HST & THE HOUSING MARKET

The July implementation of the harmonized sales tax (HST) in Ontario and British Columbia and the 2 percentage point rise in Nova Scotia’s existing HST has caused much volatility in consumer prices in those provinces. Perhaps the most interesting aspect of the HST, how¬ever, is its interplay with the housing market; while sales of existing homes are not directly taxed under the HST, some transactional services such as related financial and legal representation are and incorrect homebuyer perceptions have led to a false sense of urgency. The housing market, in which a yearlong recovery has already come and gone, has recently begun to trend downwards as the frontloading of home purchases and construction that occurred in 2009 and 2010 unwinds and housing demand dwindles. At the time, Canadians were taking advantage of record low interest rates and entering the market en masse which caused hous¬ing activity to surge. This was even further exacerbated by prospective homebuyers in BC and Ontario, Canada’s two largest housing markets, trying to close before the July 1st HST implementation. Indeed, since peaking in December 2009, existing home sales across Canada have declined by more than a fifth. Of particular note is that more than 90% of the weakening in nationwide sales has come just in the last four months between March and July. In turn, and likely on account of the HST, sales in BC and Ontario plummeted by almost 32% since March. To put a few actual numbers behind that, between those months, nationwide sales declined by 11,700 of which 71% came from BC and Ontario. So while it is difficult to separate the underlying trend from the effects of the HST announcement, it is clear that it did play a role. So where does the housing market go from here? Unfor¬tunately, the trend underlying the slowdown in home sales was merely exacerbated by the HST, not the cause of it. Slowing housing demand is more a reflection of past ero¬sions in affordability in conjunction with rising interest rates rather than a tax in just two provinces. Indeed, every single province, save for PEI, has recorded declining home sales this year, hence it is not just an issue for BC and Ontario. TD Economics expects continued contractions in nationwide home sales throughout the rest of this year and into 2011 which will eventually bleed into prices. On an annual basis, overall home sales are forecasted to contract by 11.6% next year, while prices are forecasted to decline by 3.0%.
• As published in the weekly bottom line, Francis Fong, Economist