Analysts who are studying the federal Liberals’ plan to help homebuyers have concluded that the plan could end up slowing down home sales in the coming months and doing next to nothing to improve affordability, especially in cities like Toronto.
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.
However, 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.
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.
In other words, 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.
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.
It seems unlikely that the plan will make much of a difference in affordability. It may actually have the opposite effect in the long run. -CINEWS