Will removing GST off new rental construction improve affordability? Here's what experts say

Millennials delaying home ownership Increasing interest rates, home prices and the cost of living all play a role on why millennials are delaying buying their first home.

Removing GST on new rental construction – while a step that could help increase Canada's housing supply – may not be the "silver bullet" some are looking for on affordability, analysts say.

On Thursday, the federal government announced it would take GST off the construction of new rental apartments, a promise the Liberals first made during the 2015 election.

"With rental vacancy rates at a two-decade low, and Canada's rental housing stock sitting in a severe shortage, any measure to boost rental apartment construction is certainly welcome," RBC economist Rachel Battaglia wrote in a note to clients Friday.

Battaglia says the five per cent GST discouraged developers from pursuing purpose-built rental apartments.

Instead, developers opted for condominiums in part due to their higher profitability, she said. Builders also typically include GST in the purchase price of a condo unit.

However, Battaglia cautions that given the "severe deficit position" of Canada's rental market and the time it takes to build new supply, removing the GST won't be a "silver bullet."

"While the removal of GST on rental construction projects will improve their financial viability – and with it, hopefully spur more development – it isn't likely to lower rents in short order," she writes.

A report this week found that the average asking rent in Canada reached a record $2,117 in August.

Citing multiple factors, the Canada Mortgage and Housing Corp. (CMHC) reported in January that the national vacancy rate last year was the lowest it had been since 2001, dropping to 1.9 per cent for purpose-built rental apartments from 3.1 per cent in 2021.

The CMHC this week also reaffirmed a previous report it penned saying that the country still needs another 3.5 million housing units by 2030, on top of what would be built, in order to meet demand and achieve 2004 levels of affordability.

Asked if achieving this goal was even possible, CMHC deputy chief economist Aled ab Iorwerth said on The Vassy Kapelos Show on Wednesday, "No, but it's the right question to ask."

Appearing on CTV's Power Play the following day, Iorwerth said with roughly 250,000 housing starts each year in Canada, this would need to at least double in order to meet the 3.5 million gap.

"It's an enormous challenge," he said. "It's taking housing construction growth back to levels we haven't seen since the 1970s. It's a huge challenge."

On the removal of the GST, Iorwerth said he believes it would encourage the private sector to build more rental housing.

"I think we have a drastic need for more rental supply. We talk about housing in general but housing is simply unaffordable in Toronto or Vancouver, increasingly in Montreal," he said.

"Rental will have to be a part of the solution. We need huge construction of purpose-built rental."

BMO chief economist Douglas Porter also made note of how much new housing is required in order to meet the supply gap identified by the CMHC, writing in a note to clients on Friday that the all-time record for housing completions was 257,000 in 1974.

He adds that the Bank of Canada estimates investors are taking up to 30 per cent, or more, of housing supply.

"Our key message on this front is that if we are counting on supply alone to fix the affordability issue, we are all going to be waiting a very long time indeed. As in, not going to happen," Porter said.

"To be clear, we do not dispute the pressing need for plentiful new supply. But it takes years (and years) to build multiple-unit structures, and the industry is already operating almost flat out."

Mike Moffatt, senior director of policy and innovation at the Smart Prosperity Institute think tank, told CTV National News this week that bridging the housing supply gap would take a "wartime-like effort."

The idea of removing GST on purpose-built rental housing was among the recommendations in the recently released National Housing Accord, which Moffatt helped author along with other organizations.

"I don't think we should underestimate the challenge but this is a big step in the right direction," Moffatt said.

"There's a lot more that we need to do to incentivize and create the conditions to build more both ownership and rental units, but this is a fantastic step and I'm really looking forward to seeing what all three orders of government do next in order to get us to that 3.5 million number."

With files from CTVNews.ca Writer Hayatullah Amanat, CTV National News Ottawa Correspondent Judy Trinh and The Canadian Press