- What The federal government’s proposed tax hikes have raised concerns, the brokerage said in a report
- Why Higher taxes could have repercussions for investor sentiment and capital deployment
- What next Most of the funds would go toward maintaining affordable housing and increasing the supply of purpose-built rentals
The federal government’s latest budget proposals could impact the commercial real estate investment landscape, Marcus & Millichap said in a special report.
With a commitment to invest approximately $53b over the next five years, the government has proposed tax increases on capital gains exceeding $250,000 annually, aiming to secure necessary funding. However, the suggested tax hike, from 50% to 67%, has stirred concern within investment circles, raising questions about its potential repercussions for investor sentiment and capital deployment.
“While this tax is meant to target only a small fraction of the population, it could result in a pullback in overall investment, with capital being redirected to other economies,” the firm said. “This is especially true for commercial real estate as investors tend to hold properties for an extended period, and when it comes time to sell, capital gains are usually much greater than the $250,000 limit.”
That, combined with labour shortages, falling productivity and increased overall costs, also will discourage investment in housing development, making it difficult for Canada to reach its affordability goals and aspiration to build 3.9m new homes by 2031.
Last year, housing starts fell 7% while investment dropped 12%. Housing affordability also hit an all-time low due to high interest rates and a lack of supply amid a record population growth of 3.2%.
“This deterioration in supply growth — along with robust demand — is the main reason why the federal government has put such a heavy weight on growing Canada’s housing stock,” Marcus & Millichap said, noting that only 200,000 new homes out of 500,000 needed homes, were created last year.
The lion’s share of the government spending will go toward maintaining affordable housing and increasing the supply of purpose-built rentals, given the unfavorable market.
Ottawa allocated $6b to enhance housing infrastructure – roads, sewers, and transit; $15bn for the Apartment Construction Loan Program, which offers low-cost financing to builders providing affordable rental housing; and $100m to support homebuilding technology and innovation aimed at accelerating construction processes.
Tax incentives also are included in the budget, with the capital cost allowance raised to 10%, deductions allowed for certain interest and financing expenses, and an exemption from HST for student rentals.
While housing starts were down, apartment property starts rose 3% last year. That came amid an all-time low vacancy rate of 1.5% and a historic annual rent growth of 8.4%.
“Despite this, demand is continuing to outpace supply as vacancy is forecast to remain sub-2.0 per cent to end 2024, indicating that further housing is needed,” the brokerage said.
