What do rising
costs mean?
The rents in new rental buildings are reflective of their
location, size, vacancy rates, and the costs to finance
and build. The costs associated with development
are the most unpredictable factor in determining the
viability of new market rental. The amount of new
land available to develop is decreasing, meaning the
majority of new developments will involve redeveloping
a property that is already in use. This adds another
level of uncertainty associated with the development
process. Timing, delays and all other costs related
to the development process from financing to
construction impact the ability to provide units at
market rents.
The Federal Goods and Services Tax (GST) and
Community Amenity Contributions (CACs) are
examples of fees and taxes that make the construction
of new purpose-built rental projects expensive and
risky for builders.
FEDERAL GOODS AND SERVICES TAX (GST)
The Federal Goods and Services Tax (GST) charged
on new homes is not a new cost, but it has a
significant impact on rental development. The
current approach to calculate GST on new homes
can often exceed the costs of all other government
taxes and fees combined. In Scenario 1, a high-
density development near a SkyTrain station, the GST
accounts for $13,685,717 of the total project costs, or
$26,523 per unit, while all other combined government
fees account for $5,879,493, or $11,394 per unit.
While there are rebates available for rental housing
construction, these are based on unit values that have
been set at the national level and do not vary based
on local markets. In addition, the rebate thresholds
have not been tied to inflation and have remained
unchanged since they were introduced over 20
years ago. At that time, most rental units would have
qualified for at least some part of the rebate, however
that is not the case today. Based on historic market
reports, in 2000, when the rebate thresholds for rental
housing were introduced, the average value per suite
was $97,147 (equivalent to $143,057 in 2021, based
on the Bank of Canada’s Inflation Calculator). In 2021,
the average value per suite was $486,688. This is a
direct comparison of older buildings still unable to
meet the $350,000 maximum value estimate for the
rebate, meaning the gap would be substantially wider
for new rental buildings. This shows that the increase
in value has been substantial in the past 20 years,
prompting the need to review the rebate thresholds
to more accurately reflect today’s market values.
The result is that the majority of rental units built in
major urban centres, where rental housing is in high
demand, will not qualify for a rebate. Considering the
amount of purpose-built rental that needs to be built
to accommodate new and existing Metro Vancouver
residents, the GST line item in a project’s financing
can significantly impact a builder’s ability to provide
the necessary units.
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