If you’re struggling to afford a home, you’re probably ticked off at those responsible for Canada’s housing crisis.
You might even blame the government. That’s why, with the election just 25 days away, the Liberal Party has rolled out its most ambitious package of housing “solutions” yet.
But will their proposals really save you money when buying a home in the next five years?
Below is the Liberals’ housing agenda decrypted, a look at what’s sound, and what seems like hastily conceived election madness.
What doesn’t make sense
When you buy a home with just 5 per cent down, you pay 4 per cent of your mortgage in “default insurance.” That’s too much, the Liberals say. They want to slash that by 25 per cent.
But if default insurance premiums are so high – that is, consumers are paying more than what is actuarially justified based on the insurer’s risk of loss – that’s a failure of our federal government. They approve these fees.
Policy makers have preached since 2008 that Canada must shelter taxpayers from mortgage insurance “risk.” Now, despite extreme valuations and high indebtedness, they’re backtracking on this.
The mandarins at the Bank of Canada are probably shaking their heads. “Borrowers with both a high loan-to-income ratio and a high loan-to-value ratio are associated with … greater risk,” the central bank said in May. Should the Liberals lower costs for riskier buyers, reducing taxpayers’ insurance buffer if home values nosedive?
They fail to acknowledge that when you make it cheaper and easier to get a mortgage, more people buy homes and overpay. How about we stick to solutions that don’t exacerbate overvaluation?
Canadians already have all the home savings vehicles they need: the RRSP Home Buyers’ Plan and tax-free savings accounts. Less than one in 1,000 Canadian adults (20,250 in 2017, according to CRA data) maxed out their RRSP Home Buyers’ Plan, and that was when its limit was $10,000 less.
The truth is, Canadians are so overleveraged, underemployed and overtaxed, that most simply can’t save fast enough to afford ever-appreciating properties. An FHSA tax shelter would do little more than reduce tax revenue and further lift home prices.
Down payment loans? This one must be a bad joke. How on earth will government down payment loans not spark further appreciation and indebtedness? You might as well just go back to 100-per-cent financing, circa 2007. If home values dive between 20 per cent and 25 per cent some day and people default on those loans en masse, how much will that cost taxpayers?
Lose your job? Don’t pay for six months, the Liberals propose.
Unfortunately, financial options aren’t free. If the government forced deferrals down lenders’ throats, lenders would promptly raise fees and interest rates, burdening millions of mortgagors, not just the ones who don’t pay as agreed.
Borrowers overall would be better off “self-insuring” risks such as unemployment and relying on lenders’ existing “work-out” programs, whereby lenders restructure your terms if you can’t pay. And no one should get a mortgage in the first place without emergency cash resources.
Voters love this idea and that’s why career politicians love it. But non-resident ownership is a scapegoat, a drop in the bucket. It’s a small, single-digit share of housing and just a tiny fraction of cities have more than 1 per cent foreign ownership, according to the Canada Mortgage and Housing Corp. By closing Canada’s doors to international buyers, even temporarily, we risk losing vital non-housing foreign investment. What’s more, offshore buyers don’t typically buy working-class homes, and an array of punitive taxes already discourage “unproductive ownership.”
Investors play an essential role in improving neighbourhoods and fixing up old and dilapidated housing. Details on this are scarce but a policy that discourages renovation of inferior housing stock is ill-considered. The Liberals claim they’ll allow sellers “to deduct legitimate investments in refurbishment,” but if this tax discourages such investment in the first place, Canadians are worse off overall.
What makes good sense
The Liberals want to bribe – sorry, incentivize – municipalities to “grow housing supply faster than their historical average.” It’s not perfect, but it’ll help. Federal funding will get more city-level policy makers off their rear ends and working toward solutions. The only problem is the proposed $4-billion and 100,000 homes won’t be enough. And as TVO.org’s John Michael McGrath wrote Tuesday, the feds must bribe provinces as well – if they hope to build homes quicker.
- Increasing mortgage insurance cut-off to $1.25-million
The Finance Department forbids default insurance on homes valued at $1-million and up. It’s almost a crime that this threshold hasn’t been adjusted since its inception in June, 2012. Policy makers should have indexed the limit to home values so that low-risk, small-down-payment borrowers across all income strata have a chance at suitable home ownership.
Canada’s real estate market desperately needs more transparency. Proposed measures such as open bidding, mandatory inspection periods and transparent public comparable sales data foster efficient home price discovery. Following the complicated implementation and inevitable court challenges, such measures could materially and immediately slow overvaluation.
There’s little economic reason to allow foreign “land-banking” of precious land for years on end. For that matter, one might argue that domestic owners who tie up strategic buildable land long-term create similar housing constraints.
What Canadians really need
“We will increase the power of federal regulators to respond appropriately to housing price fluctuations to ensure a more stable Canadian housing market,” the Liberal plan says. But Canada’s housing crisis is not a new problem. The Liberals have been in government for six years. What has their housing “oversight” team been doing?
If you believe the likes of Scotiabank Economics, which looked at the structural housing shortage in a May report, Canada might have up to 1.8 million housing units too few. What voters need from housing officials and politicians are fewer schemes that fuel buying power, and more policies that directly resolve undersupply.
Robert McLister is mortgage editor at RATESDOTCA and founder of RateSpy.com and intelliMortgage. You can follow him on Twitter at @RateSpy.