Return of renovation tax credit unlikely to match last economic boost

The federal Conservative campaign pledge to revive the popular home renovation tax credit comes at a time when Canada’s renovation industry is already outperforming the broader economy and booming past the market for new homes.

Canadians spent $68-billion on home renovations last year compared with $48-billion spent building new homes, according to a recent report from real estate consultancy Altus Group Ltd. Over the past seven years, spending on renovations has grown 3.6 per cent, versus overall economic growth of just 1.6 per cent. Last year, home renovations accounted for 3.4 per cent of Canada’s GDP.

“We currently spend substantially more as a nation on improving and repairing our existing homes than on constructing new ones,” the consultancy wrote.

Provided the Conservatives are re-elected in October, the tax credit would be phased in starting in the 2016-2017 budget year, Conservative Leader Stephen Harper told reporters in Toronto on Tuesday.

The tax credit, the first major campaign pledge by the Conservatives since the government called an election on the weekend, was among the most popular of the party’s tax credits in the past and one of the few that has been supported by both the Liberals and the NDP.

“It’s kind of like the greatest tax rebate hits of the Conservatives,” said Nanos Research president Nik Nanos. “It’s tailor-made for their target profile, which are homeowners, people that live in the suburbs and families.”

When the government first launched its tax credit in 2009, it was meant as a short-term economic stimulus policy designed to keep consumers spending through the global financial crisis.

The program, which allowed homeowners to claim a 15-per-cent tax refund on renovations, up to $1,350, proved exceptionally popular. Spending on renovations, which had slowed to a crawl in 2008, soared roughly 12 per cent after the tax credit came into effect. Nearly three million Canadians took advantage of the program, getting an average of $700 per claim and generating about $4.3-billion worth of economic activity, according to government estimates.

It was also expensive, costing Ottawa an estimate $3-billion in foregone tax revenue over little more than a year. The current campaign promise calls for a much smaller tax credit, which would be capped at $5,000 total spending, compared with $10,000 in 2009. The Conservatives estimate the tax credit will cost $1.58-billion a year, or roughly half what its 2009 program cost.

When the tax credit was scrapped in February, 2010, renovation spending took an immediate hit, falling roughly 3 per cent in 2010. The contraction was short-lived, however. By 2011, spending on home renovations was growing faster than spending on new home construction and on resale home transactions, a report that year by Bank of Nova Scotia found.

Economists point out that the market for home renovations is closely tied to the strength of the housing market. The largest increase in spending on renovations in 2014 was in Ontario, a market where home price growth had been particularly strong. Spending was highest on homes that had recently sold, Altus found, as sellers redid their kitchens and bathrooms in hopes of boosting the price of their homes and first-time buyers got a foothold into an expensive housing market by way of fixer-uppers.

The continued growth in home renovations, even in the absence of a tax credit, has sparked concerns over household debt. Total consumer credit hit a record $1.83-trillion in May, according to Royal Bank of Canada. Much of that has been driven by popularity of revolving personal lines of credit, which grew at the fastest pace in two years to $267-billion in May. Lines of credit now account for more than half of all consumer credit, including mortgages.

Nearly 20 per cent of borrowing on home equity lines of credit goes toward renovations, Altus said, more than the amount spent financing a new home purchase.

While a revival of the tax credit will help boost demand among first-time home buyers and seniors, it isn’t likely to give the same economic boost as the last one, said Kevin Lee, CEO of the Canadian Home Builders Association. A permanent tax credit also isn’t likely to inspire such a flurry of spending as one that is available for a limited time.

Where it should have the biggest impact is in combatting the underground economy, Mr. Lee said. The construction industry estimates that roughly half of all home renovation jobs under $5,000 are paid in cash, a huge sum of foregone tax revenue.

Back in 2009, “we saw that the underground economy and cash jobs really dried up to a large degree because all of a sudden people were asking for receipts,” he said. “That’s really important for us because it results in lost tax revenues and really creates a bad name for many people in the industry and makes it hard for good, upstanding businesses to compete.” He estimated that an increase in tax revenue from requiring contractors to report their earnings will offset the cost of the program enough to potentially make it revenue-neutral.

The pledge to revive the home renovation tax credit also comes at a time when homeowners appear to be curtailing their budgets for renovations amid a falling Canadian dollar and slower economic growth. A poll by Canadian Imperial Bank of Commerce this summer found that, while more Canadians were planning on renovating their homes, they expected to cut their renovation budgets by an average of 13 per cent to $17,000, down from $20,000 last year.

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