like resale homes, and measures that lower the cost of building new assets.
• 5:26
  SPEAKER_00: Because the HST only applies to new homes, it acts like a tax on construction.
• 5:32
  SPEAKER_00: It is ultimately a supply side tax.
• 5:35
  SPEAKER_00: Reducing the HST on housing construction is a supply side measure.
• 5:39
  SPEAKER_00: So it shouldn't be compared to something like changing mortgage amortizations, which increases the demand for new homes and resale homes alike.
• 5:47
  SPEAKER_00: So this is fundamentally different, and this is not about increasing the demand for resale homes.
• 5:52
  SPEAKER_00: HST rebates on housing actually reduces the demand for resale homes because it creates new supply, which competes with resale homes.
• 6:01
  SPEAKER_00: So it has the exact opposite effect of what this Redditor and frankly a lot of politicians suggest.
• 6:07
  SPEAKER_01: So what you're saying is it increases supply.
• 6:10
  SPEAKER_01: So it is increasing demand for new supply, but hopefully by adding new supply, it'll reduce the demand across the board, lowering prices across the board, right?
• 6:19
  SPEAKER_01: Is that about right?
• 6:20
  SPEAKER_00: So new homes compete with resale homes, right?
• 6:23
  SPEAKER_00: So if the government put in some measure to build more fords, that's not going to help General Motors, you know, in the same way that if you create more new homes, that's not going to help the demand for resale homes.
• 6:35
  SPEAKER_00: And governments won't admit this, but measures like these rebates actually puts downward pressure on the price of resale homes.
• 6:43
  SPEAKER_00: And those politicians will never admit that because they don't want to say, like, hey, our public policy is going to lower your property value.
• 6:51
  SPEAKER_00: And this downward pressure on resale happens because demand is shifted away from resale to new, but it also increases the supply of resale as some of those new home buyers will be putting their existing homes on the market.
• 7:04
  SPEAKER_00: Now, there can be complex second-order effects here.
• 7:07
  SPEAKER_00: So, for example, it can spur infill construction.
• 7:11
  SPEAKER_00: And that infill construction can increase the cost of land in specific neighborhoods, and the price of certain homes in certain neighborhoods can rise.
• 7:20
  SPEAKER_00: But on average, this puts quite a bit of downward pressure on the resale market.
• 7:25
  SPEAKER_01: So a follow-up to that is some people worry that prices will just go up exactly the rebate price.
• 7:30
  SPEAKER_01: Like developers, they could but theoretically raise prices 13% and they can give that money back, but in the end, they're making the same amount of money.
• 7:38
  SPEAKER_01: Or they could be more sneaky.
• 7:40
  SPEAKER_01: They could raise prices, you know, 5%, and then they're like, you're getting a discount, and you're getting 8% off the original price, but it's still not the full 13.
• 7:49
  SPEAKER_01: How do we know they'll actually pass along all 13% and not just bake it into a price increase?
• 7:55
  SPEAKER_00: Yeah, this is a good question and a legitimate concern.
• 7:58
  SPEAKER_00: I would say that, you know, right now, if developers had that kind of pricing power, pre-construction condo sales wouldn't be down like 97% in Toronto.
• 8:06
  SPEAKER_00: But legally speaking, the rebate goes to the buyer.
• 8:10
  SPEAKER_00: But there's a concept in economics known as economic tax incidence, which recognizes that the benefit to any change is split among a variety of actors.
• 8:19
  SPEAKER_00: And it's not just like home buyers versus developers.
• 8:22
  SPEAKER_00: You know, trades workers can reap some of the benefit here through higher wages.
• 8:26
  SPEAKER_00: You know, drywall manufacturers can benefit through extra uh demand for drywall and so on.
• 8:32
  SPEAKER_00: So there's a lot of different actors in the system, all of which who can benefit to a certain degree.
• 8:38
  SPEAKER_00: But the benefits tend to flow disproportionately to the group with the most negotiating power and who hold the most scarce asset.
• 8:46
  SPEAKER_00: Right now, home buyers are the scarce asset.
• 8:49
  SPEAKER_00: They're what's in short supply.
• 8:51
  SPEAKER_00: So they should reap the largest share of the benefits.
• 8:54
  SPEAKER_01: Right now, home buyers are in short supply, but that hasn't been the case for most of my adult life.
• 8:59
  SPEAKER_01: And I wonder what happens when we're not in such a terrible market for sellers and builders.
• 9:04
  SPEAKER_00: Yeah.
• 9:04
  SPEAKER_00: So when we're not in such an ice cold market, often the scarce asset isn't builders and developers because there's a lot of competition there.
• 9:12
  SPEAKER_00: It's actually in development land.
• 9:14
  SPEAKER_00: So who benefits by reducing construction taxes can sometimes be the owners of that development land.
• 9:21
  SPEAKER_00: So changes in tax policy can end up boosting development land prices.
• 9:26
  SPEAKER_00: So that's why land reform is so important to make sure that those groups aren't capturing the benefits here.
• 9:32
  SPEAKER_01: What kind of land reform?
• 9:34
  SPEAKER_00: Well, really anything that creates competition in land markets.
• 9:36
  SPEAKER_00: And that includes, but not limited to, things like zoning and approvals reform to allow for the ease of building a variety of different housing types, you know, both on greenfield and infield sites.
• 9:47
  SPEAKER_00: We need to make sure that developers have access to sufficient utilities from water to electricity, because nobody's going to buy a home if they can't turn on the lights or flush the toilet.
• 9:56
  SPEAKER_00: We also need to make sure that urban growth boundaries are adjusted to keep up with population growth and changes to our immigration systems.
• 10:04
  SPEAKER_01: So should this rebate and frankly the development charges reduction that was announced for only three years should they only exist when it's a buyer's market?
• 10:11
  SPEAKER_00: I understand the logic of the question, but the short answer is no.
• 10:14
  SPEAKER_00: Like unless you like really expensive homes.
• 10:17
  SPEAKER_00: Because there's no world in which governments could charge$300,000 or$400,000 in taxes and development charges for a home and have those homes be affordable to the middle class.
• 10:28
  SPEAKER_00: A typical family in Ontario, when they buy a new home, are now paying more in just taxes and fees than I paid for my entire new home back in 2004.
• 10:38
  SPEAKER_00: When I bought that home a couple decades ago, I paid about 16 grand in taxes and fees.
• 10:43
  SPEAKER_00: You know, that and that included everything.
• 10:45
  SPEAKER_00: Development charges, GST, PST, land transfer tax, you name it, 16 grand.
• 10:49
  SPEAKER_00: So my question is like, why do governments have to collect 10, 15, 20 times that amount today?
• 10:54
  SPEAKER_00: Why are governments treating Gen Z so much worse than they treated Gen X?
• 10:59
  SPEAKER_00: But if you go on Twitter, you'll find some boomer who paid like 38 cents in taxes on the home they built in 1986.
• 11:06
  SPEAKER_00: And they're now complaining that young people's new home taxes are being lowered to only$200,000, and they're crying that young people are getting subsidized.
• 11:14
  SPEAKER_00: It's a bit much.
• 11:15
  SPEAKER_00: Now that said, yeah, we have to worry that reducing taxes on housing construction will simply cause land values to go up.
• 11:21
  SPEAKER_00: But the solution to that is through land competition rather than taxing young people out of home ownership.
• 11:27
  SPEAKER_01: The provincial press release said the expanded 13% HST rebate could stimulate an additional 8,000 housing starts in Ontario next year, supporting up to 21,000 jobs and boosting Ontario's GDP growth by$2.7 billion.
• 11:42
  SPEAKER_01: How realistic are those numbers?
• 11:44
  SPEAKER_00: Yeah, it's really hard to know how many homes will get built due to this HST rebate.
• 11:48
  SPEAKER_00: You know, to get that kind of estimate, you need to be able to estimate what economists call price elasticity.
• 11:54
  SPEAKER_00: That is, how much do sales change in response to a price reduction?
• 11:58
  SPEAKER_00: Now, economists estimate price elasticity based on historical data, but the historical data doesn't tell us much here because we're operating in a market unlike anything we've seen in decades.
• 12:08
  SPEAKER_00: So I don't find any of these estimates particularly instructive.
• 12:11
  SPEAKER_00: I know why governments do it, but it's like trying to calculate how long it would take a monkey with a wooden leg to kick the seeds out of a dill pickle.
• 12:18
  SPEAKER_00: Like it's just a like a hypothetical question, and there's no data to be able to get that kind of answer.
• 12:24
  SPEAKER_01: Are there from other countries?
• 12:26
  SPEAKER_00: You run into the same problem that the conditions in other countries are so unlike what we have here.
• 12:33
  SPEAKER_00: We really do lack a map to all of this because we really haven't seen a market like this, arguably, since the early 1990s, and that was a much different world and a much different housing system back then.
• 12:44
  SPEAKER_01: So why did they go with a one-year time limit on the HST rebate?
• 12:48
  SPEAKER_00: Money, basically, though I expect it will get extended, but there are two benefits to it being such a short period of time.
• 12:55
  SPEAKER_00: First, we could treat it as a pilot.
• 12:57
  SPEAKER_00: You know, as I mentioned, we don't know how well this is going to work.
• 13:00
  SPEAKER_00: So why not test it out?
• 13:01
  SPEAKER_00: And secondly, the time limitation creates a sense of urgency.
• 13:05
  SPEAKER_00: So you'll get new buyers uh coming to the market due to a fear of missing out.
• 13:09
  SPEAKER_00: Though I will say this undermines the effectiveness of this as a pilot, because if we have a bunch of sales that happen, we won't really know if that continues, if we extend the program, or people were just acting out of a sense of FOMO.
• 13:22
  SPEAKER_01: That makes sense.
• 13:23
  SPEAKER_01: If you know you can get a big rebate, then it makes sense to act quickly, but at the same time, how can we know whether if it was going to be indefinite, would we always see that increase?
• 13:31
  SPEAKER_01: That makes a lot of sense.
• 13:32
  SPEAKER_01: Here's another question from a Redditor.
• 13:33
  SPEAKER_01: This one is pet pet and then a face.
• 13:36
  SPEAKER_01: I don't get it.
• 13:37
  SPEAKER_01: Most first-time buyers aren't buying new homes.
• 13:40
  SPEAKER_01: So this helps mostly nobody or mostly rich people.
• 13:43
  SPEAKER_01: I guess if rich people are incentivized to buy new, it leaves more older shit for us poor.
• 13:48
  SPEAKER_00: Now, the way that Redditor phrased it is funny, but they're not actually wrong.
• 13:53
  SPEAKER_00: You know, this policy benefits new home buyers naturally, but it does also benefit people who are buying resale because it opens up those existing homes that are sold by seniors downsizing and by second-time homuers.
• 14:05
  SPEAKER_00: Now, I'll leave it to those home buyers to determine whether or not these new homes are, I won't use a term that they'll use.
• 14:10
  SPEAKER_00: I'll just say uh poopay.
• 14:13
  SPEAKER_01: Uh, should it apply to people who bought last year but haven't closed?
• 14:17
  SPEAKER_01: Because I've seen some people online who are upset.
• 14:19
  SPEAKER_01: You know, they maybe heard rumors this was coming, or they just decided, you know, I should take the plunge now and buy a place.
• 14:26
  SPEAKER_01: And like I understand the argument that it's like they didn't need the help to spur construction.
• 14:31
  SPEAKER_01: They were able to afford it before this came in.
• 14:34
  SPEAKER_01: But you know it does kind of suck if you bought and then your next-year neighbor gets 13% off the same unit.
• 14:39
  SPEAKER_00: Yeah, I'd be annoyed too, but the point of this is to create new supply.
• 14:43
  SPEAKER_00: So if you've already bought the unit, you're not really creating new supply.
• 14:46
  SPEAKER_00: And frankly, like how far back do we want to go?
• 14:48
  SPEAKER_00: Like, can I get some of my$16,000 back?
• 14:50
  SPEAKER_00: I paid in 2004.
• 14:52
  SPEAKER_00: Like, there has to be a cutoff point here.
• 14:56
  SPEAKER_00: And there will always be buyers who are just on the wrong side of that point, which is really unfortunate if you are one of those people, but it's it's inevitable.
• 15:05
  SPEAKER_00: There's not much you can do about it.
• 15:07
  SPEAKER_01: Thanks so much for watching and listening.
• 15:09
  SPEAKER_01: Our producer is Meredith Martin and our editor is Sean Foreman.
• 15:13
  SPEAKER_00: If you have any thoughts or questions about monkeys and dill pickles, please send us an email to missing middle podcast at gmail.com.
• 15:20
  SPEAKER_01: And we'll see you next time.