The federal government released the much-anticipated Budget 2019, with homebuyers, builders and others awaiting measures to address housing issues.
And in short, it comes up, well… a little short.
In the end, it was the way the federal government chose to help millennials buy a first home that was a surprise, not the fact that it did. Budget 2019 included a plan that will see CMHC share the cost of owning a home with a first-time homebuyer. We believe the CMHC First-time Home Buyer Incentive, along with an increase in the amount that can be taken from an RRSP for a down payment on a first home, will bring temporary relief at best. However, the measures will do little to ease millennials’ elevated debt levels and could have a distortionary effect on the housing market over the next several months.
First-time homebuyer help
In the end, it was the way the federal government chose to help millennials buy a first home that was a surprise, not the fact that it did. They included a plan that will see CMHC share the cost of owining a home with a First-Time Home Buyer.
The Incentive would allow eligible first-time homebuyers who have the minimum down payment for an insured mortgage to apply to finance a portion of their home purchase through a shared equity mortgage with Canada Mortgage and Housing Corp. (CMHC).
About 100,000 first-time buyers would benefit from the Incentive over the next three years. Since no ongoing payments would be required with the Incentive, Canadian families would have lower monthly mortgage payments.We believe the CMHC First-time Home Buyer Incentive, along with an increase in the amount that can be taken from an RRSP for a down payment on a first home, will bring temporary relief at best. However, the measures will do little to ease millennials’ elevated debt levels and could have a distortionary effect on the housing market over the next several months.
Details suggest incentive is an interest-free loan
CMHC will offer shared equity mortgages to qualified first-time buyers (with household income of less than $120,000)—a financing scheme that will provide up to 10% of the value of a newly constructed home or up to 5% of the value of an existing home. The point is to reduce the amount a first-time homebuyer needs to borrow as a (first) mortgage and pay every month to service that debt. The savings could potentially be in the hundreds of dollars each month. No payments on the CMHC incentive will be required until the owner sells the property. While full details (including on whether CMHC will share any capital gain on the property) won’t be released until later this year, the information provided to date leads us to believe the incentive will effectively be an interest-free loan.
As rumoured, the government also announced an increase in the Home Buyers’ Plan that will allow first-time homebuyers to take out a maximum of $35,000 from their RRSP to make a down payment on a home (up from $25,000 currently).
These measures could inflate prices. So will millennials be in a better position to buy their first home? Perhaps not for long.
As we have argued previously, policy measures such as these that ultimately boost home demand without really addressing housing-supply gaps in short order are poised to inflate prices. Any near-term benefits therefore could be quickly reversed by a loss of affordability arising from higher property values. Perhaps the more perverse effect is that these measures could add to millennials’ heavy debt loads.
The program’s conditions restrict the combined value of the insured mortgage and incentive amount to four times a household’s income. Given that only first-time buyers with income of less $120,000 will be considered, this caps that value at $480,000. Adding in the buyer’s down payment (equity contribution), the maximum property value of the home purchased will range from $505,000 (5% down payment) to $600,000 (20% down payment). That may be enough to buy a small- to medium-size condo apartment in those markets but probably not a family-friendly home.
Industry reaction
“The Building Industry and Land Development Association (BILD) agrees with (Federal Finance Minister Bill Morneau’s) comments that there aren’t enough homes for people to buy or apartments for people to rent,” says Dave Wilkes, president and CEO.
“BILD feels the policies presented in (the) budget are a step in the right direction to help first-time homebuyers. We will continue to advocate for a review of the stress test so that first-time homebuyers can realize the dream of homeownership. Supply challenges still exist and are at the centre of the current unbalanced market, and we call for action on these by the provincial and municipal government.”
Supply challenges in the Greater Golden Horseshoe are serious, and Budget 19 fails to address them.
The Canadian Home Builders’ Association (CHBA) had been recommending a shared appreciation mortgage approach for some time, as a tool to help those who can’t get into homeownership but have the means to pay rent.
The modification to the RRSP Home Buyers’ Plan will help get Canadians into their first home, but will also act as a burden because the loan has to be repaid within 15 years, including a minimum of 1/15th per year.
“This means that, in the years following their home purchase, a homeowner has the additional financial responsibility of repaying their RRSP,” says James Laird, co-founder of Ratehub Inc. and president of CanWise Financial.
Important details of the First-Time Home Buyer Incentive program have yet to be released. For example, says Laird, it remains unclear whether the government would take an equity position in homes, or whether the assistance would act as an interest-free loan.
“This is an important distinction because if the government is taking an equity stake in a home, the amount the homeowner would have to pay back would grow as the value of the home increases,” he says.
The very launch of the program is surprising, Laird says, given that the BC Government implemented a similar measure a couple years ago, with unsuccessful results, and it was terminated in 2018. First-time home buyers found it difficult to understand and unappealing to have the government co-own their home.
Let’s do the math
Under existing qualifying criteria, including the stress test, homebuyers can qualify for a house that is 4.5 to 4.7 times their household income.
Under the new First-Time Home Buyer Incentive, however, the government has set a purchase limit of four times household income for the mortgage, plus the amount provided by the government, according to Ratehub.
By participating in this program, first-time homebuyers effectively reduce the amount they can qualify for by about 15 per cent, and their monthly mortgage payment naturally decreases in lockstep.
A household with $100,000 of income, putting a minimum down payment of five per cent, can currently qualify for a home valued at $479,888 with a $2,265.75 monthly mortgage payment.
Affordability calculations
The maximum purchase price for the same household, if they participate in the first-time homebuyer incentive, drops to $404,858.29 with a five-per-cent minimum down payment. The total mortgage amount would then be $400,000 (or four times their household income).
Mortgage payment calculations
If the household took a five-per-cent incentive from the government (for resales), their mortgage amount goes to $378,947.37, and monthly payment is now $1,810.90.
If the household took a 10-per-cent incentive, (for new homes) their mortgage amount goes to $357,894.73, and monthly payment is now $1,710.29.
