Metro Vancouver Real Estate Market Update November 2011

With the recent defeat of the HST (to be implemented in March 2013), I have received some questions about how this will affect the real estate market. The short answer is: there will be a minimal effect, and some people will win, while others will lose.

While we can prognosticate about how these changes will affect the market, the government has yet to come up with a set of transition rules for how this will go ahead. However, to predict how things will be affected, we must break down its effects into 3 categories: New Construction, Resale, and Fees.

New Construction

This category is the one that is likely to be most influenced by the change back from HST to GST. All new residential construction will be taxable at the 5% rate rather than the previous 12%. However, the government will also be eliminating the New Housing Rebate, which was introduced to offset the burden of the HST on a property valued up to $525,000. For new construction valued at over $525,000, the rebate of $26,250 is being eliminated as well, but with the lower tax burden, there should be a net savings.

But that’s not the end of the story. The change back from the HST to the GST & PST will result in higher construction costs as government rebates for input costs are eliminated. That means that while the tax burden may go down on these homes, the cost base will go up.

The net result is that for homes valued at more than $525,000, the overall cost will likely go down, while homes that are valued at less than $525,000, the overall cost will likely increase.

Resale

The change back to GST should have little to no effect on the resale market as ‘used’ homes are not subject to HST and will not be subject to GST or PST. Instead, the government has a Property Transfer Tax, which will remain the same: 1% on the first $200,000; 2% on the balance.

Fees

The change back to GST will apply to the fees associated with a transaction and will lead to a slight decrease in these fees. That said, many of the fees currently associated with transacting a home already charged both GST & PST so there will be no change; however, the taxes on a realtor’s fees will decrease by 7%. For a $1,000,000 home, real estate commissions typically average 2.95% of the purchase price. A tax decrease of 7% on this amount means that the tax on a typical realtor commission should decrease by roughly 0.2065% of a home’s purchase price.

Taking all of this into account, it is clear that the change back to the GST will have a positive effect on the market, but only slightly so. That said, depending on your asset class, you may end up behind.

In addition to the change in tax regimes, one must also be aware of the typical hidden costs of buying or selling a home.

I’ve spelled them out below:

Hidden Costs of Buying or Selling a Home:

Traditional Sellers’ Costs:

• Lawyer’s Fees: Attending to Execution of Documents
• Costs of Clearing Title including:
  • Discharge Fees charged by Encumbrance Holders
  • Mortgage Prepayment Penalties
• Real Estate Commission

Traditional Buyers’ Costs:

• Inspection
• Appraisal (if required for Financing)
• Lawyer or Notary Fees and Expenses including:
  • Searching Title
  • Investigating Title
  • Drafting Documents
  • Land Title Registration Fees
• Insurance
• Property Transfer Tax (1% on the first $200,000; 2% on the balance)
• Goods and Services Tax (5% on new product)

This is by no means an exhaustive list, but it will give you an idea of some of the additional costs associated with a Real Estate transaction.

To learn more, please feel free to contact me at [email protected] or call ( 6 0 4 ) 7 1 9 – 6 3 2 8