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MORTGAGE DEDUCTIBILITY - THE RIGHT IDEA AT THE RIGHT TIME! There is no question that the recent proposal on mortgage interest tax deductibility by the Ontario government sets the stage for a War of Words between left and right wing politics, rich and poor, owner and renter. Witness the Toronto Star editorial – “Mortgage Scheme a cynical vote grab” and further – “If you are a single mother on welfare, the province doesn’t give you enough money for shelter to let you rent a decent apartment. But if you live in a Rosedale mansion, Premier Eves wants the government to help you pay your mortgage”. Witness the op-ed page of the National Post by Livio di Matteo economic professor at Lakehead University, “If the Ontario Premier makes mortgage interest tax deductible that will only fuel an already booming housing sector while doing nothing to help renters. It’s Canada’s War on Tenants”. These are fighting words to which there is always some semblance of distorted truth. Let me try to outline why I think these positions miss the mark and why mortgage tax deductibility is the right policy at the right time. • TAX RELIEF TO BELEAGUERED HOMEOWNER LONG OVERDUE! Market value assessment was introduced in Ontario with the objective of balancing disparities in a municipal tax structure in place for decades. The tax burden on homeowners has settled in at about 1.25% of market value – reviewed every three years. With property values in the Toronto GTA up 45% in the last ten years – property taxes have soared with MVA controlled adjustments and general increases in municipal spending. It should also be noted that new home construction in the GTA has been setting records each year since 1995. In 2002 the GTA produced over 54,000 new home sales, making Toronto the third strongest market in North America. – but these new homes carried a huge tax burden! In a study conducted for the Urban Development Institute recently a newly built, entry level, 1200 square foot townhome selling for $200,000 will have paid nearly $50,000 in taxes, fee and changes – 24 to 26% of the selling price of a new home is tax! It’s the right policy and the right time to give the battered homeowner some modest tax relief.
Rental vacancy rates in the GTA are soaring upward for the first time in decades! As measured in October 2002 by CMHC rental vacancy stands at 2.5% - up from 0.9% in 2001. In the first quarter of 2003 this pattern is continuing with vacancies estimated in some market areas to be over 5%. Monthly rental rates are dropping like a stone! With this dramatic increase in rental unit supply monthly rental costs in new condominium units have dropped by 20% to under $2.00 per square foot. Why has the supply of rental units increased so dramatically when very little new rental construction has been initiated – the renter has become a homeowner! In 1996, GTA ownership was at 58% of households; rental at 42%. Five years later in 2001 ownership stood at 63%; rental at 36%. The surge in commitment to home ownership has freed up affordable rental units. At the same time, investors have been a very active component of the new high-rise condominium market producing many thousands of new rental units annually. If mortgage deductibility is introduced the homeowner and renter are equal beneficiaries. It could be argued that since the primary beneficiary is the first time home buyer the renter receives a greater benefit due to increased supply of affordable units.
What a surprise! In a recent interview with Stanley Duobinis, Vice President and Director of Forecasting for the National Association of Home Builders’ in the United States he surprised me with the statement – “only 20% of U.S. homeowners take full advantage of mortgage tax deductibility”. I thought the Toronto Star said it was a “bonanza” to the rich – a cynical grab for homeowner votes! It turns out that the American’s; even with their vaunted tax breaks are very similar to Canadians. In the housing cycle as we move up from the first timer to empty nester the tax benefit is far outweighed by paying off the mortgage. That’s what we do – that’s what the Americans do. The primary beneficiary and the vast percentage of households exploiting mortgage tax deductibility to the maximum is the FIRST TIME BUYER! The strength of the First Time Buyer Market is critical to the overall economic health of the housing market – construction materials, employment, municipal tax base and consumer mobility. It also stimulates the existing home market – because that’s where the first time buyer purchases – the most affordable resale house. It also, as noted earlier, drives rental vacancy rates up and monthly rental costs down.
• EVES TAX PLAN DOESN’T GO FAR ENOUGH! I would suggest that the Eves mortgage tax deductibility (MID) should be expanded to 100% of the provincial income tax portion not 50% as proposed. Let’s get the Feds in on the program and expand MID to all earned income. I would limit the program to First Time Buyer’s only thereby reducing the overall imputed cost of the program and eliminating the benefit to that poor homeowner in Rosedale! The U.S. MID program limits the mortgage amount to $1,100,000 and any renewal of mortgage to $100,000 over the original mortgage amount (the latter rule restricts refinancing of significant equity appreciation). The U.S. program also applies to a principal and secondary residence with a capital gains exception of $500,000. If the Eves program were limited to first time buyers the mortgage amount could be capped at a maximum of $300,000 (the same level now restricted to mortgage insurance coverage for 5% down payment programs – i.e. first time buyers). In effect, MID already exists for investment properties but imagine the impact upon rental vacancy if a capital gain exemption were provided for investment or resort properties – so long as it remained in a rental program. The Mortgage Interest tax deductibility proposal is an exceptional concept. It will benefit the homeowner, the renter and the municipal tax base in equal proportion. It is neither a cynical vote grab nor a war on tenants……… It is the right idea at the right time! Keep Positive! |
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