Bryant Renovations at a Leslieville home where they're renovating the bathroom and replacing the flooring of the main floor.Fred Lum/The Globe and Mail
The government's home renovation tax credit gave the industry a $4.3-billion shot in the arm last year, but renovation activity will now start to cool because most of that strength came from demand borrowed from the future, a report released Wednesday showed.
Ottawa's home reno program, which allowed taxpayers to get up to $1,350 in tax relief for projects worth between $1,000 and $10,000, was introduced as a limited-time measure in the 2009 federal budget. It was available for a year and expired last month.
Toronto-Dominion Bank economist Diana Petramala calculated that the program bolstered renovation activity by between $4- and 4.3-billion and provided a 0.3-per-cent lift to Canada's real gross domestic product.
"We believe that the stimulus measure likely borrowed $3-billion of demand from the future - as those with future plans for renovations undertook the spending in 2009, rather than waiting until later years," she said in a report.
Because the economic benefits of home reno projects often lag over time, especially those last-minute ones started by people scrambling to take advanatge of the credit before it expired, activity will likely drive a 1-per-cent annual gain in renovation investment this year. However, Ms. Petramala expects "the pace of growth will diminish over the course of the year and into 2011 as payback from the tax credit occurs."
Higher interest rates, a cooling housing market and more moderate household spending will also slow renovation activity in Canada next year, she said.
There are other signs that Canada's housing market is finally slowing down. The Canadian Real Estate Association said Wednesday that Canada's housing market may have peaked in December, as its January statistics show a slight pullback in resale activity.
Did you take advantage of the home reno tax credit?
The news comes one day after Mr. Flaherty unveiled new mortgage rules to dampen Canada's roaring housing market. The new measures, designed to keep people from taking on too much debt and to rein in speculators from buying houses solely as investments, were introduced as policy makers are warning borrowers and lenders to get ready for higher interest rates, as early as this summer.
A Tuesday report from the Vanier Institute of the Family warned that with interest rates set to rise, many families - especially first-time buyers who took advantage of record low rates to enter the market - "may not fully realize" what an increase in mortgage rates by several per cent will mean for their monthly payments.
Higher interest rates could likewise hurt Canadians who have taken on debt to fund their home renovations, overextending them further as they struggle to make heftier repayments.
A tally from the Canada Revenue Agency shows that 3.5 million people, or about 10 per cent of Canada's population, inquired about the home reno tax credit. Encouraged by both the limited time tax credit and low borrowing costs, some Canadians clearly decided to undertake renovations in 2009 that might otherwise have been put off for a few more years.
Robert Katzer had a contractor redo both bathrooms in his Victoria condo, putting in marble sinks and faucets, along with a new bathtub with marble wall linings. Not done there, he upgraded most of the lighting in the unit, replaced the carpets, painted, caulked the windows and retiled the fireplace. "It wasn't cheap but I love the end result," he told the Globe & Mail last month.
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"We estimate that the combination of the tax credit and low interest rates has made the cost of $10,000 in renovation spending in 2009 16 to 19 per cent lower when compared to the projected cost in 2010 and 2011," Ms. Petramala said. The final price tag could have been further lowered by home building and supply stores that offered incentives alongside the fiscal tax credit.
"The decrease in current costs relative to future spending gives households an incentive to bring forward such expenditures rather than wait until next year. The latter steals from future demand, and would cause a drop-off in demand as the tax credit expires," she said.
Had the tax credit not been introduced, renovation investment may have declined almost 9.4 per cent last year, instead of likely growing 1.8 per cent, Ms. Petramala said. With most of the future payback from the tax credit expected to take place this year, she expects renovation investment will grow a tepid 1.5 per cent in 2010. Without the tax credit, it would have grown 3 per cent, she noted.
Canadian households have accumulated large debt loads, with household indebtedness reaching a historical high of 140 per cent of income in 2009. The TD report noted that in the last year, personal lines of credit - which are often used for renovations - have increased at almost double the annual growth rate of the five years leading up to the recession.
Looking further into the future, Ms. Petramala concluded that "an expected rise in short term interest rates of a full 3 percentage points from their current level by the end of 2011 will likely result in a broad-based moderation in household spending and investment - renovations included."