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Business Commentary Federal budget 2019: The Liberals’ mortgage plan is bad news for the economy – and it might not even help home buyers

Copies of the 2019 budget booklet are stacked at a lockup session with experts and reporters in Ottawa on Tuesday, March 19, 2019.

Fred Chartrand/The Canadian Press

The federal government named its new budget “Investing in the Middle Class,” and in many ways, the pre-election plan lives up to that billing. But one of the showcase perks in the budget looks more like “soothing the middle class” – and far from being a sound investment, it fans the country’s most serious economic brush fire.

The announced housing-affordability plan, which will have Crown agency Canada Mortgage and Housing Corp. provide up to 10-per-cent funding of mortgages for first-time buyers, is a can’t-lose political proposition for a government that hangs its hat on supporting the middle class (and expects that support to be returned at the ballot box). For most Canadians, owning a home is the surest evidence that you have attained true middle-classness. It’s especially compelling for the masses of suburban voters – not only those frustrated by the difficulties of buying a home, but their parents, too, who have become the country’s most powerful voting block and will almost certainly determine the outcome of next fall’s election. And the cost is virtually nothing – it’s essentially a system of interest-free loans from CMHC that are repaid when the homes are eventually resold.

Frankly, it’s hard to see where the opposition could criticize the plan without coming off as coldly insensitive to hard-working millennials who are struggling to simply put a roof over their young families’ heads. Politically, it’s pretty bulletproof.

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But economically, it’s much harder to square. It may ultimately do little to improve housing affordability. And it leans against attempts to rein in the biggest and most conspicuous threat to the country’s economic stability: record-high household debt that is tilted heavily toward mortgages.

The federal budget includes new spending in a range of areas including support for first-time homebuyers, ensuring seniors are enrolled in CPP and the further advancement of reconciliation.

Federal budget 2019 highlights: 10 things you need to know

The plan will increase demand for homes – that’s precisely what it’s designed to do. The government argues that because CMHC will contribute a bigger incentive for buyers of newly built homes, the plan will also spur increased supply. But while the demand will be essentially immediate, it takes much longer for homes to be built to catch up. It doesn’t take a PhD in economics to figure out that higher demand, in the absence of matching supply, will inflate prices. The help the government is offering new buyers could very quickly be wiped out by rising prices; in markets where prices have been declining, this could undermine the improving affordability that buyers would have seen otherwise. And this isn’t just for first-time buyers – all buyers will feel the impact.

None of this is helpful in addressing Canada’s record-high household debt loads. Instead, it encourages more people at the margins of being able to afford a home to take on mortgage debt, while contributing to the bloated housing costs that got Canadian households into the current debt conundrum in the first place.

Tell me again how this is a good investment?

Contrast this with some of the other key initiatives in this budget. The government announced billions for mid-career retraining, for nationwide access to high-speed internet, for municipal infrastructure, for incentives to keep seniors in the work force longer. These are all consistent with the economic strategy the government has pursued since it took office in 2015 – to enhance Canada’s productivity and grow its labour supply to better position the economy to weather the serious long-term challenges of an aging population. Its past major commitments to infrastructure, to immigration, to innovation – even to small-business tax reform – were all directed to these goals. In this sense, they are investments in Canada’s economic future.

Indeed, Finance Minister Bill Morneau justified on Tuesday his government’s continued willingness to spend (program expenditures have risen 25 per cent since the Liberals took office) and run deficits (nearly $20-billion targeted for 2019-2020) by saying that “the most important [election] promise we made to Canadians is that we would invest in their future.” And, more often than not, his government has.

But the housing-affordability plan is only an investment in votes. It gives middle-class suburban voters what they most crave, scratches their biggest itch – regardless of whether it’s good for them or for the health of the broader economy on which they ultimately depend.

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Surely, the best investment a government can make is in providing the most healthy and stable economy it can. Keeping Canada’s household credit ills in check should be at the top of the priority list. Doubling down on the economy’s biggest risk is a poor investment, at any price.

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