Brandon Donnelly
Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly.
Brandon Donnelly
Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly.
Some people thought I was referring to development charges, but I was actually thinking of the GST/HST New Housing Rebate in Ontario.
The way it typically works in Ontario is that when buy a new construction home, the price you pay is inclusive of HST (harmonized sales tax) and net of any applicable rebates, such as the rebate program mentioned above.
This means that the price you see on your agreement is usually the price you pay. I say usually only because there are ways that you could disqualify yourself from the New Housing Rebate program. But that’s a different post.
So what does this mean in practice?
Let’s say you went out and bought a new construction condo for $368,200 (there is a reason I’m picking what seems like an arbitrary number). If there was no such thing as the New Housing Rebate program, then the sales tax owing on this home would be the full 13%. And that would mean that the price paid before any taxes is actually $325,841 (x 13% = $368,200). This is an important number because it represents revenue to the developer.
But since there is a New Housing Rebate program, the effective tax rate actually works out to be 5.20% for this particular sale price, which means that the price paid before any taxes is now $350,000 (a nice whole number). And so because of rebates and because they are now paying less HST, the developer’s revenue number has increased. It has gone from $325,841 to $350,000.
The way this logistically works is that purchasers usually assign the New Housing Rebate benefits to the developer who then processes all the paperwork. This is what I mean when I say that the “sticker price” is inclusive of HST and net of any rebates – it already factors in the possible deductions.
So far things are looking good. And I want to be clear that I don’t have concerns with the New Housing Rebate program in its entirety. In fact, it’s a hugely important part of the new home industry. Without it, many projects would simply not be feasible to build.
However, as the price of the new home increases (which typically happens as the home gets bigger), the rebates start to fall off. The federal portion of the rebate maxes out at a base purchase price of $350,000 (which is why I chose that number) and the Ontario portion maxes out at a base purchase price of $400,000.
What all this means is that as the unit sizes get bigger and more expensive, the effective tax rate is no longer at 5.20%, as was the case in the example I gave above. It increases. And if you hold prices constant for the purchaser, it means that the developer’s revenues now start to drop.
To illustrate why this matters, consider the following chart:
In the first scenario, the developer builds and sells 2 units for a price of $368,2000. This translates into revenue of $700,000. However, if the developer instead decides to combine those 2 units and sell the larger single unit for $733,100 (roughly double the price) then the effective rate of HST goes up and revenue drops by $30,000.
The second scenario is similar to the first one except that instead of 2 units, it’s 3 units which then get combined into one. Here revenue drops even further – by $50,000.
Now, you could argue that there are some cost savings associated with building fewer suites, but I don’t think it would offset the differentials shown above, especially if you multiply those revenue numbers across an entire project. So what this all means is that it can be more profitable for developers to build smaller units priced below the thresholds mentioned above, as opposed to a smaller number of larger units.
Again, I’m not saying that HST rebates are bad. They’re critical to the industry. I love them. But I do believe we should be thinking about the possible implications that the current set up could be having on what we’re building and in particular on unit sizes.
If you’d like to learn more about how the rebates work, check out this PDF from the Canada Revenue Agency. I tried to keep things simple in this post.
Ever since I was a little kid, I have thought that I would one day get into politics.
A lot of it has to do with me wanting to affect positive change, which is also one of the reasons I love real estate development (and one of the reasons I write this blog). Developers might have a bad rap in some circles, but I view it as a mechanism for positive change in the built environment.
However, I have also felt that politics is something that’s better to do when you have grey hair and you don’t actually need the money to live. That way people take you more seriously and you can, hopefully, just do what you feel is right as opposed to playing the political game.
But more and more I find myself thinking: Brandon, you would make a terrible politician.
I don’t want to play games. I don’t want to have to think about which stance will win me the most votes. And I don’t want to have to dance around questions so I can avoid upsetting certain constituents. I’d rather be clear and decisive about what I think is the right thing to do.
But that doesn’t always work so well in politics. So I think I’ll just stick to building things and writing this daily blog.
Some people thought I was referring to development charges, but I was actually thinking of the GST/HST New Housing Rebate in Ontario.
The way it typically works in Ontario is that when buy a new construction home, the price you pay is inclusive of HST (harmonized sales tax) and net of any applicable rebates, such as the rebate program mentioned above.
This means that the price you see on your agreement is usually the price you pay. I say usually only because there are ways that you could disqualify yourself from the New Housing Rebate program. But that’s a different post.
So what does this mean in practice?
Let’s say you went out and bought a new construction condo for $368,200 (there is a reason I’m picking what seems like an arbitrary number). If there was no such thing as the New Housing Rebate program, then the sales tax owing on this home would be the full 13%. And that would mean that the price paid before any taxes is actually $325,841 (x 13% = $368,200). This is an important number because it represents revenue to the developer.
But since there is a New Housing Rebate program, the effective tax rate actually works out to be 5.20% for this particular sale price, which means that the price paid before any taxes is now $350,000 (a nice whole number). And so because of rebates and because they are now paying less HST, the developer’s revenue number has increased. It has gone from $325,841 to $350,000.
The way this logistically works is that purchasers usually assign the New Housing Rebate benefits to the developer who then processes all the paperwork. This is what I mean when I say that the “sticker price” is inclusive of HST and net of any rebates – it already factors in the possible deductions.
So far things are looking good. And I want to be clear that I don’t have concerns with the New Housing Rebate program in its entirety. In fact, it’s a hugely important part of the new home industry. Without it, many projects would simply not be feasible to build.
However, as the price of the new home increases (which typically happens as the home gets bigger), the rebates start to fall off. The federal portion of the rebate maxes out at a base purchase price of $350,000 (which is why I chose that number) and the Ontario portion maxes out at a base purchase price of $400,000.
What all this means is that as the unit sizes get bigger and more expensive, the effective tax rate is no longer at 5.20%, as was the case in the example I gave above. It increases. And if you hold prices constant for the purchaser, it means that the developer’s revenues now start to drop.
To illustrate why this matters, consider the following chart:
In the first scenario, the developer builds and sells 2 units for a price of $368,2000. This translates into revenue of $700,000. However, if the developer instead decides to combine those 2 units and sell the larger single unit for $733,100 (roughly double the price) then the effective rate of HST goes up and revenue drops by $30,000.
The second scenario is similar to the first one except that instead of 2 units, it’s 3 units which then get combined into one. Here revenue drops even further – by $50,000.
Now, you could argue that there are some cost savings associated with building fewer suites, but I don’t think it would offset the differentials shown above, especially if you multiply those revenue numbers across an entire project. So what this all means is that it can be more profitable for developers to build smaller units priced below the thresholds mentioned above, as opposed to a smaller number of larger units.
Again, I’m not saying that HST rebates are bad. They’re critical to the industry. I love them. But I do believe we should be thinking about the possible implications that the current set up could be having on what we’re building and in particular on unit sizes.
If you’d like to learn more about how the rebates work, check out this PDF from the Canada Revenue Agency. I tried to keep things simple in this post.
Ever since I was a little kid, I have thought that I would one day get into politics.
A lot of it has to do with me wanting to affect positive change, which is also one of the reasons I love real estate development (and one of the reasons I write this blog). Developers might have a bad rap in some circles, but I view it as a mechanism for positive change in the built environment.
However, I have also felt that politics is something that’s better to do when you have grey hair and you don’t actually need the money to live. That way people take you more seriously and you can, hopefully, just do what you feel is right as opposed to playing the political game.
But more and more I find myself thinking: Brandon, you would make a terrible politician.
I don’t want to play games. I don’t want to have to think about which stance will win me the most votes. And I don’t want to have to dance around questions so I can avoid upsetting certain constituents. I’d rather be clear and decisive about what I think is the right thing to do.
But that doesn’t always work so well in politics. So I think I’ll just stick to building things and writing this daily blog.
In this month’s issue of Monocle magazine (#80) they profile an interesting prefabricated and affordable housing project in Knivsta, Sweden.
A collaboration between architect Andreas Martin-Löf and developer Junior Living, the project contains 124 single occupancy units, each of which has 32 square meters of interior space (that’s about 344 square feet).
The way it was built is quite simple. The modular housing units were fabricated off-site and then inserted on-site into a prefabricated concrete frame. Think bottles going into a wine rack. Here’s a diagram showing how it works:
What’s truly amazing about this project though is how quickly it was built and how cost effective it actually was for end users. Construction started in January 2014 and residents started moving in about 3 months later. The sale prices ranged from €50,000 to €87,000 per unit. That’s roughly $62,000 to $98,000 in US dollars.
Finally, here’s a shot of one of the interiors:
What do you all think of this project?
Photography by Åke E:son Lindman via Andreas Martin-Löf Arkitekter
In this month’s issue of Monocle magazine (#80) they profile an interesting prefabricated and affordable housing project in Knivsta, Sweden.
A collaboration between architect Andreas Martin-Löf and developer Junior Living, the project contains 124 single occupancy units, each of which has 32 square meters of interior space (that’s about 344 square feet).
The way it was built is quite simple. The modular housing units were fabricated off-site and then inserted on-site into a prefabricated concrete frame. Think bottles going into a wine rack. Here’s a diagram showing how it works:
What’s truly amazing about this project though is how quickly it was built and how cost effective it actually was for end users. Construction started in January 2014 and residents started moving in about 3 months later. The sale prices ranged from €50,000 to €87,000 per unit. That’s roughly $62,000 to $98,000 in US dollars.
Finally, here’s a shot of one of the interiors:
What do you all think of this project?
Photography by Åke E:son Lindman via Andreas Martin-Löf Arkitekter
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