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Opinion: Will First Time Buyer Incentive really help people into homeownership?

To recap, the new First Time Home Buyer’s Incentive will offer first-time buyers an interest-free loan, in the form of a shared-equity mortgage.

 Young family receiving keys from apartment / ShutterstockYoung family receiving keys from apartment / Shutterstock

The federal finance minister had been hinting for a while that his 2019 Budget would include new measures to help young people into homeownership, and earlier this week, his key new policy was unveiled.

To recap, the new First Time Home Buyer’s Incentive will offer first-time buyers an interest-free loan, in the form of a shared-equity mortgage, from the Canada Housing and Mortgage Corporation. The loan will be up to 10 per cent of the purchase price if you’re buying a new-build home, and up to five per cent if you’re buying resale. Only households earning under $120,000 a year are eligible, and the program is capped at four times the applicant’s annual household income, so it will only apply to homes where the mortgage value plus the CMHC loan is $480,000 or less.

The Budget document gave an example of how it might work. It said, “For example, if a borrower purchases a new $400,000 home with a five per cent down payment and a 10 per cent CMHC shared equity mortgage ($40,000), the borrower’s total mortgage size would be reduced from $380,000 to $340,000, reducing the borrower’s monthly mortgage costs by as much as $228 per month.”

The CMHC loan will have to be repaid, of course. The Budget document did not say when, but the current widespread assumption is that it gets repaid upon the eventual sale of the home. The loan is interest-free, but it’s a shared-equity mortgage, which suggest CMHC would get back a proportional cut of any uplift in the home’s value, in addition to the original loan amount, although this has not been clarified.

This new program has been met with some surprise, and a mix of positive and negative reactions.

Surprise because it’s glaringly similar to the largely unsuccessful, now-defunct B.C. HOME down payment loan program, which was introduced by the B.C. Liberals when they were in power, and scrapped in 2018 by the B.C. NDP government. That program saw relatively little uptake, as many buyers seemed unenthusiastic about the province sharing a small slice of their home.

Positive reactions on the feds’ new measure have come largely from the real estate and development industry, which have lauded the attempt to not only aid first-time buyers in getting into homeownership, but also to balance any increased demand by encouraging the purchase of new homes, which should theoretically boost supply. This is a well-thought-through move on the part of the Liberals – whether it will work in practice remains to be seen.

Critics pan upper limit

Critics, however, have slammed the new incentive, for two key reasons. First and foremost, they say that the upper home price limit of $480,000 means that the program will have the least significant effect in the most expensive urban regions where it is most needed.

But does that mean that the price limit should have been increased – let’s say, to a more widely encompassing $700,000?

After all, nobody is criticizing the household income eligibility level of $120K a year – such a limit has to be set, and that seems fair. And an applicant-household earning less than $120K really shouldn’t be taking out a home-purchase loan of more than $480K. It would have been more irresponsible of the Liberals to encourage those households to make pricier home purchases than that. (The only people of that income group who should buy a pricier home should be those with a substantial additional down payment, who likely don't need this loan.)

The question then becomes whether a first-time buyer can get into an expensive real estate market like Metro Vancouver or Victoria for $480K. The kneejerk reaction has been something along the lines of, “You can’t buy a shoebox for that in Vancouver!”

Well, a quick search of current listings (March 21, 2019) shows there are just over 2,000 attached resale home listings in the Greater Vancouver and Fraser Valley board regions under $480K (admittedly only a handful of detached houses, but nobody starts in a detached house). Sure, that wide catchment includes inexpensive areas such as Mission, Maple Ridge and Pitt Meadows. But there are 98 such listings in Vancouver alone, and hundreds in great starter-home areas like Surrey, Langley and New Westminster. In the Greater Victoria area, there are around 300 resale homes currently available for that price or less. Unfortunately there’s no single source of data on how many new presale homes are available for under that price, but they do exist, especially in places like Langley and Abbotsford, and around the capital region.

Cheap, but not free, money

The other criticism is that the federal government isn’t really offering anything – the buyers are simply borrowing from a cheaper source, as the loan is interest free. But with a federal budget that is not yet balanced, expecting the feds to hand out more than a billion dollars in permanently free money is highly unrealistic.

So will this new measure help people into homeownership, even in pricey cities? I think yes, some people, a bit.

For those who are motivated to buy, this is cheap – not free, but cheap – money that they’d be fools to turn down. The new policy is probably not significant enough to cause a rush of demand, and it may help boost new supply a little. So although it isn’t a cure-all for affordability (nothing is), we do have reason to hope it’ll help a good number of people get out into homeownership without making affordability worse.