Is the First Time Home-Buyers Tax Credit Really as Good as It Sounds?

October 30, 2009

Tax Credit As Good As It Sounds? by Jacob Boetter

Among all the government actions taken in Canada to ease last year’s real estate slump, the tax credit was one of those most highlighted. However, compared to the first time home-buyers tax credit offered by the US government, the Canadian one seems like a joke. But who will laugh last?

First, let’s compare the two tax credits. The Canadian First-Time Homebuyer’s Tax Credit, offered by the Federal government, is based on a $5,000 deductible. Multiplied by the lowest income tax rate (15%), it adds up to a net $750 credit for anybody who intends to buy a housing unit in Canada and didn’t own property during the last four years.

On the other hand, the American tax credit can be as high as 10% of the property’s value, to a maximum of $8,000. There is one significant difference – this sum is not deducted from the tax base (like ours), but deducted from the buyer’s income tax owing. In cases where the income tax owing doesn’t exceed $8,000, the equivalent sum is given back to the homeowner in cash. This tax credit is available to those who haven’t owned property in the three years prior to taking advantage of the tax credit.

While the Canadian real estate market rebound is credited by experts mostly to the Bank of Canada interest rate cut, the (still quite shaky) recovery of the American market was indeed fueled by their enormous tax credit, which strongly reduced the limiting pressure of a down payment and thus put a lot of purchasing power into the hands of the first time homebuyers. The question of whether the Canadian economic action plan shouldn’t take the tax credit more seriously comes naturally, but the answer is more complicated.

First, there is a question of necessity. The impact of the Canadian recession vs. the US recession on our respective property markets has been radically different. While falling prices, lost jobs and a flood of inventory drove many Americans right into short sales or foreclosures, the Canadian market rebounded within a few months, with any impact hitting investors and real estate agents more than ordinary homeowners.

The second question is of a fiscal kind. With around 1.5 million taxpayers claiming the credit, the US federal government has lost around $10 billion in tax revenues so far, adding yet more weight to the already tremendous budget deficit.

Finally, the short term effect on the real estate market is the most important for consideration. There is one last significant difference between our tax credit and the US equivalent. While the Canadian credit has no certain expiration date, our southern neighbour’s policy is about to end November 30th, 2009. Apparently a free $8000 gift is too precious to be left lying around, so thousands of potential buyers have been hurrying in recent weeks to close their deals – skewing the numbers to suggest a dramatic rebound that just isn’t real.

The artificially inflated US real estate market can expect record sales in October and November, followed by what is certain to be a cold winter. We witnessed a similar gold rush in Toronto at the end of 2007, when droves of people rushed to buy to avoid the new municipal Land Transfer Tax. Following this buying orgy, the depressed property market was already being felt by February 2008.

In the U.S., many of those who are able and willing to buy a property have already done so, or will make a purchase in the coming days. After November 30, property owners – especially those owning less than desirable properties – may find it much more difficult to find buyers.

Canadians shouldn't despair. Our government may not have given us a generous first time home buyers tax credit; but buying a home shouldn't  really be about on-the-spot incentives. If it were, everyone would retain one of those Realtors who, with dubious motives and track records, offer a wide screen TV with every home purchase!

Buying a home is about the long term ability of a borrower to generate positive cash flow on a regular basis and meet the conditions of his or her credit. It’s about investing in one’s personal and financial future. A one time gift does not change the underlying dynamics, however tempting and, dare I say, so American.

What the Canadian real estat need is a healthy financial environment with affordable mortgages and a stable labour market. And that’s what we have. Let’s hope it lasts.

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