Here is something I’ve been meaning to post for a while, and if I wait any longer, it’ll seem dated!

This is a look at the new HST as it affects the real estate industry in British Columbia.

Or I guess you could say it’s a look at how it truly doesn’t have an affect…

By: KERRY GOLD
The Globe & Mail
September 23rd, 2010 

Other than the build-up to it, general industry response would suggest the Harmonized Sales Tax has had relatively little impact on the B.C. housing market.

“On the whole, the HST’s effect on the market has been more psychological,” says Dan Scarrow, vice-president for Macdonald Realty in Vancouver. “Buyers rushed to buy before July 1st, then sat on their hands for the months following its introduction to see what would happen to the market.”

The underwhelming effect might be due to the fact that the HST only applies to newly built housing, and closing costs, such as inspections, legal fees and commissions. As well, the government offers rebates on houses that are priced lower, thereby exempting a whole demographic of new home buyer. In theory, lower construction costs should close the gap between pre-HST pricing and post-HST pricing.

“What we found was that, on the resale side, nothing changed, while on the new home side, only a small subset of the market was affected in any significant way,” said Mr. Scarrow.

That subset, he added, is the mid-range purchaser, the one who buys a home costing between $525,000 and $1-million. In Vancouver, that’s generally referred to as the middle-class home buyer.

For properties valued at less than $525,000 – which is the average price for homes in most multi-family developments – the new housing rebate offsets most of the HST cost increase. For properties more than $525,000, the effect becomes more pronounced.

But, “people who are buying brand new multi-million dollar residences are generally more capable of absorbing the additional tax,” said Mr. Scarrow.

Those high-end buyers might, however, start to opt for resale homes or building their own homes and paying HST on builder and building supplies instead.

“On the west side of Vancouver, with average housing prices reaching $2-million, the HST on a new home can reach over $200,000. This reality may change buying patterns.”

But it’s also that bigger, mid-range segment of buyer that will challenge marketers the most.

“The mid-range unit … will need to see developers and project marketers being more creative in the incentives they provide in order to move product,” said Mr. Scarrow.

So far, the biggest impact the HST has had on the market has been the hype around it. Immediately leading up to the July 1 implementation of the HST, sales activity was “a near-record tsunami,” says a report released by B.C. based Landcor Data Corp. “Home buyers rushed to beat the ‘dread’ line and avoid the new tax… and then the wave collapsed,” says the report, prepared by Landcor president Rudy Nielsen and his team.

“The next day, July 1, the HST was fact and home-buying activity fell more than tenfold, to a mere 182 homes,” says the report.

The Canadian Real Estate Association recently said national home sales activity that slowed in July was almost entirely due to softened sales numbers in B.C. and Ontario, with month-to-month declines of 14.1 per cent in B.C.

But if condo marketer Bob Rennie’s reaction to the HST is any indication of it affecting his industry, he’s less worried about an additional tax than he is about taking it away. When Premier Gordon Campbell announced his government’s decision to hold a binding referendum on Sept. 24, 2011 that will decide the future of the HST, Mr. Rennie worried about a year of uncertainty.

“Indecision kills,” he told a group of industry professionals recently. “And the consumer really needs certainty right now. I don’t know whether somebody wants to pay an HST tax if it might go away.”

Mr. Rennie supports the HST as a necessary tax, and points to lack of inventory as the main culprit for the sales slump.

“If you look at inventory across the board, between July and August, inventory is down,” he says. “Downtown, we delivered 3,300 condos in 2007 and we will deliver less than 1,000 in 2010. In 2012, we will deliver less than 500 completions.

“When you look at those numbers, where is supply coming from? Watch the supply side.”

Marketer Bill Szeto, who’s working on presales for the Rolston project, says the HST hasn’t been as big an obstacle as the economy. The downtown Rolston is 50 per cent sold, and construction starts in November. Mr. Szeto is planning a program of incentives to help sell the remainder, HST included. By sucking up the HST, it also makes the question of a referendum a moot point.

“What’s going to happen is the developer will make a lot less money and eat that additional seven per cent,” he said. “They have to.

“By Campbell doing this, it got slippery – it put oil on the road for us to navigate around. But I don’t think it’s going to hurt us. It was never a big issue for us on the presales.”

The Ontario real estate industry was also hit with the HST on July 1, but it’s standard practice to simply build it into the purchase price, softening the blow. B.C. developers are now cottoning on to the idea of sucking up the additional tax as one of many emerging incentives to push product.

“One of the incentives that we are considering would be to include the HST on Olympic Village,” said Mr. Rennie, who has 441 units to sell there.

Some developers, in an effort to make it as palatable as possible to the new home buyer, are even pricing new homes that, thanks in part to the rebate, are cheaper than the older resale equivalent.

Morningstar Homes president Bob Morse says his deluxe family homes at his Pepin Brooks development in Abbotsford are cheaper than the average resale equivalent. They are priced at $512,000, including HST. The average resale comparable he found is priced at $556,000.

“Over the last couple of months, we’ve noticed that there’s a lot of misinformation on how HST was impacting our homes in our Abbotsford project,” Mr. Morse said. “We got together with trade and suppliers and with the PST disappearing, there is some savings we made sure was passed through to the buyer. So what’s occurred is, by doing that and making sure our trades and suppliers could give us the sharpest prices possible, we’ve been able to keep prices of our homes at very affordable levels.”

The program to include HST has worked. Within a week recently, he sold three of the lower priced homes.

Mr. Szeto is also including the HST in his Rolston project incentives program. If a buyer qualifies, the developer will be giving the buyer the equivalent of a rebate on mortgage payments as well as five per cent on top of their deposits that sit in a trust account until construction is complete. When you’re putting down $60,000 to $100,000 in the new economy, interest on top of that can make a difference to a buyer. As for the HST, Mr. Szeto says it was a no-brainer to include that in the equation.

“Obviously we bought the land high, and if construction costs don’t come down there’s a possibility of losing money with these incentives,” he says. “We can’t keep these incentives with the entire building. We said we’d do the next 15 [sales] or so, but if the program works well and we can continue, we’ll keep it up.

“You do the deals,” he shrugs. “It’s back to reality for everybody. I think everybody is tightening their belts.”

What I found most interesting about this article is the notion of “indecision” among buyers, when you consider that *maybe* this HST could be removed in 2011 or 2012.  I personally don’t think that a prudent buyer is going to hold off for two years on making a major life decision on the off-chance that the HST is removed or somehow lessened for the purchase of real estate.

But the article speaks to other types of indecision, confusion, and lack of knowledge amongst the consumer base.

It seems to me, in my daily endeavours, that the general public STILL doesn’t understand the new tax as it pertains to real estate.  And ultimately, I don’t think they feel the effects.