Our unhealthy obsession with home ownership is never more clearly seen than it is in a well-used federal government program called the Home Buyers’ Plan.
The HBP allows first-time homebuyers to withdraw up to $25,000 from a registered retirement savings plan to help cover a down payment. Somehow, we’ve decided that houses come before retirement savings. That’s a mistake and it needs to be corrected by winding down the HBP.
Prepare for hysteria if this is ever seriously discussed by the federal government. “There’d be a deafening outcry from the real estate industry, mortgage industry, first-time buyers, and many politicians,” Robert McLister, editor of the Canadian Mortgage Trends blog and a mortgage planner, told me in an e-mail. “First-timers have already taken the brunt of recent rule changes, so canning the HBP would be viewed as war against young homeowners.”
This is true, and here’s why. The idea that everyone should own a house is a foundational and uncontested financial principle here in this country. The massive rise in house prices since the mid-1980s has convinced almost everyone that there’s not only a social and economic benefit in promoting home ownership, but also a financial one for owners.
If you’re buying in some cities at current prices, that latter point is debatable. But let’s leave this alone and focus only on the misalignment of financial resources encouraged by the HBP.
Imagine a young couple, both 30 years of age and both with $20,000 or so in their respective RRSPs. Through the HBP, these disciplined savers are converted into spenders. They remove money that could grow to roughly $96,000 in value over 40 years (assuming a 4-per-cent average annual growth rate) and turn it into a pile of bricks and lumber. Okay, a house.
A house is an appreciating asset, if you can commit to living there for at least 10 years or more. But houses are not cash boxes. Few people reach a point in life where they sell their house and pocket the proceeds. Typically, a lot of the money is needed to buy or rent their next place of residence.
RRSPs, not houses, are how you save for retirement. Tax-free savings accounts are also good for retirement, and for saving a house down payment (read my take on this here.)
It’s not like using the HBP is an outright plundering of the RRSP. You are supposed to put the money back.
The default repayment plan puts you on track to repay in equal instalments over 15 years, although you can certainly speed things up. Many people do just the opposite, though. Figures from the Canada Revenue Agency show that approximately 35 per cent of HBP withdrawals are not repaid each year.
In these cases, the required annual repayment is added back to your taxable income. The government recoups what it lost when it gave you a tax deduction for your RRSP contribution, while your RRSP gets stiffed.
CRA figures show it has been used 2.6 million times as of the end of 2011, with total withdrawals in the area of $27.9-billion. The good news is that HBP use has been declining in the past few years, although this may simply reflect the declining percentage of first-time buyers in the home market.
There’s no question that eliminating the HBP would be yet another blow to the first-time buyer. Last June, the federal government reduced the maximum amortization period for mortgages with a down payment of less than 20 per cent to 25 years from 30. The longer amortization period made it easier to afford mortgage payments.
Ending the HBP wouldn’t stop young people from saving for a house, though. They can still use TFSAs, which for this year have a contribution limit of $5,500. You can also carry forward the $5,000 annual limit in place from 2009-12. You don’t get a tax deduction for TFSA contributions like you do with RRSPs, but there’s a lot more flexibility in terms of getting access to your money and putting it back later.
TFSAs are designed to be all-purpose accounts – good for everything from safety-first emergency or home down payment funds to stock trading. RRSPs should be just for retirement, but that’s not the message being sent by the availability of the Home Buyers’ Plan.
Through the HBP, the federal government is telling us that buying a house is important enough to scoop down-payment money out of your retirement savings. Why is Ottawa handing out bad financial advice?
Some facts and figures on the federal Home Buyers’ Plan
-Background: The Canadian Real Estate Association and the Canadian Home Builders’ Association suggested the idea to the federal Department of Finance.
-Total amount withdrawn from RRSPs since the inception of the HBP: Approximately $ 27.9-billion from inception to the end of 2011
-Average amount of RRSP withdrawals under the HBP: $9,426
-Number of times the HBP has been used: 2,555,484
-Usage trend: From 131,112 participants in 2007, the number fell to 115,927 in 2010 and 106,281 in 2011.