Aug 23 | Posted by Barry

For the past few months, we have been reporting on the introduction of the Harmonized Sales Tax and how it would affect home sales in Ontario. The results are in for July and Ontario home sales declined nearly 8% from June*. This fits our prediction as many home buyers accelerated their sales in earlier months to avoid the HST. The new tax also coincides with tougher mortgage rules and increased interest rates*.

The HST’s largest impact has been on new home sales prices. For example, with the old 5% GST, a new house priced at $1,000,000 would close at $1,050,000. With the 13% HST in place, that same home now closes at $1,130,000. Even though many new houses are promoted with tax included, the tax is being absorbed into the selling price.

The effects on resale homes are not nearly as pronounced, because in this case the 13% HST is levied only on the real estate agent commission portion of the transaction, and that commission is borne by the seller. For example, if a 5% real estate commission is established on a $1,000,000 house sale, then the seller only has to pay $6500 (ie: 13% tax on the 5% commission), while the buyer is exempt.

This explains why York Mills (C12) was not badly affected as most houses in the area are pre-owned.

Ultimately, the introduction of the HST is what economists call revenue neutral. Market activity may remain dormant for a while, but in the long-run, a more stable market will emerge.

(*Source: Marr, Garry. “Home Sales Tumble.” National Post 17 August 2010)