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rob carrick

First-time buyers are the housing market's pinata.

People buying a first home are essential to the real estate market. But when the federal government periodically tries to cool home sales, its go-to strategy is make it tougher for first-timers. We've seen that in the rollback of maximum amortizations to 25 years from as many as 40 and in tighter requirements to qualify for a mortgage.

Housing consultant Steve Pomeroy says the focus on first-time buyers is both unfair and ineffective in addressing a major contributor to rising home prices. "First-time buyers are being marginalized when they're not the ones driving house prices," Mr. Pomeroy said. "It's the resale buyer that is driving prices."

Our housing policies as a country have been designed to aggressively promote home ownership, yet they've created a market where young people can't afford to buy in. Mr. Pomeroy's report gives us a little more insight on why this is.

Even with ultra-low interest rates, first-timers live in a world of precarious affordability. Every month prices rise, and so do the down payments they have to save and the mortgage payments they'll make when they buy. Move-up buyers love rising prices because they mean more equity help finance the purchase of a bigger home.

Mr. Pomeroy created an example of a family with a modest annual income in 2001 of $47,000, enough to purchase the average-priced Canadian home at $172,000. The house is bought in his example with a 5-per-cent down payment, which means a mortgage of $163,000 and monthly payments of $1,175 based on prevailing rates back then of 7.3 per cent.

At the national average rate of price increase over 10 years, the home would have grown in value by 95 per cent as of 2011. Add in repaid principal of about $34,000 and you have equity of $207,404 to use for the purchase of a larger home (assumes no extra payments and the same mortgage terms for the whole period). With rates in 2011 down to 4.55 per cent, Mr. Pomeroy figures a $420,000 home is easily doable for this family.

That's based on their income in 2001. Using average income gains over the decade ahead, Mr. Pomeroy estimated the family would qualify for a mortgage of $275,000 and a maximum house price of $480,000. Flash ahead to 2014, and he projects this family would be able to buy a house costing $684,000 as a result of further increases in house prices and income that now comes in at $65,800.

In a column last summer, I calculated that a first-time buying family would need income of $89,363 to qualify to buy the average-priced $416,584 resale home with a 5-per-cent down payment. Mr. Pomeroy's example has a family with a much smaller income moving up to something quite a bit more expensive.

There's a name for the psychology of rising house prices – they call it the wealth effect. We feel rich when our houses rise steadily in price, and so we act that way. It's well documented how people have used home equity lines of credit (HELOC) to capitalize on rising home values. A Bank of Canada report of a few years back called HELOCs a main driver of rising household debt.

But move-up buying isn't as well understood or discussed, said Mr. Pomeroy, who in addition to running Focus Consulting is also a research associate at the Carleton University Centre for Urban Research and Education. Part of the problem is that there's not a lot of data showing the breakdown between move-up and first-time buyers. The closest Mr. Pomeroy has come is a survey by the Canadian Association of Accredited Mortgage Professionals that indicates first-timers accounted for about 55 per cent of purchases in 2013.

There's also the question of what can be done to inhibit move-up buyers in particular. First-timers are an easy mark because there are so many ways to adjust the rules on qualifying for a mortgage. The precedent in our mortgage market is that once you've qualified for a mortgage loan, you can renew it without any new hurdles being introduced.

Interest rate increases would cool the entire housing market, but first-time buyers would be hit the hardest. For a first-timer with a 5-per-cent down payment, the average-price resale house in Canada would today require borrowing of more than $390,000 including mortgage insurance premiums. The more you borrow, the more vulnerable you are to rising rates.

It may be that the best check on move-up buyers will be weak demand for their homes from first-timers. "We are really constraining the ability of young kids to get into the market," Mr. Pomeroy said.

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