B.C. to offer loans to first-time buyers as BoC issues debt warning

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British Columbia will start offering interest-free loans to help first-time home buyers with their down payments in a market where skyrocketing prices have fuelled an affordability crisis and pushed the dream of owning property out of reach for many.

But the program, which will begin next month, was announced on the same day the Bank of Canada issued a new report warning of Canadians' high debts and heavy exposure to the housing market. Fresh statistics show the country's real estate market will post record-high prices and numbers of sales in 2016.

B.C. Premier Christy Clark said Thursday it is unlikely that a new provincial loan program will stoke enough demand to drive up prices in the housing market significantly.

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"We should all be concerned about the levels of debt overall across the country – we're one of the most indebted nations in the world," she said. "We need to pay attention to that, but, in the meantime, we should also pay attention to making sure British Columbians can own a home.

"People need a partner in scraping together that first down payment."

Under the program, the B.C. government will match down payments of up to $37,500 made by first-time buyers purchasing any home priced up to $750,000. These applicants can only get the 25-year loans – which are free of interest for the first five years – if they commit to living in the unit for those initial five years.

In October, the federal government implemented new measures designed to slow the housing sector, including higher affordability thresholds that borrowers have to meet to qualify for mortgages.

"When it comes to housing activity and prices, the measures will weigh on demand, especially for more expensive houses," Bank of Canada Governor Stephen Poloz said. "The important takeaway is that one cannot judge the effectiveness of these policies simply by observing whether house prices continue to rise. This is because the measures are aimed at mitigating risks to households and to the financial system, not at house prices per se."

In its new report, the Bank of Canada's financial system review expressed confidence that mortgage and housing measures will alleviate pressures "over time." Effective Oct. 17, the federal government tightened mortgage rules. In November, sales across Canada decreased 5.3 per cent compared with October.

The central bank cautioned that the proportion of the most at-risk group of borrowers (loan-to-income ratios that surpass 450 per cent) out of the total number of high-ratio mortgages is growing. In the Toronto area, the proportion climbed to 49 per cent in the third quarter from 41 per cent a year earlier while rising to 39 per cent from 37 per cent in and around Vancouver.

B.C.'s loan program will target those applying for these high-ratio mortgages and match up to a maximum of 5 per cent of the purchase price so that they can afford a down payment.

"Owning the place where you live is part of what being a Canadian is all about," Ms. Clark said at a news conference outside a new town home development in Cloverdale, a 45-minute drive southeast of Vancouver.

Joshua Gottlieb, an assistant professor at the University of B.C.'s Vancouver School of Economics, said the new loans are asking people to stretch themselves even further to achieve home ownership, a risky proposition if interest rates increase significantly in the future.

He called the policy a counterproductive taxpayer-funded subsidy for homeowners and developers. The roughly 15,000 new buyers a year the government estimates will take advantage of the new loans will hurt affordability further in a market constrained by a lack of supply, he said.

"The easiest way to think about it is with an analogy to a store having a sale," Prof. Gottlieb said. "If they raise all of their prices by $200 and then give you a $200 discount, are you any better off?

"That's effectively what's going on here: It's a $37,500 discount for first-time buyers so then the sellers can raise prices by however much extra those buyers are able to afford."

Canadian home sales and prices are expected to drop next year after a record-setting performance in 2016, according to the group representing the country's realtors. The Canadian Real Estate Association forecasts that residential sales nationally will decline 3.3 per cent next year while the average price slips 2.8 per cent.

The last year that Canadian sales decreased was in 2012, while the last year that the average price fell nationally was in 2008.

The B.C. housing market is likely to remain a core issue in next May's provincial election.

This year, the government has introduced a series of new policies aimed at cooling the market and addressing affordability, including a law to allow municipalities to tax vacant homes, and hundreds of millions of dollars in funding for new rental projects.

Its highest profile move has been a 15-per-cent tax on foreign home buyers that came into effect at the start of August and covered 22 communities in the Vancouver region.

Last month, despite an continuing market slowdown that started before that tax was announced, the average price of all single-family detached houses sold in the City of Vancouver exceeded $2.6-million, and $1.6-million in the Vancouver region. Those prices are considerably higher than just two years ago.

Shane Koka, a sales manager living in Surrey, B.C., said he was very happy to hear about the interest-free loan program after searching for more than two years and failing to find a two-bedroom apartment in Vancouver selling for less than $500,000.

"I'm still waiting on the market to come down, but I had gotten to the point where I pulled out [of buying] thinking 'I'll never be able to afford a home here,'" he said. "And now it's become a reality again.

"What kills me is it's from a political party I absolutely detest doing it and I know they're just buying votes, but I'll be damned it doesn't help me out."