B.C. Premier Christy Clark caught almost everybody by surprise on December 15 with the unveiling of a program to give qualifying buyers no-interest loans of up to $37,500 for down payments on their first homes.
Beginning in January, the Home Owner Mortgage and Equity (HOME) Partnership Program will lend buyers pre-approved for an insured mortgage 5% of the purchase price (to a maximum of $37,500) for 25 years, with no interest or payments during the first five years. After that, participants in the program pay interest at market rates. Participants must be Canadian citizens or permanent residents with a household income of less than $150,000 and the purchase price cannot exceed $750,000.
“People need a partner in scraping together that first down payment,” Clark said in explaining the initiative.
The move was applauded by Mortgage Professionals Canada. “This single action by the Clark government will ensure that tens of thousands of middle-class British Columbians will be able to move from renters to homeowners,” association president Paul Taylor said in a release.
But others were sharply critical, insisting the program only blows more air into a housing bubble on the verge of collapse. While the federal government is tightening mortgage lending rules with stricter stress tests for buyers, “Our provincial government’s response is to encourage people to take on more debt and to subsidize that debt,” NDP housing critic David Eby said. Green Party leader Andrew Weaver labeled it a “Band-aid solution” to the housing affordability crisis. Speaking to The Tyee, Nanaimo-based accountant Ken Dreger lamented that, like American banks during the 2008 financial crisis, “The B.C. housing market’s become too big to fail.”
All along, Canada’s purported housing bubble has posed two public-policy problems: affordability and financial risk. The HOME program addresses the former, at least for one segment of the population. What it doesn’t ameliorate—and may indeed exacerbate—is the financial risk. It creates a kind of made-in-Canada subprime mortgage market where first-time buyers see the barriers to entry into the housing market lowered, only to have full debt-servicing costs kick in five years later. If the participants in the program are not making more money by that time or mortgage rates have increased significantly, or both, they could find themselves strapped and in a position to default.
Those risks are real, says Lauren Haw, CEO of digital real estate brokerage Zoocasa, and she hopes that the people who take advantage of the program give them serious thought. However she dismisses the comparison with the U.S. subprime crisis, in which people who could not really afford one home ended up buying two or three; the HOME program will be limited to principal residences for first-time buyers only—and ones who have already met mortgage requirements. It will not so much introduce new buyers to the market as push people who would buy an entry-level condo into a two-bedroom or a townhome.
“A benefit I haven’t heard anybody else talking about here is that by bumping them into the next bracket they won’t be forced to move in the next two or three years” as they partner up or have children, Haw says. They will stay in that first home longer and save on transaction costs such as Realtor commissions, moving expenses and the property transfer tax, leaving them with more home equity in the long run, she argues.
Haw likewise discounts predictions that the $37,500 boost to down payments will see prices increase accordingly. “It’s not a big enough buyer pool to affect prices by that amount,” she says.
But Central 1 Credit Union senior economist Bryan Yu isn’t so sure. He expects the assistance for first-time buyers to soften the Metro Vancouver market’s landing from sales and price declines triggered by Victoria’s 15% tax on foreign buyers in August and tighter federal mortgage rules introduced in October. (Prior to the announcement, Central 1 had forecast home price declines of 4% in Metro Vancouver in 2017.) “What could happen here is it could be pretty inflationary in that entry-level market,” he says.
While HOME allows first-timers to get into the market sooner than they might have otherwise, it does little to affect the overall cost of shelter, including the rental market, Yu points out.
At the same time he doubts the program will affect enough buyers to appreciably increase the broad financial risk. (The government projects it will help 42,000 buyers over the next three years, to the tune of $703 million.) What it does do, in advance of a provincial election to be held in May, is show the government, long criticized for standing on the sidelines, to be doing something about affordability. The same goes for the foreign buyer tax, which marked a turn in the direction of single-family house prices in Vancouver. Good politics, in other words, if not necessarily good policy.
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