First-time home buyers and the new federal government incentive

June 12, 2019

When the federal government tabled its 2019 budget in March, it introduced a raft of measures aimed at helping Canada’s financially squeezed middle class. These included new programs and funding designed to make housing more affordable, through incentives to first-time buyers and more money to help increase the country’s housing supply.

Interest-free loans, with caveats

One of the new measures is the proposed First-Time Home Buyer Incentive, to be administered by the Canada Mortgage and Housing Corporation (CMHC). The program would offer eligible first-time buyers an interest-free loan of up to 10% of the price of a newly built home, or 5% on a resale purchase, payable only when the home is resold.

If the incentive is passed into law, this measure may help medical residents, but not likely practising physicians. There are still many questions around the incentive and how it will work, but here’s what we know so far.

Not targeted to higher income earners

The incentive would be available only to those with an annual household income of up to $120,000. Given that the average annual salary for physicians in Canada was about $342,000 in 2016, according to census data, not a lot of physicians and their spouse/partner would qualify today. Medical residents may be able to make use of it.

The incentive would apply only to mortgages of less than four times an applicant’s household income. In other words, it would be available only to a first-time home buyer who took a mortgage of $480,000 or less ($120,000 x 4).

While that might sound like a lot, consider that in Vancouver and Toronto — Canada’s two hottest housing markets — the average price of a detached house is well north of $1 million, and the average price of a condominium is more than $600,000. In those cities, a first-time buyer would need a hefty six-figure down payment to meet the incentive program’s $480,000 mortgage limit.

Unanswered questions

Critics have pointed out the First-Time Home Buyer Incentive program’s lack of detail. For example, it’s not clear how much those who used the incentive would owe the CMHC upon selling their home. Would it be the same dollar amount that the CMHC loaned at the time of purchase, or would the amount depend on how much the home had changed in value, as is the case for most shared equity mortgage arrangements?

Housing market analysts have raised another important concern. Some say that the proposed incentive program could have the unintended consequence of pushing housing prices even higher. Remember, eligible first-time buyers with the required $20,000 minimum down payment for a home would have as much as $40,000 more purchasing power when making offers, courtesy of their interest-free government loan.

The CMHC responded to this inflation-centred concern several weeks after the incentive program was unveiled. “We have carefully targeted the [program] to help younger Canadians having trouble affording home ownership,” the Crown corporation said in a statement. “We do not expect the [program’s] inflation effect to be beyond a maximum of 0.2%–0.4%.”

Next steps?

“The First-Time Home Buyer Incentive may look good at first glance, but the federal government needs to explain exactly how it will work,” said Stephen Hunt, National Lead of Financial Planning Advice and Strategy at MD Management Limited. “Like other Canadians, younger doctors are faced with high housing costs that essentially dictate where they can and cannot live and work. We would like to see clearly defined measures that take everyone’s situation into account, from coast to coast to coast.”

The CMHC says all will become clear by the fall, when the incentive program is supposed to come into effect. Of course, the whole exercise could prove pointless should Justin Trudeau’s Liberal Party fail to win a second majority in the November federal election, and their new housing measures end up on the cutting-room floor.

 

References

1. “Employment Income Statistics,” Statistics Canada, 2016 Census of Population.

2. Francis Fong, “Ottawa’s First-Time Home Buyer Incentive Is Flawed,” Policy Options, May 7, 2019.

3. Finn Poschmann, “Is Elevating Housing Prices a Good Way to Make Homes More Affordable?” The Globe and Mail, April 30, 2019.

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