Liberals’ Plan To Help Homebuyers Will Mean 'Turbulence' In Market, And Won't Help Pricey Cities: Analysts

The federal Liberals’ plan to help homebuyers could slow down home sales in the coming months, while doing little to improve affordability, analysts say.

As part of the budget, Finance Minister Bill Morneau announced last week a plan to help homebuyers struggling with the worst home affordability levels Canada has seen in three decades.

The plan surprised many observers by not including a number of measures the industry had been pushing for, such as a loosening of the mortgage stress test and an increase in insured mortgage amortizations to 30 years.

Watch: Ontario’s most and least affordable housing markets. Story continues below.

But it did put in place some unexpected measures, including a First-Time Homebuyer Incentive that will see the government-run Canada Mortgage and Housing Corp. (CMHC) contribute up to 10 per cent of the price of a new house, or five per cent of the price of an existing home, to qualifying first-time buyers.

CMHC would recoup its money only when the home is sold, though it’s not clear if the plan is for the corporation to take back the initial capital, or a percentage of the home’s sale price.

The program could mean “turbulence” in Canada’s housing markets in the coming months, Royal Bank of Canada said in a recent client note, because first-time buyers will be tempted to sit out the spring season and wait for the new aid program, which launches in September.

“This could depress the market even further during that period,” RBC economic analyst Robert Hogue wrote. Those delayed purchases could mean a bounce-back in activity come September, Hogue noted, ahead of the fall federal election.

Not much help for Toronto, Vancouver

Analysts have also pointed out that the program will be of limited use to homebuyers in Toronto and Vancouver, Canada’s priciest cities. It’s available to households earning no more than $120,000 a year, and the mortgage plus CMHC’s contribution can’t be more than four times household income, or a maximum of $480,000.

By Hogue’s calculations, this means the maximum house price a buyer can afford under the program is $505,000 with a 5-per-cent down payment, or up to $600,000 with a 20 per cent down payment. That’s perfectly reasonable in Calgary or Ottawa, but it is well below the selling price of a majority of properties in Toronto and Vancouver today.

The CMHC program “may be enough to buy a small- to medium-size condo apartment in those markets but probably not a family-friendly home,” Hogue wrote.

A boost for home construction?

The CMHC program was designed to boost construction of new homes by making support more generous for new-home purchases — 10 per cent of the purchase price, versus 5 per cent for existing homes.

According to Capital Economics, a similar scheme introduced in the U.K. in 2013 boosted home construction in that country by 10 to 15 per cent.

But the U.K. program was more generous, with the government offering to cover 20 per cent of the purchase price outside London, and 40 per cent of the price in London.

Participation in the U.K. scheme was “very high,” but “given the far less generous nature of the Canadian version, all else equal we might expect a boost to construction of 5 per cent at the very most,” economist Stephen Brown wrote in a client note.

The U.K. program did coincide with a spike in house prices. The average house price in the U.K. had seen no growth for years until 2013, when it began to rise, jumping nearly 23 per cent in the following three years.

The Canadian experience may prove to be different.

British Columbia itself tried out something similar in recent years with a fund that contributed 5 per cent to the purchase price of a home. The province shut the program down last year, due to a lack of interest from homebuyers. It had received 3,000 applications, well short of the 42,000 the province had been expecting.

“First-time home buyers found the program difficult to understand and unappealing to have the government co-own their home,” said James Laird, co-founder of mortgage comparison site Ratehub.