NewsImpact of eliminating GST from rental housing construction
GST temporarily eliminated
The federal government delivered welcome news last week for rental developers and renters as it ‘eliminated’ the GST on rental construction. Previously, GST needed to be paid on the value of the completed rental building by the property owner/developer. While it’s comparable to the GST that needs to be paid on new strata condo or new SFH homes by the buyer, rental buildings don’t benefit from tax incentives like the capital gains tax exemption for principal residence that ownership housing benefits from. This change to the GST has the effect of rebalancing the taxation treatment on tenure preference in the housing market.
There are however some details to the change, namely:
- the projects need to start construction between Sept 14, 2023 and Dec. 31, 2030, and complete by Dec 31, 2035.
- projects need to have at least 4 units
- ninety percent of residential units must be for long term rental
- conversions from non-residential to residential do qualify for the GST exemption
- substantial renovations of existing residential however do not qualify
Potential impact on rental supply
This policy change has the potential to unlock more land for development at a given market rent level. This is especially helpful during a time when financing costs for debt are high, construction and labour costs uncertain, and rental valuations are being challenged by higher risk-free rates.
Given a certain level of rents, this policy can shift the supply curve to the right, so that for a given level of rent, more rental housing supply can come onto the market and moderate rental price growth.
The below illustrates using a simplified example with variables that resemble the Vancouver market. In Vancouver, most residential rental projects will be infill development, that is densifying some other use – likely low density residential, into denser residential. The example is to illustrate a potential 2.5 FSR 4 Storey Woodframe rental building that one may see built on arterials like the projects going through the streamlining rental program.
These projects need to assemble single family use land. A rough estimate for land value in the west-side of Vancouver is $500 PSF. People need to be incentivized to move so a hypothetical 40% premium is added, meaning the residual value of a project would need to be around $700 PSF land to take place.
Given the below assumptions in table 1, table 2 shows that rents need to be about 40cents PSF monthly higher, or $200-300 per month higher, prior to the GST change in order to have the assumed development be viable.
The red band shows how high rents need to grow to spur development prior to the GST change and the green band shows the rent level required after the GST change. Given that existing rents hover between the green and yellow bands, this change may very well be a good catalyst to spurring additional rental supply.