Arguably the most talked-about measure of the Liberals’ latest federal budget is the First-Time Home Buyer Incentive.
Under the plan, the government would help some first-time buyers by advancing up to 10 per cent of the purchase price of a home so they can take out a smaller mortgage and keep monthly payments lower.
The program would be administered by Canada Mortgage and Housing Corp. (CMHC), the crown corporation that insures most Canadian mortgages on homes purchased with a down payment of less than 20 per cent of the price. Indeed, the new incentive would only be available for CMHC-insured mortgages.
There are number of other caveats. Buyers must pony up their own cash for a down payment — at least five per cent of the home price. And they must have a household income below $120,000 a year. Also, the amount of the insured mortgage plus the CMHC incentive would be capped at four times the home buyers’ annual incomes, or up to $480,000.
That means the most expensive home you can hope to buy under the plan would be worth somewhere between $500,000 and $600,000, depending on the size of your down payment.
The CMHC would give out up to $1.25 billion in incentives over three years starting in September. Buyers of newly-constructed homes would get 10 per cent of the home price, while those purchasing an existing property would get five per cent.
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That’s what we know about the program for now. But there are a number of missing details and bigger questions surrounding the proposal:
How exactly will you need to repay the money?
Home buyers would eventually have to repay the CMHC, either when the home is sold or, if they wish, sooner. It’s not clear, though, whether homeowners would simply repay the sum the CMHC originally advanced — which would make the money an interest-free loan — or whether the government would get a share of the sold price — five per cent or 10 per cent, depending on the equity share it originally contributed.
This is an important detail, and some simple math shows why. Say you’re buying a $400,000 home with a 10 per cent CMHC incentive worth $40,000. If your home value rose to $600,000 over the years, a zero per cent loan would mean that you’d still have to return only $40,000. An equity-share type of arrangement would mean you have to return $60,000, which is a much better deal for the government and taxpayers.
If your home value dropped, say from $400,000 to $300,000, you’d still be on the hook for the original $40,000 at resale with a zero per cent loan. On the other hand, a shared equity arrangement would mean that the government’s 10 per cent slice of your home is now worth just $30,000 — better for you but a loss for taxpayers.
How exactly will your income be assessed?
Another hazy part of the plan is how that $120,000 household income cap will be applied. Presumably, the government will do more than just assess your income in a single year. Otherwise, there would be a strong incentive for some buyers to stay below the cap just so they can get the housing incentive, as personal finance commentator Preet Banerjee noted in a tweet.
Having a sharp income cut-off also means that home buyers with incomes just under $120,000 would have a significant advantage over those just above the threshold, who would not qualify for the CMHC incentive.
How would the new policy impact home prices?
The basic worry here is that if the government helps more people buy homes without a corresponding increase in the number of available homes for sale, buyers will bid up real estate prices.
TD economists estimate the new mortgage incentive could help push up home sales and prices by between two and five per cent by 2020. But their calculation also includes the expected effect of another budget measure that would allow first-time homebuyers to use up to $35,000 — rather than $25,000 — of their funds held in a registered retirement savings plan (RRSP) for a home purchase without tax consequences.
Speaking only about the CMHC incentive, Heather Tremain, CEO of the housing non-profit Options for Homes, characterized the likely impact on prices as “marginal.”
Noting that the government is committing only around $400 million a year to the program, Tremain argues it will have a limited impact.
“This is a targeted measure for [home buyers] who are credit worthy but have been challenged by the stress test,” she told Global News.
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The federal government’s stress test ensures borrowers will be able to keep up with their debt repayments even at higher interest rates.
Thomas Davidoff, a professor and housing expert at UBC’s Sauder School of Business, is of a similar mind. If the program is structured as shared equity rather than as an interest-free loan, it will have a moderate impact on housing demand, he predicts.
Davidoff was a harsh critic of a 2016 B.C. program that gave interest-free loans to first-time homebuyers. The government was topping up British Columbians’ down payment with a contribution of up to five per cent of the purchase prices (for a maximum dollar value of $37,500). The loan was payment- and interest-free for five years.
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The program was essentially a “give-away,” Davidoff said. The provincial government was not taking an equity stake and was effectively lowering the amount buyers would have to save for a down payment, he noted. It was a fantastic deal for buyers and one that had a “very large” impact on housing demand, which only increased pressure on prices.
A shared-equity arrangement, though, would be less attractive, according to Davidoff, which is why he expects a smaller buyer take-up and a limited impact on prices if the federal government opts for that scheme.
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Who would benefit?
With a maximum home price range of $500,000-$600,000, the program is likely to be of little help to buyers in Vancouver and Toronto, where average home prices sit at $925,000 and $765,000, respectively.
Because of this, take-up for the program in the country’s two most expensive real estate markets will be minimal, predicted John Pasalis, president of Toronto real estate brokerage Realosophy.
From Pasalis’ point of view, the government faces a fail-fail predicament on this one. If the incentive proves popular, it will push up home prices. If it doesn’t, it means it only made a difference for a small number of homeowners. He believes the latter is more likely.
Davidoff thinks the measure could still make an important difference in less pricey markets. The average home price in Canada, excluding Vancouver and Toronto, is around $370,000, fully within the scope for the new program.
In these markets, the CMHC incentive would “take the edge off the stress test,” Davidoff said.
Under the new program, mortgage applicants still have to qualify under the federal stress test. But the incentive would essentially lower the bar for test takers, as applicants would have to qualify for a lower mortgage.
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What’s the risk for taxpayers?
Another question surrounding the plan: what’s the chance that the government — and by extension, taxpayers — would lose money on this?
Options for Homes runs a share-equity program for low- and middle-income families that’s remarkably similar to what the federal government described in the budget. The non-profit offers a “down payment loan” of between five and 15 per cent of the purchase price to low- and middle-class-families that qualify for a conventional mortgage. When the homeowner sells or moves, the non-profit takes between five and 15 per cent of the sold prices, depending on how much was loaned.
Options for Homes has been operating for 25 years and helped more than 3,600 households buy a home. It has only seen five homeowner defaults, three of which were due to exceptional circumstances related to a specific building, Tremain said.
The lender’s risk in home-equity share programs is low, according to Tremain.
“These are homeowners who live in their homes,” she said. “If real estate prices drop, they’re going to say, ‘We’ve gotta stay and hold on.'”
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The long-run rate of appreciation for residential real estate is around three per cent, so the chances that the home purchase price would be lower than the inflation-adjusted sold price at the end of, say, a 25-year mortgage are close to nil.
Still, the real risk is homebuyer defaults in a recession, Pasalis said. People often struggle to make mortgage payments when they lose their job or their hours at work are trimmed. And the kind of homebuyer who would need to resort to the CMHC incentive to buy a home would likely be more sensitive than average to this kind of financial shock, he added.
One way in which the government could lower its exposure to this kind of risk is basing the rate of CMHC insurance on the size of the home buyers’ down payment, rather than the size of the mortgage, Davidoff said.
CMHC currently charges higher insurance rates for smaller down payments. This is because, the more a buyer need to borrow compared to the value of the home, the riskier the loan and the higher the housing default-insurance premium.
But a buyer who makes, say, the minimum five-per-cent down payment, and gets a five-per-cent top-up from CMHC incentive, would have to get a mortgage worth only 90 per cent of the home value, rather than 95 per cent.
Davidoff hopes the housing agency will choose to charge such a buyer the higher premium associated with a 95-per-cent mortgage. But, as with so many other things around this policy, that detail remains TBD.