Federal Budget Unplugged

Listening to the Federal Budget being announced this week was disappointing to say the least.  There were so many changes that could have been made to right the wrongs that have negatively affected housing affordability.  As we heard the introduction of the measures the Federal Government feels will spur market activity, it became clear that they are disconnected with reality and the issues that have kept buyers on the sidelines.

The main issue concerning Housing Affordability is, and always has been, supply.  As demand increased over the past few years, supply issues came to the forefront and the solution would have been to find ways to increase supply.  As you recall, Ontario’s Liberal government addressed the supply issue back in 2017, or at least they thought they did.  What they actually did was throttle demand by introducing ways to make it tougher for buyers by decreasing purchasing power for Ontarians.  Then came the stress test, which added another hurdle that would see purchasing power deteriorate further. This created one of the hottest rental markets in decades and drove rental prices through the roof.  Now people were faced with rents that were out of control as well as stringent criteria that saw them being declined for a mortgage.  It became quite clear that home ownership was even further out of reach due to the measures the government introduced to bring it back.  The Housing Market - which is the engine that drives our economy - came to a halt.  The spin off revenue that is put back into the economy off each home sale is said to be approximately $60,000.  All of the sudden, this disappeared.  Municipalities started to lose money from the loss in Land Transfer Tax revenues.  This caused some municipalities to raise property taxes or cut services to cope with the decrease in annual revenues.  The increase in property taxes to existing home owners continued to erode purchasing power and kept current home owners in their existing home thereby decreasing supply even more.  

Fast forward to this week’s “pre-election” Federal Budget.  Expectations were for supply issues to be addressed with concrete solutions (no pun intended), as well as a major overhaul to the Stress Test.  What we received instead was a lot of sizzle but no steak.  Let’s take a look at the two big “solutions” that were announced: 

1. An increase to the RRSP amount that first time buyers can put towards their home ownership dream 

2. The Shared Equity Mortgage Program that will see buyers receive an “interest free” loan of 5% of the purchase price for resale properties, and 10% of the purchase price on new builds.  A few conditions apply though, you must have a household income of less than $120,000, you cannot borrow (Mortgage plus Incentive) more than four times your household income, and you must pay back the incentive when you sell your home (details on any percentage you will need to pay based on capital gain in the property over the years will be released later this year).  

Great news right?  Before you decide on that, let’s break these down.  

Let’s take a look at the RRSP withdrawal amount first.  After ten years at $25,000, the amount has been increased $10,000 to $35,000.  This brings the total a couple can withdraw from their RRSP’s for their first home to $70,000.  Previously this amount would have been $50,000, so the extra $20,000 will certainly help.  To help with this increase, the government should have increased the repayment time from the current 15 years to possibly 20 year, or even 25 years to match the amortization period of a mortgage.  For the couple that does manage to have $70,000 collectively in RRSPs, the pressure of having to pay back an extra $20,000 in the same time just adds to their debt level and adds stress.  The bigger question remains “How many young couples have $35,000 each in their RRSPs for this to even be a consideration?”.  The reality is that these buyers have been in the workforce for a relatively short period of time, and even at the max contribution level for their entry level salaries, they wouldn’t be able to hit the $35,000 max, let alone a $25,000 withdrawal.  What could have been done to enhance this program?  Allow all home buyers to utilize the RRSP withdrawal option and provide an extra five or ten years to repay the same.  Without that, all we really have a pretty weak incentive that maybe 5% of the buyers out there could be in a  position to take advantage of.   

Now we get to the Interest Free, Shared Equity Mortgage.  In order to take advantage of this, your household income cannot exceed $120,000.  You must go through CMHC and have a minimum downpayment of 5% and maximum of 20%.   Your total debt (insurable mortgage amount plus your shared equity “incentive”) cannot exceed four times your household income.  For a couple making the max $120,000, their total for mortgage and the incentive cannot be more than $480,000.  Once you add in their downpayment amount, you’re looking at $480,000 being between 95% (for those putting 5% down) of the purchase price to 80% (for those putting 20% down) of the purchase price.  Therefore, the couple that makes $120,000 could purchase a home between $505,263 to $600,000.  Let’s think about this for a minute.  We were so concerned about home buyers hitting historically high levels of debt recently, so what did the government do?  The government has just authorized an increase to household debt by allowing buyers to purchase a home that they normally would not have been able to afford under current criteria.  Sure, they say it is interest free, but it’s still an extra 5-10% debt that will have to be paid back. This debt may be subject to an additional percentage depending not the capital gain on the property when you go to sell your home.  Details are to follow, but what could this be?  Could it be 2% of the capital gain?  5%?  10%?  You may save $100-$200 on your monthly payments with this “interest free loan” program but at what cost in the long run?  It’s concerning that we do not know the details for repayment as yet.  I’m pretty sure if any lender had come up with this strategy, the government would have been quick to deem it illegal and shut it down.  What if a Realtor had said, “I won’t charge you a 2.5% commission when you purchase this home, but when I sell your home we will split the profit”?  Unethical?  Cash Grab?  Those would be some of the ways to describe this practice for sure.  The other concerning fact about this initiative is that it does not take effect until September 2019.  Traditionally, the busy time for buyers and sellers ends in August.  Inventory is usually at a low by September.  By providing buyer incentives at a time when inventory is lowest, the result will be multiple offers/bidding wars which will force buyers to pay 5-10% over asking on these properties.  Depending on the buyers’ income level, when you apply the “4x income calculation”, the bidding wars will jeopardize the buyers’ ability to purchase a home with this incentive.   Why would a resale buyer wait for this incentive to take effect anyway if they’d be paying 5-10% more to receive essentially a 5% “2nd mortgage” that would have to be paid back anyway?  The thought process behind this incentive is flawed.   From a local perspective, if you are looking at the GTA, there is not much that a buyer could purchase under this program in the $500,000 - $600,000 range.  Looking across the nation to Vancouver, this won’t help anyone there either.  There are two markets in Canada that the consumer complains about affordability in,   Toronto and Vancouver.  These changes will do absolutely nothing to help buyers in Canada’s hottest cities for Real Estate.  How does this increase affordability at all?  

It seems the government has taken a page out of the auto industry.  The car leasing phenomenon sees drivers go out and lease vehicles according to what they can afford in monthly payments.  By advertising that you can now own a home and lower your monthly payment for the time you are in this home, isn’t it the same type of mindset as car leasing?  When you sell, you pretty much have a “buy back”, which is the cost of the interest free loan (a.k.a. second mortgage plus any share of equity).  Household debt is being increased with little regard for equity, however the monthly payments fit.  Not sure if this is where we wanted to go when we asked for means to increase affordability and DECREASE household debt.  The government has just found ways to increase household debt and decrease affordability.  

What SHOULD have been done?  

Here’s what I believe should have been addressed in the budget.  

1. A solid plan to increase housing starts.   How about reducing red tape for builders to commence projects that have been stalled due to the layers and layers of bureaucracy?  I would have liked to see more concrete incentives for builders to provide homes/condos at a lower price per square foot.  Maybe a reduction in development charges if a certain percentage of the development was priced under the municipality’s average?  Tax incentives if they build within a certain timeline to allow for an increase to supply within the next twelve months? There was so much left to be desired.  

2. Major overhaul to the Stress Test that instantly reduced affordability by 16%?    The stress test was introduced when historically low interest rates were about to increase.  The rates have now increased and there are no plans to increase them another 2% in the near future, so why are we still trying to qualify purchasers at hypothetical rates that we will not see?  At the LEAST, we should have seen a 1% reduction to the Stress Test, and at best we should have seen it done away with.  We continue to throttle demand by making it pretty much impossible to purchase a home. We are driving people into an ultra hot rental market which is seeing double digit percentage increases in rents across the GTA.  

3. An increase to the repayment term for RRSP withdrawals AND allowing all purchasers the opportunity to utilize these funds when purchasing a home, instead of just for first time buyers.   As mentioned earlier, I believe the repayment term should have been changed to 25 years, and at the very least it should have been changed to 20 years.  Allowing ALL purchasers to use their RRSPs towards their downpayment would certainly stir up activity and provide an incentive for homeowners.  This would increase supply and introduce more properties to the market.  

4. A one to two year reduction in CMHC insurance premiums for purchasers putting less than 20% down would also help with affordability.  Maybe even changing high ratio mortgages to 15% or less.  

5. Reintroduce the 30 year amortization to allow for increased affordability.  This would have been the easiest change to make, and still maintained the integrity of the world’s soundest banking system.  

The above five changes would have done a lot more in bringing affordability back to the forefront.  As for what was tabled in the budget ….. it's a bit of a slap in the face for Canadians that were excited for true changes that would bring affordability back.