New tax would add $40,000 to the price of an $800,000 home after July 1

Derrick Penner
Sun

Developers are doing what they can to beat the harmonized sales tax July 1 deadline, building units ahead of schedule and hoping to make sales earlier rather than having to charge the unpopular tax later.

Opportunities are limited, the time fleeting, but with the tax adding a cost in the tens of thousands of dollars to homes, builders who have serviced lots figure they’re better off taking the risk of having to hold onto excess inventory.

For Ranjit Rai, it has meant building nine houses on spec on lots in a Surrey subdivision he is developing rather than customizing them to suit buyers, just so he has them done before July 1.

“It is risky for me,” Rai, head of Raicon Developments Inc., said in an interview. “I’m relying on a lot of people wanting to get in before July 1 and that I can move that inventory.”

New homes have always been subject to the seven-per-cent federal GST, but the harmonized tax will add the five-per-cent provincial tax to transactions.

The province included a rebate program that will pay consumers back the equivalent of the provincial tax portion on new homes up to $525,000, with the full tax owing on amounts above that threshold.

In Metro Vancouver in March, the benchmark price, which is an average for typical properties sold, hit $800,341 for detached homes.

Rai said that after July 1, the HST will add $35,000 to $40,000 in taxes to his $750,000-to-$800,000 homes.

“Homes are getting priced out of the comfort zone of a lot of buyers,” he said.

Rai, however, was lucky that he had poured the foundations for the homes some 18 months ago and had been building houses to suit buyers.

Peter Simpson, CEO of the Greater Vancouver Home Builders’ Association, said the public will likely see more advertisements from developers looking to clear outstanding inventory as July 1 gets closer.

There is no HST rebate for secondary homes, so developer Jon Van Geel decided he was better off doubling the construction program on his Cottages at Cultus Lake project and building 20 to 30 cottages on spec in addition to the pre-sold units he was already building.

“We thought then that [the HST] was going to have a pretty big impact on recreational real estate in general in B.C.,” Van Geel said in an interview.

“We thought we have to take advantage of that and push [construction] as hard as we can.”

His incentive is being able to sell units in the development without having to tack on the five per cent the HST will add to prices of cabins that now range from $379,000 to $629,900.

Van Geel was also fortunate. Cottages at Cultus Lake development, with 230 building lots in total, was already well underway with 90 units already built.

Van Geel’s remaining lots are serviced, he had enough cash reserves and previous sales to convince banks to put up financing for spec construction and with the region’s residential construction sector still not running at full speed, he had crews willing and able to work.

George Hare, with Higher Ground Project Marketing, Van Geel’s sales agent, said the company is launching its 2010 sales campaign about 12 weeks early to try to move the spec-built units before July 1.

Rudy Nielsen, president of the recreational property firm NIHO Land and Cattle Co., said Van Geel has hit on a good marketing tool, but doubts it will be repeated by a lot of recreational developers who were caught in the middle of the recession with the HST announcement.

“It takes a while to develop a subdivision, let alone build a cabin on [a piece of land],” Nielsen said. “People just weren’t ready for [the HST] so most people won’t do [what Van Geel has done].”

Van Geel said that after July 1, he will return to his usual model of pre-selling first and building later, but will first have to get post-HST repricing from his suppliers and contractors to see how it will affect his new costs.

As businesses, they will receive HST input tax credits, so Van Geel wants to see if he will be able to pass some of those savings into his final prices.

Nielsen doubts that the HST will put too big a hit on the recreational real estate market.

He recalled that when the federal GST was applied to recreational properties in the late 1980s, buyers and sellers adjusted relatively quickly.

Nielsen said the GST forced sellers to bargain more with buyers, which he said will be likely again once the HST is in effect.

“I don’t like the HST as much as anyone,” Nielsen said.

“I think it was bad for the government to do, but I still think people will get over it and it will be bargained in as part of the price.”

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