This week, the federal government in its pre-election budget did something they always do; produce smoke and mirrors and buy your votes with your own money. The question is, why do Canadians fall for this strategy every single time? The Wynne government did it with rent control and now the federal liberals are at it again.
Let’s start off with what changes the government announced
- The CMHC will give first-time home buyers who make $120,000 annually or less a no interest loan of 5% to go towards their down payment. The buyer must be able to match it with 5%. The buyer will pay back the loan when they sell the house proportionally to the new market value of the house. CMHC will give you 10% if you purchase a pre-construction condo.
- With the CMHC 5% assistance program, you can only have a mortgage that represents 4-times your income.
- The government has increased the RRSP withdrawal amount from $25,000 to $35,000. This is for first time home buyers but can also be used by those who are divorced or separated from a common-law spouse.
All of this money must be repaid at some point. When you take out a loan from your RRSP, you must pay it back in equal installments over the next 15 years. So now, the government has given a first-time buyer an increased bill hanging over their heads for the next 15 years. These first-time home buyers will already have their new mortgage payments, property taxes, maintenance fees (if it’s a condo) and utilities. So, allowing them to get further in debt doesn’t seem very helpful to me.
What the government should have done was to increase the amortization of a mortgage from 25 years to 30 or 35 years.
This would have allowed home buyers to decrease their monthly costs. Yes, they would pay more interest in the long run but it’s still worth it. The new plan with the CMHC means that Canadian tax payers are picking up the tab. We have a deficit and the Liberal government has committed Canadians to adding to that deficit. Extending the amortization would lower the expenses of homeowners and not come out of the pockets of the Canadian taxpayer.
Then, of course, there is the stress test. The government could have reduced the Stress Test given that we are most likely going into a recessionary period where rates will most likely decrease or remain flat. The government created the stress test where prospective home owners would have to qualify for a mortgage at a higher rate when rates were on their way up. This was to make sure that homeowners would still be able to afford their house in a market where rates are rising.
The economic future has now changed, as it often happens in cyclical markets. Interest rates will most likely be coming down or remaining flat. Thanks to Bill Morneau, we are “stressing” home buyers out unnecessarily.
With the CMHC matching program, you could have a max mortgage of $480,000 (4 X $120,000, assuming you make $120,000). A mortgage in Toronto or Vancouver of only $480,000? Again, that’s assuming that your household income is $120,000. What if it’s $100,000 or less? Your max mortgage amount would be $400,000 or less. You really won’t be purchasing a condo or a house in the Greater Toronto Area for that amount either.
Buyers can now purchase a home worth 15% less than if they didn’t use the program and give CMHC a portion of their profits when they sell. I’m not sure how well that will sit with buyers who have to give up some of their profits.
It brings CMHC into the role of a mortgage lender and highly exposed to the housing market.
Reducing the Stress Test would have helped more buyers get into all of the markets across Canada, including Toronto and Vancouver. The government created the Stress Test to slow down the markets in Toronto and Vancouver, but resulted in slowing down the real estate market across Canada in all areas. The current matching program may help buyers in much smaller markets but does very little for those in Toronto and Vancouver. The government really needs to go back to the drawing board on this one and figure out how they can create change for all home buyers in all markets without inadvertently affecting certain towns and cities.
Other food for thought?
Does this put more buyers in the market who could presumably drive real estate prices up higher? Maybe the government needs to stay out of the market’s way and start to unwind some of its regulations like the stress test and the 25-year amortization time for mortgages to truly help people.