Ottawa is introducing a pair of measures, as part of its economic fiscal update, to help Canadians get a foot into the housing market.
The First-Time Home Buyer Incentive is a shared-equity mortgage to reduce payments, with the Government of Canada taking on 5-10 per cent of the loan on a new home and 5 per cent on a resale home or mobile home. It’s being expanded for the high-priced Toronto, Vancouver, and Victoria markets.
When it was first introduced in 2019, the maximum home price to be eligible was 4 times household income, but is going up to 4.5 times household income in spring 2021. The buyer’s income threshold is being raised from $120,000 to $150,000. The changes mean the maximum home price for eligible first-time buyers in the three markets goes from $505,000 to about $722,000.
Uptake to date has been relatively low and the changes aim to address the concerns of critics that said $505,000 was too low considering the high prices in three markets.
“The changes implemented in the First-Time Home Buyer Incentive for prospective homebuyers in some of the priciest real estate markets including Toronto, are a testament to the fact that the federal government is listening to the changing outlook for first-time home buyers brought on by the pandemic,” Right at Home Realty President John Lusink, told Yahoo Finance Canada.
“Raising the maximum household income threshold to $150,000 from the original $120,000 announced in September 2019 will help a greater number of first-time buyers re-think the possibility of purchasing a home in major cities. Allowing potential homebuyers to purchase a home worth up to 4.5 times their annual income also injects capital into local economies, something desperately needed especially in this period of heightened uncertainty.”
Effect on home prices
A number of market watchers think the expansion could lead to higher prices in the target markets, which are already on an improbable record run during the pandemic.
“In general, these ‘affordability’ measures just stimulate demand and bump prices further,” BMO senior economist Robert Kavcic told Yahoo Finance Canada.
Paul Kershaw, UBC professor and founder of advocacy group for young Canadians, Generation Squeeze, says the expansion helps make the incentive more relevant in the high-priced regions and doesn’t expect it to stoke prices the way other measures could.
“While these subsidies for buyers can risk fueling further price escalations, CMHC research shows that its shared equity approach is less likely to inflate prices by comparison with changes to mortgage rules that would either lengthen the amortization period or reduce the interest rates at which buyers need to qualify,” he told Yahoo Finance Canada.
With that said, Kershaw says the program addresses the symptom and not the root cause.
“To get to the root causes, we need federal and provincial governments to revisit the many ways in which their policies incentivize or entangle many Canadian households to count on high and rising home prices for their security and wealth,” he said.
“By inclining Canadians to count on high and rising home prices, these policies reinforce feedback loops that result in… rising home prices, which ultimately undermine affordability for those who follow in our footsteps.”
Targeting foreign buyers
The other measure announced is a national foreign buyer’s tax. Though details were lacking, the federal government says it will take steps to implement one over the next year. Generation Squeeze has been calling for the policy, but Kershaw says a lot more needs to be done considering affordability has deteriorated in British Columbia and Ontario, despite already having foreign buyers’ taxes.
SFU assistant professor Josh Gordon is noted for his research into the effects of foreign money on Canadian real estate. He says he was encouraged to see the federal government show greater awareness, but has some concerns about how effective it will be.
“If they are only trying to tax vacant properties owned by non-resident non-Canadians, then this is likely a small share of properties, and it won't move the needle much. If they actually wanted to make an impact, they should apply the tax to properties where foreign money is primarily being used for the purchase, and households aren't paying Canadian income taxes,” Gordon told Yahoo Finance Canada.
“This would include properties that aren't vacant as well as properties owned by permanent residents and citizens, similar to the Speculation and Vacancy Tax in B.C.”
He also says provinces could push back on a national plan that would infringe on their jurisdiction and rob them of potential revenue. A broad strokes approach could also have other unintended consequences.
“If they do introduce the tax, they should target it at major urban centers,” said Gordon.
“There are many resort towns that rely on substantial foreign ownership, and those places will suffer if they apply the tax there. Choosing where to apply it, then, will involve some challenges.”
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.