BC government throws in a lifeline

Will the new home buyer’s incentives save the housing market?

The newly released 2012 budget for the B.C. government contains a sort of a lifeline thrown to real estate market in Vancouver. Aside from all the “bubble talk” the government seems to be concerned by the large number of newly build houses on the market with no takers. By some estimates there are more than 4,000 new housing units only in the Lower Mainland sale. To help move that inventory the government is offering tax incentives.

According to Troy Media (read the full analysis of the budget here), effective Feb 21, 2012 to Mar 31, 2013 first-time home buyers, who purchase a newly constructed home will enjoy a sizable tax credit.

  • First-time home buyers: The credit will be calculated as 5% of the purchase price of the home up to a maximum credit of $10,000 or on the first $200,000 of the purchase price. The credit will be phased out at a rate of 20% of net income in excess of $150,000 for single individuals and at a rate of 10 per cent of family net income in excess of $150,000 for couples.
  • Seniors home renovation tax credit: Effective April 1, 2012, a $1,000 refundable personal income tax credit will be available for eligible expenditures to assist with the cost of permanent home renovations that provide individuals age 65 and over with increased independence.
  • New housing rebate threshold increase: Until the PST is re-implemented, the HST applies to sales of new housing and to assist in the transition, the B.C. HST New Housing Rebate threshold will be increased from $525,000 to $850,000 for eligible new housing where the HST is payable on or after April 1, 2012. The maximum rebate available to purchasers will increase from $26,250 to $42,500.

Real estate watchers are wondering if the extra cash, provided by the government in the form of tax break, will affect in any way housing prices.

Here are some possible outcomes:

  1. Maintain the status quo. Sales in Vancouver have already started declining. With this shot in the arm, prices will remain at the 2011 level due to new buyers lured to the market by the incentives.
  2. From red-hot to white-hot market, but not across the spectrum. We may see higher demand for lower-priced housing and respectively – higher prices for entry level homes. Sales and prices of the high-end housed may not be positively affected.
  3. The downtrend in prices may still continue driven by other factors such as higher mortgage rates, higher unemployment, or more restrictive lending rules.

Americans have been using the same medicine for the last few years, but with a different goal in mind – to stimulate buying and stop sinking home values. Did it work? There were lots of critics saying it is the wrong move. Wall Street Journal reported last year that an academic study was completed to analyze the effect of $8,000 tax credit on housing. The conclusion is … dismal at best. Sellers saw the credit as an excuse to raise the asking price by the amount of the credit.

Those critics won’t be surprised, then, by a new paper that finds—you guessed it—that average listing prices rose by around $8,000 in the month after the signing of the first major tax credit, and that they fell by slightly less than $9,000 two months after the tax credits expired.

Today’s results from the Case Shiller index – widely used measure of the health of the real estate market in the USA – confirm that housing prices kept declining through 2011 despite all the efforts.

I don’t want to put such a negative spin on B.C. government measures, but, considering the American experience, the final result may be similar to the withdrawal effect in drug addicts. Such measures keep the market on an artificial, unrealistically high, but frail position. Once the administration of steroids stops, the suffering starts.

But British Columbia is not America, so the results may be quite different. Do you think so?

 

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