The federal Liberals have finally found the hammer in their housing affordability toolbox.
We can debate how directly responsible they are, but the Liberals have presided over what could very well turn out to be the end of mass affordability in home ownership in Canada. On Tuesday, they announced a series of proposals aimed at giving young adults a fighting chance to get into the housing market in the years ahead.
The measures tick a lot of boxes – calming demand from investors and flippers, increasing supply by building affordable housing, addressing real estate sales practices by banning blind bidding, and offering buyers a new First Home Savings Account and a 25 per cent cut in premiums for mortgage default insurance from Canada Mortgage and Housing Corp.
But there’s a problem here and it affects the housing platforms of the Conservatives and NDP as well. Housing prices exploded in the pandemic when interest rates plunged and lockdowns prompted people to seek more living space. Only a major price reversal can restore mass affordability and the federal parties won’t touch policies that would make this happen. Example: Taxing capital gains on housing.
A quick housing market recap: Average resale prices nationally peaked in March at $716,828 and have fallen steadily since then to $661,788 last month. But that July level is still 15.6 per cent ahead of the same month a year ago and almost 33 per cent higher than July, 2019. Projecting the next leg for housing prices means reconciling conflicting expectations: Interest rates will likely rise in the next 12 to 24 months, while a resumption of immigration stokes demand.
The challenge in addressing affordability is to avoid further stimulating demand for homes, thereby keeping prices from skyrocketing. The NDP promise to reintroduce 30-year mortgages for first-time buyers who have a down payment of less than 20 per cent and thus need mortgage default insurance.
A 30-year amortization would help affordability a lot, and right away. But that’s just going to bring in more buyers. A house bought at the national average resale price in July would cost almost $300 a month less with a mortgage amortized over 30 years instead of the usual 25, assuming a 20-per-cent down payment and a 2-per-cent five-year fixed rate mortgage.
Similar economics apply to the Conservative and Liberal promise to increase the $1-million cap on eligibility for mortgage default insurance and index it to house inflation. That would be a big help in cities like Toronto and Vancouver, where average house prices are above $1-million and the current minimum down payment would be at least $200,000.
The Liberals’ First Home Savings Account, an echo of the registered home ownership savings plan of the 1970s, is an example of housing policy that looks to future affordability. It would allow people under 40 years old to invest up to $40,000 for use in a home purchase. Contributions would generate a tax deduction, just like with registered retirement savings plans, and both gains and withdrawals would be non-taxable in the same way as a tax-free savings account.
All three parties promise to build more affordable housing, but it could be years before the next government is able to turn policy into a nationally significant number of freshly built homes waiting for owners and tenants. It’s widely accepted that we need to build up the supply of housing, although a recent BMO Economics report said major city housing completions over the past six months came in at the highest level on record dating back to the mid-seventies.
The Liberals, Conservatives and NDP also promise measures to limit buying by investors, notably those who do not live in Canada. My colleague Rachelle Younglai reported recently that investors account for one-fifth of all home purchases in Canada, which is significant. Pushing investors to the sidelines will definitely help slow price momentum.
The Liberals’ first pass at helping young adults with housing was the First-Time Home Buyer Incentive, introduced in 2019 as a kind of shared equity plan where the government owned a slice of your home that you pay out when you sell. The program almost seemed as if it was designed to let the government say it was doing something about housing, while not being effective enough to encourage mass adoption and, in turn, a surge in first-time home buying.
The Liberals now propose a new option for the FTHBI – instead of shared equity, you’d take out a loan with payments deferred until you sell. The loan would supplement your regular mortgage, thus making it smaller and less costly than it would otherwise be.
What all the housing affordability promises from the federal parties do is offer affirmation that owning a home is something the masses can still aspire to. We’ll have to see whether the economics of home prices co-operate. Don’t count on it.
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