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Home builders prepare for poor 1991.

Home builders prepare for poor 1991

For residential construction, the proposed Goods and Services Tax will hit home all over Northern Ontario, say some industry officials.

However, the jolt will pass through the various stages of the industry and, in the end, it will be the consumer who will be staggered.

John Parr, an accountant with Sal-Dan Developments Ltd. in Sault Ste. Marie, notes the GST will not apply to home resales, and that could lead people away from buying new houses.

Parr says if there are two similar homes to choose from, people will buy the older home rather than the new one.

"They wouldn't have to pay the GST on it. Four-and-a-half per cent makes a big difference."

Most of his company's new homes cost between $130,000 and $150,000.

Parr has already heard of people interested in getting into the new housing market before the GST takes effect Jan. 1, 1991.

"This year will probably be a great year for us," he adds. As a result, the company is trying to build a lot of houses this year.

After that, house sales will depend on the overall economy of Sault Ste. Marie.

Parr says he will have to wait and see if the switch from the current 13.5-per-cent federal sales tax to the GST will bring down the cost of buiding a house. "It might. It might not."

From an accounting point of view, he believes the tax will be only a bit of an inconvenience.

Andre Vigneault, president of Grand Homes Ltd. in Sudbury, says the industry is working under the assumption that the cost of housing will rise between 3.5 and five per cent.

"The five-per-cent increase radically changes the affordability parameters out there," he says. "If you tack on five per cent, people who could squeak into the market at $100,000 can no longer compete in the marketplace."

In such a situation, Vigneault says builders must make a decision. "Do they try to absorb a portion of the tax in their operating margin or do they look to pass it all along?"

For this year, Vigneault foresees people either being panicked into the market or sitting on the fence, waiting to see how it all turns out.

Some people are buying now because of the tax, he says.

"They're assuming the worst-case-that they would get hit with the full seven per cent. They say we can't save that much in a year."

If the markets panic, a percentage of sales will be taken from 1991, he said. "So we end up with a vacuum in the next building season."

As for construction companies collecting the tax and receiving credits for the GST paid, Vigneault says the process can be handled.

"I wouldn't say that we're going to need more personnel, but I think it's going to tax existing resources."

Ed Gilbert, president of Quality Homes Inc. in Thunder Bay, notes that labor is going to be taxed for the first time.

"The effect will be that the overall price will be higher," he says.

Gilbert has also been told by some manufacturers that they are not going to reduce prices by the difference between the FST and the GST.

"They're like everyone else, I guess," he says. "They're not exactly sure as to how the whole thing is going to work out, if in fact it goes through."

Gilbert explains that, with the lack of any specific information on how construction-type companies are expected to apply the tax, most subtrades will be adding seven per cent to any work which is done in 1991, because they're not sure whether or not their suppliers are going to be reducing the cost of materials to them.

"They don't know whether the FST is definitely going to be coming out, so they're having to play it safe and therefore they're quoting seven-per-cent higher on material and labor on any work which goes into 1991," he says.

Gilbert notes his company is seeing more people interested in getting new homes built this year.

"Next year I think the housing market will be very poor because home-building demand will be taken up this year. I think you'll see more people renovating their existing homes or buying resale homes in subsequent years."

Resale homes are not subject to the GST.

In coming years, Gilbert believes demand should gradually rise again as people get accustomed to paying the GST.

A typical three-bedroom bungalow on a small lot in Thunder Bay is about $130,000. The GST will mean a $3,000 to $4,000 increase in the price, he says.

As for the collection of the tax, Gilbert says, depending on how the rebate system is handled, there may be some additional carrying charges incurred by business to finance the gap between the time they pay the GST and the time they receive a credit.

Sergio Perut of Perut Construction Ltd. in North Bay believes the GST is going to severely hurt home construction.

Perut notes the new tax will be added to the eight-per-cent provincial tax.

"There are no cheap prices now and they're going higher, so I don't know what you can do so people can afford it," he says.

He estimates the average price of a house in North Bay is now about $200,000, including land.

Perut is sure that people will try to beat the tax by building this year. He has already heard a few people talk about it.

The 35-year veteran of the business is pessimistic about next year.

"I think it's going to slack down 50 per cent, myself."

Perut said, if it gets too tough, he may just opt for an early retirement from the business. "That's what it looks like."

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Title Annotation:Construction Report; effect of Goods and Services Tax
Author:Bickford, Paul
Publication:Northern Ontario Business
Date:May 1, 1990
Previous Article:Tax will add $2,000 to new home: builder.
Next Article:GST expected to reduce builders' costs.

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