Affordable Housing: Is the Government Actually Helping?

Affordable Housing: Is the Government Actually Helping?

In 1971 economist Milton Friedman published a paper called “Roofs or Ceilings.”[1] It was his critique of the government in New York City using price controls to address the shortage and cost of housing in the city.  His argument was that the shortage was a supply issue and price controls were impeding the natural corrective process of the market.

We are in a similar situation across Canada today with a generally accepted housing shortage that has driven prices up to the place where homes are simply too expensive to be reasonably affordable by many people.

 All three levels of government have committed to taking action on the crisis: we have incentives, and savings plans, rent control and penalties for those perceived to be benefitting too much from owning real estate – to the point where even the sacred “Principal Residence Exemption” in is under attack.  And we’re still falling behind.

So the burning question is why is government taxing housing so heavily?

According to houseful.ca the average list price of a home in the Comox Valley is currently $799,000[2] – and I wanted to figure out how much of that, on a new home, is tax to various levels of government.

Analysis

The federal government’s take is pretty easy to calculate – GST at 5% of the price – $40,000.  It is interesting to note here that when the GST was implemented in 1991 the federal government also implemented a GST New Home Rebate which was designed to lessen the effect of the GST on new homes by 36% – which reduces the GST from 5% to 3.2%.  There was a maximum imposed on this rebate so that ‘rich’ people would not be able to claim the rebate on ‘luxury’ homes.  This maximum was $450,000.  While it was intended that the government regularly review that maximum to ensure that it kept up with inflation that never happened so most new homes today, including our example, do not qualify.  If this ceiling had been indexed to inflation it would now be in excess of $878,000 [3] – which would nicely cover our example home.

The province taxes home construction at two levels – PST on building materials and Property Transfer Tax.

  • Property Transfer Tax is calculated at 1% of the value of the property up to $200,000 and 2% from $200,000 up to $2,000,000 – or in this case $14,000[4]
  • Provincial Sales Tax on materials used to build the home at 7%.  The province does not apply PST to the sale of the home, but it does require the contractors who work on the home to pay PST on materials that they buy and that absorb that cost as the ‘end-user’.  The contractors of course treat this as a cost of doing business – they mark it up and pass the cost along to the general contractor who passes it along again to the prospective homeowner.  This calculation requires a few assumptions, but having worked in construction for 11 years, I’m comfortable with those.  Let’s assume that an average lot costs $400,000 and that 40% of the rest of the retail selling price of a house is materials – everything from wood and nails to flooring and windows.  In our average house that equals $162,080 and we will multiply that number by 7/107ths to pull the included PST out and that works out to $10,603

Total provincial take – $24,603.

But long before the provincial and federal governments get their piece, the municipal governments also get into the game.

Municipalities in BC charge two types of fees – Development Cost Charges (DCC’s) and Community Amenities Contributions (CAC’s).  DCC’s are designed to offset the costs of providing services to the property (primarily water, sewer and roads) and CAC’s are a contribution to a pool of funds that the municipality uses to fund projects that it sees as desirable to the community.  It has long been my view that CAC’s are simply a repackaged sales-tax on homes.

I’m going to use my hometown of Comox (and the Comox Valley Regional District) as my example, but there’s a lot of consistency locally between municipalities so its pretty representative.

In Comox the DCC for a typical single family lot is $16,322.07[5]

Amenities Contributions are ‘sought’ by municipalities in a number of different areas (parks, parking, public amenities) but these are negotiated on a project-by-project basis so they are not particularly easy to analyze. 

One CAC that is easily quantifiable is the Affordable Housing Amenity contribution which the Town has set at $7,300 per lot[6].  It is a curious methodology to try to make housing more affordable by taxing residential building lots to be sure, but this seems to have been widely adopted – our municipal neighbours  the City of Courtenay also charge a Affordable Housing Amenity Contribution on a sliding scale – from $5,000 to $15,000 depending on lot size. [7]

Total municipal take:     $23,622

Total provincial take:     $24,603

Total federal take:           $40,260

Total tax paid:                   $88,485

List price:                            $800,000

Tax as a percentage:      11%

Indirect Taxes

To this point we have been discussing the direct taxes associated with building and purchasing the home, but we should also acknowledge that there are indirect taxes as well – specifically the income and payroll taxes levied on the employee wages earned in the construction of the home.

Based on our model about 50% of the construction cost is labour – or about $200,000.  A red-seal tradesperson who earns $85,000 will pay $16,640 in tax, or 19.5%.  CPP clocks in at 11.9% and EI at 3.98% – for an all-in total of 35.38% (not including Worksafe).  This works out to taxes on wages of $71,645.

We now have a total of over $160,000 in taxes on a purchase price of $800,000 – 19.9% .  This is staggering given that the profit margin on most spec homes is 8-10%!

Conclusion and Recommendations

I started off by acknowledging that we are in a housing affordability crisis.  The key to any intolerable price escalation is always and only going to be a significant increase in supply.  So much so that the 2024 Federal Budget aims to unlock 3.78 million new homes.[8]

Given this level of crisis it seems counterintuitive to levy this rate of tax against a segment that is going to subsequently invest this much money back into the sector – we can easily see money moving around in circles – which is never efficient.

I would recommend that each level of government should, at least for a period of time, scale back its taxation appetite as follows:

  1. The Federal government should immediately, and on a going forward basis, index the GST new home buyer’s rebate to the CPI.  Failure to do so is a de facto tax increase.  Tax increases on housing during a housing affordability crisis is unconscionable.
  • The Provincial government should immediately place a moratorium on Property Transfer Tax on principal residences up to $1,000,000.  This is already partially underway as a reduction for the purchase of a first home up to $860,000[9], but does not allow for changes in residence mandated by changes in job locations or family size – moving into a bigger home to allow for a growing family or new job should not penalize those who have already managed to own a first home and need to move or upgrade.
  • It is recommended that municipalities reduce DCC’s to the minimum amount required to maintain services to new subdivision and homes and put a complete moratorium on CAC’s for at least three years.  In 2021 the Province of BC and the Government of Canada released a joint report into the housing crisis in BC called “Opening doors: unlocking housing supply for affordability”[10].  The report specifically recommends eliminating CAC’s and dealing with municipal spending priorities in other, more comparable and predictable ways[11].  I would go one step further – CAC’s on new homes is equivalent to a sales tax and its counter productive in making housing more affordable.  If there are amenities that the municipality believes are desirable and will benefit the entire community, then add them to the municipal budget and increase property taxes to fund the amenities based on ‘contributions’ from the entire community.  If this is politically untenable, then perhaps the amenities aren’t as desirable as they seem.

We are trapped in a cycle where local families are paying tax to all levels of government who receive the money, repackage it and send it back to solve a problem that the taxes are helping to create in the first place.  This makes no sense – it makes far more sense to reduce the taxes at source, and at the same time reduce the demand for the programs they fund.

Couple that with a little loosening of the restrictions on the market à la Friedman, and we might actually make some progress on this issue.


[1] Roofs or Ceilings, Newsweek, 22 March 1971, p. 92

[2] Comox Housing market trends, houseful.ca

[3] https://www.bankofcanada.ca/rates/related/inflation-calculator/

[4] BC Provincial Government Property Transfer Tax Calculator

[5] Town of Comox DCC Fee Schedule

[6] Town of Comox Affordable Housing Amenity Contribution Policy

[7] City of Courtenay Official Community Plan, page 197

[8] 2024 Federal Budget

[9] BC PPT Reduction for First Time Home Buyers

[10] Opening doors: unlocking housing supply for affordability

[11] Ibid, page 29 Reforming Fees on Property Development

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