With national home sales falling to a 10 year low in February and the home price index slipping into negative territory, the risk of a near two decade long housing bull market coming to an end was enough to scare the Trudeau Government into action. In the latest budget, the Trudeau Government announced it will begin taking an equity stake in homes purchased by first time buyers. Of course there are a few stipulations involved.
This loan only applies to first time buyers using an insured mortgage (less than 20% down payment) and earning a maximum household annual income of $120,000 and can only be leveraged to 4x your income. If one does qualify, CMHC will take a shared equity position on your mortgage. The equity position will be either 10% for a newly constructed home or a 5% for an existing home and will need to be repaid upon a future sale. The Government will share in both price gains or losses when you sell.
Either way the deal works like this, if a borrower purchases a brand new $400,000 home with a 5% down payment and a 10% 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. If is re-sale unit CMHC would only take a 5% shared equity mortgage ($20,000).
Of course the real winner here is property developers who are being gifted a liquidity injection as pre-sale absorption rates fall in Vancouver and more recently sank to an eighteen year low in the city of Toronto.
However, since this program has borrowing constraints it will do nothing for homes priced above $600,000 which is basically the cost of entry for a place to live in the city of Vancouver and Toronto. It should, however, provide a small boost in activity to the entry level in outlying areas and for lower priced new construction units that fall under the threshold.
Further, there has only been $1.25B allocated over three years, or about $400M per year. In Canada there are nearly 300,000 first time buyers per year so this program will only provide a $1300 per buyer stimulus assuming every first time buyer goes the insured mortgage route.
While using taxpayer money to help first time buyers purchase a home at record high valuations sounds like a heartwarming idea, thankfully the policy has little bite in reality. The only real way to make housing more affordable is for prices to drop, not by handing out free money. I suspect this was the plan all along given the Federal Government did not go ahead with re-introducing the 30 year amortization and remained firm on the B-20 mortgage stress test. As usual, this appears to be mere window dressing ahead of a federal election. The program is expected to be up and running by September 2019.
