By Terrence Belford – Globe and Mail

Ontario Premier Dalton McGuinty and Finance Minister Dwight Duncan may wake up one morning a few years from now and have one of those “What was I thinking?” moments.

They will look out of their Queen’s Park windows and see a Toronto changed for the worse. Two-bedroom and larger condominiums will be significantly less affordable and the Greater Toronto Area’s supply of family-sized rental apartment suites will be sinking faster than the Titanic.

The GTA will be turning into a metropolis of small one-bedroom and one-bedroom and den suites. Only the rich will enjoy condos more than 800 square feet in size and even they will be looking at paying a premium of at least 6% more than today’s prices — before factoring in any rise in construction costs.

That is how the building industry sees the future of the GTA if the province goes ahead with its plans to combine the 8% provincial sales tax and the 5% federal goods and services tax on July 1, 2010.

The GST component will have a neutral impact. Builders already pay it and receive rebates depending on the selling price of a new home. They just pass the cost through to buyers in their sales price.

The PST is the problem. Currently, builders pay PST on materials that go into construction. Today’s PST adds about 2% to the total selling price of a new home.

For the first time, however, the PST component of the harmonized sales tax would apply to the selling price of the home and not just to the materials that went into it. The HST kicks in at $400,000 on a sliding scale rising to full rate at the $500,000 mark.

If the PST component continues at the 8% rate, that means 6% more in taxes on the price of those new homes.

“The way the HST is structured means a significant increase in the price of any new home over $400,000,” says Stephen Dupuis, president of BILD, the group that represents GTA home builders. “It is really a back-door way to raise taxes and is certain to deeply affect the GTA’s growth.”

While Mr. Duncan would not grant an interview, spokeswoman Alicia Johnston acted as a pinch hitter. She points out that the new HST would not affect 75% of new homes being built in Ontario. They average well below that $400,000 mark, and in the GTA it would not have an impact on affordable homes.

Why tax housing at all? The province needed to find ways to make up for the hundreds of millions of tax revenue lost through planned cuts in personal and corporate taxes and to pay for the costs of economic recovery plans, she said. It chose to place the burden on the shoulders of those buying expensive homes.

“We are going to lose $2.6-billion in revenue over the next four years,” Ms. Johnston says.

BILD estimates the tax on new housing will raise $800-million a year for the province.

But as George S. Kaufman once quipped: One man’s Mede is another man’s Persian. What may be a luxury home outside of the GTA is basic accommodation in many of its submarkets.

While the average selling price of a new condo in the GTA was $344 a square foot at the end of February, it was more than $500 in eight of the 18 submarkets tracked by RealNet Canada Inc. The average cost of a new condo is already more than $400,000 in 10 of those submarkets and just $5,000 less than that mark in an 11th.

If the HST were introduced today, that would mean instant price increases on all of them. If the new HST started at 2% on suites above $400,000 and ranged up to 6% on anything greater than $500,000, then price increases on those being sold today would range from $8,400 on the average suite along the Etobicoke waterfront to $72,000 in the Bloor-Yorkville area.

Want a condo in downtown west? It will instantly cost $30,000 more as will the average suite in North Toronto.

Howard Cohen, president of Context Developments Inc., which built Radio City on Jarvis Street and has Market Wharf behind the St. Lawrence Market under way, says costs for new projects are already nudging higher than the $500-a-square-foot mark.

“That means anything over 800 square feet in size will be affected. These aren’t luxury suites. These are family homes,” he says.

The new HST will also have a distinctly negative impact on the supply of rental stock. Mr. Cohen points out that 98% of all rental apartments built in the GTA since the mid-1980s have come from investors buying condos and then renting them out.

“Between 20% and 25% of all new condos have traditionally gone to investors,” he says.

But as prices for new suites climb, the economics of investing diminishes. Investors can’t charge enough in rents to cover both their mortgage and monthly maintenance costs.

“The HST nudges those costs even higher, which means we are looking at real supply shortages, very low vacancy rates and significantly higher rents down the line,” he says.

“The HST may be great tax policy but it is lousy housing policy.”

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Contact Laurin Jeffrey for more information  –  416-388-1960

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