ANALYSIS: Finance Minister Bill Morneau’s odd plan to help homebuyers won’t help with housing affordability
But who told him Canada has a homeownership problem?
Homeownership rates in Canada are among the highest in the developed world. Even among young people, homeownership rates are high compared to our peers with more than 40 per cent of households led by people under 35 owning homes. And yes, even in Toronto and Vancouver, homeownership rates are high relative to those cities’ global peers.
“We take issue with the notion that Canada has a home ownership problem in the first place,” Royal Bank of Canada economist Robert Hogue wrote in a pre-budget note published on Feb. 28.
If there is a problem in the Canadian market, Hogue wrote, it was “the lack of housing options that ordinary Canadians can afford in some of our country’s larger markets. Let’s treat the source of the problem, not its symptom.”
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In other words, we have a supply problem, and to put a point on it, a problem with the supply of affordable housing.
So does Morneau’s initiatives in the budget help with that?
I asked Hogue on Wednesday, after he’d read through the budget.
“Ultimately, these are demand-side measures,” he said. “What it’s likely going to do is raise prices and will reverse any kind of benefit. It’s not clear to us that [these measures] will unleash new construction.”
Hogue was not alone. Many economists took a look at Morneau’s plans to help out new homebuyers and figured they were a solution looking for a problem.
“These policies make affordability issues worse,” Beata Caranci, TD Bank’s chief economist, told me in the budget lockup on Tuesday before releasing her bank’s scorecard on Morneau’s budget.
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But it’s not just the Bay Street gang coming to this conclusion.
“There is no shortcut to housing affordability,” David Macdonald, senior economist with the progressive think-tank Canadian Centre for Policy Alternatives, wrote in his commentary on the budget.
“There is plenty of money in previous budgets for affordable housing focused on low-income households. These are laudable and important efforts, however, they won’t necessarily have a big impact on middle-class renters. That group needs purpose-built rental apartment buildings, in other words — not condos — to reduce high rental costs while they wait out housing prices. Measures on that front were much less a focus in this budget.”
There were two key measures that combined, will cost the government more than $1 billion.
First, the government increased the maximum amount a first-time homebuyer can withdraw from an RRSP for a down-payment. The maximum used to be $25,000. Now it’s $35,000.
The second measure is a little more complicated and involves the federal government’s mortgage insurance agency — the Canada Mortgage and Housing Corporation (CMHC) — becoming what amounts to a part-owner of Canadians’ homes. The CMHC will essentially provide a small interest-free loan to help with a home purchase and in exchange, take a small equity stake in that home. The homeowner repays the CMHC when the home is sold.
Combined, those measures will stimulate demand for entry-level homes but without a similar spur in supply, it’s only going to push up prices. Caranci’s shop puts up a number on it, figuring these measures alone will push up housing prices — and sales — anywhere from 2 per cent to 5 per cent.
And in any event, the program design in each case seems a little odd.
Are there really a lot of young adults in their late 20s or early 30s, single or married, who already have $35,000 socked away in RRSPs? I asked around my 30-something friends and none of them knew anyone who had that kind of cash already socked away a few years into their working lives.
And even if there are those people, are they the kind of people that really need help? This measure seems designed to help out wealthy people who are not in the middle class and have no intention of falling back into it.
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Meanwhile, this new CMHC program which won’t roll out until the fall is available only to those who have a household income under $120,000. But the purchase price of the home in the program cannot be more than four times the annual income of that household. That effectively caps this program at homes costing $500,000 or less. ($480,000 maximum in insured mortgage and incentive, plus the down payment.)
Now in a lot of markets in Canada, there’s probably a healthy choice of homes under $500,000. Indeed, the average cost of a new home in Canada — not including the Toronto or Vancouver markets — is about $371,000.
But in the Greater Vancouver Area the average home costs about $925,000. In Toronto, the average is around $765,000. Those are two major metropolitan areas where first-time homebuyers are struggling most to find affordable homes.
It’s hard to see how a program designed to help buyers of $500,000 homes is going to work in those and other high-priced urban markets.
“Relief for first-time homebuyers is pretty meagre for young people living in our two most expensive regions,” wrote Sherry Cooper, the chief economist at Dominion Lending Centres.
The government did take modest steps to expand an initiative to increase the construction of rental housing and will let municipalities compete in a contest, with federal cash as the prize, to come up with ways to “unlock new solutions for Canadians searching for an affordable place to call home.”
Still, there’s not going to be nearly enough new supply coming online to deal with the intended boost in demand these programs are designed to deliver. And when demand outstrips supply, prices tend to rise.
“The affordability benefit is wiped out and we’re back to where we started,” Macdonald said.
As CIBC economists Avery Shenfeld and Andrew Grantham wrote, “Since such programs enhance demand, and therefore lean a bit against house price declines, the real work to address affordability has to come on the supply side.”
But in Morneau’s eyes, all these economists don’t know what they’re talking about.
“We think you’re wrong,” Morneau said on Tuesday in the budget lockup when I challenged him with the conclusions of the experts. “We know that it’s not going to make an impact on the overall market from a pricing standpoint meaning people are actually going to be better off, more optimism in terms of housing and it’s the reason we’re very excited about this measure.”
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