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Report on Business Federal budget 2019: Interest-free mortgage loans for new buyers unlikely to boost home sales, experts say

Prime Minister Justin Trudeau walks with Tamarack Homes' Michelle Taggart after a press conference highlighting the first-time home buyer incentive, at Tamarack's Cardinal Creek Village development in Ottawa on March 20, 2019.

Justin Tang/The Canadian Press

The federal government’s new plan to offer Canadians interest-free mortgage loans in exchange for shared ownership in their homes is unlikely to provide a major boost to home sales in Canada because of constraints built into the program, housing experts say.

The Liberal government announced its new shared-equity mortgage program in Tuesday’s budget to help first-time home buyers afford their homes. It will see federal housing agency Canada Mortgage and Housing Corp. invest $1.25-billion over three years to provide interest-free loans to new home buyers, moving the mortgage insurer into a new role as a direct mortgage provider.

CIBC World Markets Inc. deputy chief economist Benjamin Tal said the program is unlikely to have a big impact on the housing market because an investment of about $416-million a year is a tiny fraction of the $60-billion annual market for insured mortgages in Canada.

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“It will make a change for those people who take it, but from a market perspective it will not be a game changer for the housing market as a whole,” he said. “It’s simply not big enough.”

The loans can be worth up to 10 per cent of the purchase price of newly built homes, or 5 per cent of the price of resale homes. The program is only available for buyers with household incomes under $120,000 annually, and the loan portion has a cap of four times annual income. Mortgage rate tracking web site Ratespy.com calculates that the most expensive home purchase that could qualify is $491,000.

CHMC loans a tough sell in Toronto,

Vancouver

Under the shared-equity mortgage plan, a buyer

with the maximum allowed household income

who makes a 5% down payment and gets a 5%

CMHC loan could qualify for a home purchase of

no greater than roughly $491,000, according to

calculations from RateSpy.com.

That is well below average sale prices in Greater

Toronto in February, along with benchmark prices

in Metro Vancouver the same month.

Condo

Detached

Townhouse

$1,600,000

1,400,000

1,200,000

1,000,000

Max. price

under

scenario

800,000

600,000

400,000

200,000

0

Greater

Toronto

Metro

Vancouver

MATT LUNDY, THE GLOBE AND MAIL, SOURCE: TREB, REBGV

CHMC loans a tough sell in Toronto, Vancouver

Under the shared-equity mortgage plan, a buyer with the

maximum allowed household income who makes a 5%

down payment and gets a 5% CMHC loan could qualify for

a home purchase of no greater than roughly $491,000,

according to calculations from RateSpy.com.

That is well below average sale prices in Greater Toronto in

February, along with benchmark prices in Metro Vancouver

the same month.

Condo

Detached

Townhouse

$1,600,000

1,400,000

1,200,000

1,000,000

Max. purchase

price under

scenario

800,000

600,000

400,000

200,000

0

Greater Toronto

Metro Vancouver

MATT LUNDY, THE GLOBE AND MAIL, SOURCE: TREB, REBGV

CMHC loans a tough sell in Toronto, Vancouver

Under the shared-equity mortgage plan, a buyer with the maximum allowed household income

who makes a 5% down payment and gets a 5% CMHC loan could qualify for a home purchase of

no greater than roughly $491,000, according to calculations from RateSpy.com.

That is well below average sale prices in Greater Toronto in February, along with benchmark

prices in Metro Vancouver the same month.

Townhouse

Condo

Detached

$1,600,000

1,400,000

1,200,000

1,000,000

Max. purchase

price under

scenario

800,000

600,000

400,000

200,000

0

Greater Toronto

Metro Vancouver

MATT LUNDY, THE GLOBE AND MAIL, SOURCE: TREB, REBGV

The price cap will limit how much the program can be used in Toronto and Vancouver, where properties are priced above that level on average. Royal Bank of Canada senior economist Robert Hogue said it means the program won’t be available for many buyers who have the biggest problems affording homes.

“That may be enough to buy a small condo apartment in those markets, but probably not a family-friendly home,” he said.

But Heather Tremain, who runs the non-profit organization Options For Homes, which also provides shared-equity mortgages for low-income earners, said the CMHC program is not aimed at the broad market, but at a narrow group of people who have been shut out of housing by new mortgage stress-test rules.

“It’s like a surgical intervention to address the bluntness of the stress test,” she said. “I think they’re trying to be quite targeted and smart about it, that’s my sense.”

Shared-equity mortgages do not require interest payments or continuing principal repayments, with the loan repaid when the home is sold. Lenders typically take a share of the profits – or absorb a share of the losses – when the house is sold, in proportion to the percentage they invested. CMHC has not provided any details yet about how it will share in profits.

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Toronto mortgage broker Rob McLister, founder of Ratespy.com, is not convinced many Canadians will like the idea of sharing the profits they earn on their homes, which he believes will limit demand for the program.

He said the even bigger constraint is the fact the program limits people to homes worth four times their annual income, which means people would have to buy less expensive homes than they could if they didn’t use the new program.

Buyers today can typically qualify for an insured mortgage at a maximum of about 4.65 times their income, Mr. McLister said. It means buyers would have to purchase homes worth about 15 per cent less if they use the new program.

“It looks like what this program does is reduce your monthly payment, reduce the amount of interest you pay, but it doesn’t help you get into the housing market in terms of qualifying for a home,” he said.

If the purchase price maximum had been set at five times income, Mr. McLister believes it would have more takers. “This proposal looks to be the most overhyped housing affordability proposal I’ve ever seen,” he said.

The program will mark a shift in strategy for CMHC, which had been sharply reducing its exposure to Canada’s residential housing market in recent years through rule changes limiting the amount of mortgage insurance it provides. By becoming a mortgage lender, it will jump squarely into the market, risking losses if home values fall.

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But several analysts said the risk to taxpayers is likely minimal because the program is not huge and Canada’s housing market would have to drop significantly for CMHC to face losses.

Phil Soper, chief executive of real estate brokerage Royal LePage, says the program is likely “a good bet” for the government’s finances.

“If you look at the rates of household formation and immigration and economic growth, the next 10 to 15 years look pretty good for housing,” he said.

The program also makes CMHC a new competitor to private lenders, but the mortgage industry has so far expressed little concern about losing market share.

Andrew Moor, CEO of Equitable Group Inc., the parent company of mortgage lender Equitable Bank, said the new program should be “mildly positive” for his firm’s insured mortgage business by making it easier for some first-time buyers who would not have bought otherwise.

“We’re assuming that we still provide a mortgage, we just provide a slightly smaller one. So that’s not a concern to us at all,” he said.

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With a report from James Bradshaw

Opinion: The 2019 federal budget’s attempt to address housing affordability is not brave enough

Opinion: The First Time Home Buyer Incentive is bad policy

Opinion: Federal budget 2019: The Liberals show how unafraid of Singh’s NDPs they are this election

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