Photo: James Bombales
The Canadian federal government’s newly announced First-Time Home Buyer Initiative isn’t the first of its kind.
The program, which was outlined in the 2019 federal budget last month, would see the Canada Mortgage and Housing Corporation effectively pair with first-time homebuyers to purchase properties, gaining an equity stake along the way.
That’s not unlike a scheme UK policymakers introduced several years ago under the Help to Buy program, through which applicants could take advantage of similar equity loans.
With that initiative set to expire in 2021, Livabl has taken a look at what it is accomplishing across the pond — and how that should shape expectations for Canada’s policy.
Canada’s plan not as ‘generous’ as the UK’s
While the initial program outline leaves many questions unanswered — does the government charge interest, too? How are profits and losses on home sales split? — one thing is abundantly clear out of the gates. The feds are offering up to 5 percent the value of a resale home and 10 percent towards a new home. That’s well short of the British variant, a recent Capital Economics report notes.
“The UK introduced an even more generous scheme in 2013, under which the government will take an equity stake of 20% of the value of a new home, or up to a substantial 40% in London,” writes Stephen Brown, senior Canada economist with the UK-based economic research firm.
Keep in mind the Canadian program also caps the qualifying income at under $120,000 and the maximum mortgage amount at four times that, capping the potential purchase price at $565,000, meaning limited relief for buyers in expensive markets like Toronto and Vancouver, which have median prices of $670,000 and $710,000, respectively.
The Canadian initiative won’t have as much of an impact on the housing market as the UK’s
The larger the subsidy, the greater the appetite for such programs. “Uptake of this [UK] scheme was very high and we think it boosted construction by 10% to 15%,” writes Brown. In 2016 alone, Capital Economics says there were more than 38,000 Help to Buy sales, representing over 40 percent of all new-home transactions.
Assuming, like the UK version, that there are no charges associated with the government-equity loan, Capital Economics forecasts the Canadian effort would “boost” housing starts by 5 percent “at the very most.”
“Overall, the equity loan scheme should have small positive effects on house prices, sales and construction across the country as a whole,” Brown predicts.
However, the First-Time Home Buyer Initiative provides more choice
Unlike the Trudeau government’s proposed program, the UK’s Help to Buy initiative limits buyers to the new-construction market. In doing so, it forces buyers to compete for more expensive homes and leaves them unable to look for more-affordable, older housing stock. “The premium of a new build… has risen,” Brown tells Livabl in a follow-up interview, referring to developments in the UK market since the Help to Buy program’s creation. He doesn’t anticipate this will happen in Canada to the same degree because the subsidy extends to the resale market.
Canada’s plan won’t increase homeownership rates in the long term
Because the UK program, especially as it is structured in London, offers such a large subsidy, some homebuyers who might never have been able to get into the market have gotten a chance. “When we’re talking about London, there are probably people that can afford the monthly mortgage payments but to save up a 40-percent deposit on a home — because the homes are so expensive — that’s going to take 10 to 20 years,” Brown explains. “That’s not really a practical aim for most people.”
Canada’s program isn’t an effective way to increase the homeownership rate, Brown suggests. “Basically, it’s just going to bring forward purchasers from the future,” he notes. “Anyone who would be able to afford the monthly payments, eventually they should be able to afford to save up for a deposit,” he explains.
But it can counteract headwinds from other policy moves
“It’s just a short-term measure really to boost the market, from our perspective,” says Brown. So Brown and company don’t view the First-Time Home Buyer Initiative as a game changer. But it does have a potential upside. “It can help to offset negative short-term measures as well,” he says, noting the year-old stress testing also introduced by federal policymakers.
The stress testing, which already applied to insured mortgages, was expanded to the uninsured segment last January. The move meant that even with a 20-percent downpayment, a mortgage applicant needs to qualify at a rate 200 basis points above what they are being offered from a bank. Since then, Canadian home sales and prices have taken a hit. Brown suggests the incentive could offset these losses “while reducing overall financial instability by limiting the amount people can borrow.”