We're starting to hear a lot about a new victim class in the Canadian economy – the first-time home buyer.
Houses in some cities keep rising in price, while the federal government keeps making home buying either less accessible or more expensive. The latest example is the announcement Tuesday by the federal agency Canada Mortgage and Housing Corp. that it will boost premiums on the mortgage default insurance that home buyers must pay for if they have a down payment of less than 20 per cent.
Expect this increase to be added to the grievance list of people who work in the real estate-industrial complex – agents and mortgage brokers, plus others who make a living from home sales. They are working hard to portray first-time buyers as martyrs to government policies designed to cool down the housing market.
But these measures are not just necessary – they may also help to make houses more affordable by containing price increases or causing them to fall. The CMHC premium increase demonstrates how these measures can also make our financial system more stable.
CMHC says the higher premiums will take effect on March 17 and add about $5 to the monthly payments of the average CMHC-insured home buyer. But this math is based on average prices that don't reflect costs paid by people in Toronto and Vancouver, plus the cities surrounding them.
With a mortgage of $550,000 and a down payment of between 5 and 9.99 per cent, the extra cost per month is $10.35. On an $850,000 mortgage, the extra cost is $15.98. CMHC said the average down payment for the first nine months of 2016 was about 8 per cent, while the average insured mortgage loan was $245,000. Its examples of how much higher premiums would cost are based on a 2.94-per cent five-year mortgage rate and a 25-year amortization.
CMHC is increasing premiums to boost funds available in case there's an economic shock of some sort and mortgage defaults soar. High house prices increase this risk because people must stretch their finances to get into the market and then afford the full array of costs as a homeowner.
People who make a living off home sales want it both ways – endlessly rising prices and easy access for first-time buyers. But a real estate market left untouched by government might actually be harder for young people to buy into.
There's evidence in the December data for home sales that the measures put in place by Ottawa last year are starting to slow some markets down. Not Toronto or nearby Hamilton – prices there keep surging ever higher. But the Canadian Real Estate Association says the pace of price increases in 2016 was the slowest in two years. Among the cities reporting year-over-year price declines in December were Vancouver, down 3.3 per cent; Edmonton, down 1.8 per cent; Saskatoon, down 3.3 per cent; Halifax, down 2.9 per cent; and, St. John's, down 6.2 per cent.
The right way to make housing more affordable is by lightly squeezing the housing markets so that price growth moderates. The wrong way is what provincial governments in Ontario and British Colombia have done recently. Ontario is offering a limited break on land-transfer tax, while the B.C. government is offering loans to first-time buyers to help them put together a down payment on homes costing up to $750,000.
Measures like these incrementally support more home buying, which in turns pushes prices higher. Worse, we end up helping people get into the market while ignoring the much more important question of how they'll be able to afford their mortgage over the long term. The Ontario property tax break won't be much help if interest rates are higher when a buyer today renews a mortgage in five years.
The price of steadily rising house prices is that a growing number of people can't afford to buy in. We need to let this economic reality play out while addressing it strategically with measures like the ones CMHC just announced and the federal government introduced last year. The wrong approach is to offer cosmetic, politically expedient help to young buyers that fails to address the reality that it's way more of a burden to own a house than it is to buy one.