Tuesday, June 12, 2018
By NEIL HARTNELL
Tribune Business Editor
A "huge" number of Bahamians will be priced out of home ownership by the budget, a prominent developer warned yesterday, revealing the cost of a popular housing model will rise $23,000.
Franon Wilson, Arawak Homes president, told Tribune Business that the rate hike and changed real estate taxation structure will "have a bigger impact than VAT's introduction" back in 2015.
He disclosed that the price for Arawak Homes' three-bedroom, two-bath "lot and home" package will rise from $192,000 to $213,000 as a result of the 2018-2019 budget's austerity measures, with many Bahamians unable to afford the "jump" given largely stagnant salary levels.
While the 60 percent increase in the VAT rate will raise construction costs, the government's decision to revert to the old real estate transaction tax structure - going back to ten percent stamp duty from the current 7.5 percent/2.5 percent split between duty and VAT - threatens to spike developer costs that will be passed on to home buyers.
Mr Wilson, a former Bahamas Real Estate Association (BREA) president, said he was "keeping my fingers crossed" that the prime minister will realise the proposed changes threaten to undermine the government's much-touted goal to make home ownership more accessible and affordable for Bahamians.
His warning comes just after the Senate passed the Access to Affordable Homes Bill 2018, which aims to provide serviced lots for less than $30,000 to Bahamian home purchasers. Incentives, such as Customs duty and excise tax exemptions, will be provided for a two-year period to persons who move to construct their own homes on the property.
Suggesting that the budget's measures could void such ambitions, Mr Wilson told Tribune Business of the changes: "This will be a bigger impact than the introduction of VAT.
"The reality is we have a three-bed, two-bath house and lot package now at $192,000, brand new. With the changes, that same house will now be $215,000."
That represents a material 12 per cent increase, and the Arawak Homes president added: "People's salaries have not moved at anywhere near that pace. As a result, what is going to happen is newcomers will have to look at smaller houses.
"At the end of the day, there are a lot of people that can't afford that jump, and it will be quite a while before salaries increase back to that same level. That is the reason why there is such an impact. There are a lot of people trying to get in at $192,000."
Mr Wilson said the real estate-related VAT changes, which are due to take effect from July 1, were especially poorly-timed for the commercial banking industry's mortgage campaigns.
He added that the three Canadian-owned banks, CIBC FirstCaribbean, FINCO (RBC) and Scotiabank, were all offering reduced interest rates once qualified buyers met certain downpayment and other criteria, as they bid to deploy more than $2 billion in surplus assets for lending purposes.
Describing the likely impact on efforts to revive the mortgage market as "sad", Mr Wilson added: "We are trying to find people who own a lot, or want the package, to build now. Now is the time.
"People are really doing it. We are seeing a change, with more people coming in and moving forward. Once these [Budget] changes happen, those people trying to make it will get cut off at the bottom.
"There are a lot of people the banks are looking at, considering and moving forward with, but as a result of the changes they're not going to be able to afford it. And whatever they can afford, they will have to cut back a lot."
The Arawak Homes chief suggested some may have to shrink their design plans, going from four-bed to a three or two-bed home, or drop design features such as walk-in closets.
"There are a lot of changes people will have to make," he told Tribune Business, "because what the bank will qualify you for will be cut down significantly. It's a huge impact. A significant amount of people will have a really hard time."
Mr Wilson said Dr Hubert Minnis' goal of expanding affordable home ownership meant he was "keeping my fingers crossed" that the Government would realise the potential negative impact of the proposed Budget and reverse course.
"We are sure the Government's intention is not to put people in that position not to own a home," he added. "That is the key to what has to change.
"It's one where we listened to the Prime Minister with great interest when he spoke about home ownership, and went on record to say how hard it is for Bahamians to own their own home.
"I'm hopeful, as the Government reflects on this change and feedback comes in, if the goal is for more people to own their own home, the change will come."
Should no change occur, Mr Wilson warned that the proposed reforms threaten to add to a government housing list that is already thousands of persons long.
The proposed Budget tax changes threaten a potential 'double whammy' for home buyers. Apart from the increase in materials and construction services costs as a result of the higher 12 per cent rate, VAT's removal from the 'transaction tax' structure effectively means developers are being treated as VAT 'exempt'.
This will have the likely-unintended consequence of increasing real estate costs for both Bahamian and international buyers, as developers such as Arawak Homes can no longer offset their 'input' VAT.
Developers currently 'net off' the VAT they pay on construction materials, and the likes of contractor, engineer and architect bills, against the 'output' tax whenever a property is sold. The Budget's altered tax structure, by eliminating VAT, robs developers of the ability to claim back already-paid input tax, thus saddling them with a major increase in development costs that will likely be passed on to buyers.
Mr Wilson yesterday backed calls for a phase-in or 'transition' period for real estate projects already underway, given that the VAT increase's magnitude was potentially significant enough to wipe out profit margins and force developers to sell remaining inventory at a loss.
"I don't know what percentage of the market that represents," he told Tribune Business of Arawak Homes' $192,000 price point, "but that means a whole lot of people in the Commonwealth of the Bahamas will not be able to afford a home."