Renovations seen as key to saving housing market

One of the showpieces of yesterday's budget is a new home-renovation credit program, which comes with an estimated price tag of $2.5-billion over the next fiscal year and is aimed at supporting the faltering housing market.

While the government had already signalled its intention to focus on housing, the depth of its commitment was a surprise, said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.

"I think the view there is that they're looking for a way to support the economy short-term," Mr. Porter said in an interview. Home renovations have the appeal of keeping most of the economic benefit in Canada, he said.

The plan will offer a tax credit for 15 per cent of the cost of qualifying home renovations in the $1,000-to-$10,000 range. The maximum payment per household is $1,350, and the program expires on Feb. 1, 2010.

The plan is estimated to make up more than 10 per cent of the cost of the total stimulus measures in the budget for the year, Mr. Porter said.

In a report, BMO noted many Canadians in danger of losing their jobs won't be enticed to renovate by a tax credit.

But, the deadline means enough people could push forward their kitchen or bathroom renovation plans that it could be "surprisingly effective" as a near-term economic stimulus, Mr. Porter said.

More debatable in the face of the economic downturn is how successful new incentives will be for first-time home buyers, he added.

One is the expansion of the Home Buyers' Plan, which was introduced in 1992 and allows first-time buyers to withdraw registered retirement savings plan funds toward their purchase. The withdrawal maximum is being raised by $5,000 to $25,000.

There's also a tax credit of up to $750 for first-timer buyers for their closing costs.

These moves are unlikely to lower the barrier for many first-time buyers, gripped by plunging consumer confidence, said John Andrew, assistant professor, School of Urban and Regional Planning, at Queen's University.

"Many of these people will have seen their life savings decimated by the financial markets, and may need to postpone buying their first home, perhaps by years," he said.

Investors will likely also be reluctant to crystallize their losses by pulling money out of RRSPs whose values have fallen dramatically, he added.

The moves were applauded by industry groups as a means of restoring some confidence to a market in which existing home sales have plunged to a six-year low, and new home construction is on the decline.

"We are very supportive. We see it as a good news story and a welcome measure," said Jim Murphy, president and chief executive officer of the Canadian Association of Accredited Mortgage Professionals.

(prepared by Lori McLeod/Globe and Mail)