607 
Do lower taxes lead to more construction?
The simple answer has to be yes, at least when analyzed in isolation. At the end of the day, taxes are a cost, and higher construction costs necessarily lead to less construction than otherwise.
But the story is more complicated when tax cuts are introduced in the real world.
In late 2023, two tax policy changes — the removal of the federal GST and Ontario PST on rental construction — aimed to boost rental housing development. They were met with much fanfare. However, data from UrbanToronto reveals that while these measures had some impact, their effects were relatively temporary and limited.
Rental Construction Response: A Temporary Boom
Figure 1 looks at the rental units as a proportion of all new dwellings that began construction in the Greater Toronto and Hamilton Area (GTHA). This metric reveals that the tax cuts incentivized a big surge in relatively more rental units (compared to condos and freehold units). In the GTHA, the proportion of new rental unit construction starts jumped from 16% in the second quarter of 2023 to 27% in the third quarter, which is when the federal government announced the cut in GST. The effect was much more prominent in the City of Toronto proper, where rental construction starts accounted for 51% of all new housing starts after the announcement, more than triple the rate from the previous quarter.
However, the effect seems to be short-lived. Despite Ontario also announcing a cut in PST the following quarter, rental construction starts in both the GTHA generally and the City of Toronto specifically had dropped to pre-tax-break levels by the end of 2024.
This suggests that the tax cuts did not incentivize new construction per se, but rather represented a "shuffling of chairs" of sorts: some rental units that were already scheduled to be constructed began sooner than anticipated, and perhaps other projects that were initially borderline profitable as condo units were quickly reimagined as rental units instead. Moreover, there is the question of whether the tax cuts led to any changes at the development proposal stage; that is, did developers start proposing more relatively more rental units for future projects?
Shifting Trends in Housing Construction and Rental Proposals
Figure 2 illustrates the total number of new housing starts in the GTHA and the City of Toronto, from 2022 to 2024. Unambiguously, the total number of units that began construction has declined under the new tax regime.
While this doesn't imply that the taxes themselves somehow induced developers to build fewer homes (it could very well be the case that despite the cost savings here, inflationary and credit pressures were increasing at a faster rate), it does clarify that housing construction is not a simple matter of pulling on a single policy lever. There are many considerations that go into the timing, let alone the quantity and quality, of construction; sales taxes on construction materials for a small subset of housing is demonstrably only a small consideration.
Finally, figure 3 looks at the future. Specifically, how are development proposals (such as rezoning applications) responding to these tax cuts. Since almost all large scale construction in the GTHA requires some level of approval that can take years to obtain, looking at the data for proposals gives an insight into how developers are thinking about the future. If more rental units are being proposed in the wake of the tax break, then we can say that the policy greatly influenced the construction of rental housing.
However, the data suggests the opposite happened: that developers proposed fewer rental units after the new tax change. Despite the public announcements of some developers that they had changed the tenancy type of some prior plans from condo to rental to take advantage of this new policy, the aggregates suggest the story is more complicated. In fact, in the six quarters after the announcement of the tax breaks, the proportion of rental units being proposed never reached the same highs as the six quarters prior. This pattern holds for both the GTHA in general, and the City of Toronto specifically.
Conclusion
The removal of HST on rental construction marked a well-intentioned effort to address housing affordability. However, as the data shows, these measures alone are insufficient to create a lasting shift in rental housing development specifically, or the housing market generally. There are many reasons for this.
Throughout 2023 and 2024, the construction industry was facing multiple headwinds. Inflationary pressures, while slowing down, still had increased the cost of materials significantly from pre-2020 levels. Changes in immigration policy has negatively affected the housing demand outlook from many analysts. Large increases in local development charges have become a political hot button as well, even inviting commentary from federal politicians.
Sales taxes on construction materials represent only a small proportion of the total cost of developing new housing. So ultimately, it should be no surprise that even reducing these costs to zero had little impact.
Ultimately, bigger changes in policy are required in order to make a more noticeable impact—both for the present construction market, as well as the future plans of developers.
***
Whether you’re a developer, planner, or investor, UTPro offers the data needed to track growth patterns and seize new opportunities. Explore the full capabilities of UTPro to see how its powerful insights can support your vision for the future of the Greater Golden Horseshoe.
Contact us with your queries or to schedule a demo.
