First-Time Home Buyer Incentive – Will It Help?

Mortgage CalculatorThe federal budget included a proposed measure that would see the federal government take on part of the costs of buying a home. The basic elements of the plan are:

  1. It will be available only to first-time homebuyers;
  2. It will be administered by CMHC and will only be available for CMHC-insured mortgages;
  3. Buyers must have at least 5% down payment to qualify, and their total household income must be no more than $120,000;
  4. The total amount of the mortgage, including the incentive must be no more than 4X the total income, or up to $480,000; and
  5. Buyers of newly-built homes can get 10% of the home price, while buyers of resale homes can get 5%.

The upshot of all this is that the most expensive home that could be purchased under this program would be worth somewhere between $500,000 and $600,000, depending on the buyer’s down payment. The government’s contribution will have to be repaid when the home is sold (or sooner), though the details are as yet unclear. It could be in the form of an interest-free loan, in which case the full amount would have to be repaid, even if the value of the home goes down. Alternatively, it could be in the form of an ‘equity stake’ in the home, in which case the amount repaid would be higher or lower than the original amount, depending on whether the value of the home goes up or down.

For the Toronto area market, this incentive would appear to be a losing proposition. There are very few homes valued at under $600,000 in the GTA, and most of those are condominiums. So, if there is a lot of uptake by first-time buyers, this could accelerate price increases in an already-hot condominium market, pretty much the opposite of what is intended by the plan. If there is little uptake, there will be very little impact on the market. Either way, it’s more likely to cause damage than to help the GTA market.

In areas outside the GTA where prices are much lower, the plan could help offset the impact of the mortgage ‘stress test’ on first-time buyers, giving them a better chance to get a toe-hold in the market. However, the plan will not help move-up buyers to afford their next home, so the overall effect could be to simply increase demand for entry level houses without increasing supply, again a recipe for causing more harm than good.

So, low marks for this initiative. It’s attempting to fix the problems caused by the stress test by distorting one part of the market, and is unlikely to achieve the sought-after results. It would have been much more effective to simply remove or modify the stress test, now that mortgage rates are very unlike to rise, but the governments’ Office of the Superintendent of Financial Institutions (OFSI) has stoutly resisted this. Yet another example of ‘government help’ as oxymoron.