Rupert Campbell and his wife were among the few to take advantage of the now-defunct provincial program that gave first-time homebuyers an interest-free loan for their down payment.
The Liberal government announced the Home Owner Mortgage and Equity Program (HOME) in late 2016 and the NDP government promptly cancelled it a year later. When first launched, it was expected there’d be 42,000 takers. By closing, there were fewer than 3,000.
The program provided five-year interest-free loans for 5 per cent of the purchase price to a maximum of $37,500. Critics argued that it would drive prices further upward due to lack of supply. For the average first-time buyer, it just wasn’t a big enough advantage, especially when the complicated red tape was factored in.
“It was horrendously stressful,” says Mr. Campbell, who is an urban planner and director of development for Cape Group, a developer of residential and industrial properties.
On the upside, it amounted to a secondary mortgage, an easy enough concept to grasp, he says.
“It’s like a student loan on housing, and interest free for five years.”
Now that same group of buyers is being lured into the market with a different carrot: the federal government’s recently announced shared equity mortgage (SEM). The SEM is different in that the government puts up 5 per cent or 10 per cent of the price, depending on whether it’s an existing property or a new one, in which case you get the bigger loan. And, upon selling, the government collects a portion of equity, which has yet to be disclosed. Mr. Campbell says that part of the deal would make him nervous.
“Say you put in two years of sweat equity, paint it, fix it up and raise the price by about $100,000 or so. That is how you climb the ladder. You can really make a great nest for yourself, but also establish home equity to start a small business – there is a whole ripple effect to that. But if you take this loan, is 50 per cent of that equity going back to the federal government? If so, then you are removing the incentive to get into the market and do any of that work. That’s a really big question.
“Also, with this [program] they are co-purchasing the house, and government is taking my word that I’ve made a good housing decision. It raises a lot of questions. Maybe they are a silent equity co-owner, so you can still make financial decisions without their input. But couldn’t I get a Home Equity Line of Credit, and pay them off and they are gone? That’s an interesting question.”
There are questions too about the government’s exit strategy. Are they willing to wait for 30 years to recoup their investment?
The Canada Mortgage and Housing Corporation will oversee the $1.25-billion SEM, but the specifics have yet to be released. When asked for more detail, a CMHC representative said that they couldn’t share details yet, but they would be coming in the following months.
What we do know is that they expect about 100,000 buyers to participate over a three-year period once the program is launched in September. The goal, according to government, is to make home ownership more affordable by reducing mortgage payments. If a homeowner purchases a newly constructed home for $400,000, with 5 per cent down and a 10 per cent SEM of $40,000, for example, their mortgage size would go from $380,000 to $340,000.
Eligible first-time buyers must have the minimum down payment for an insured mortgage. Those buyers must be earning more than $50,000, but less than $120,000 a household. And the property they purchase must not be priced at more than four times their household income, which means it’s capped at $480,000. In Vancouver, that $480,000 budget would get a buyer a 525 sq. ft. condo on the fringe of the city, in the River District, or a condo in an older building around Hastings Street. Otherwise, it means commuting.
For Mr. Campbell and his wife, a long commute was not an option. They purchased a property in the dense and central Fairview neighbourhood.
“For us to buy a place to make a home is integral. I am from New Zealand and I grew up in Europe and lived in Beijing, and I am a strong believer in pedestrian and bike-centric living, so we wanted to stay central so we can walk and bike for what we do in our lives. We are willing to pay a bit more for that, and look a bit harder.”
With a cap of $480,000, buyers will go looking far outside the city, he says. Within the city, they would find that price point impossible.
“You’re incentivizing people to go buy the worst product out there, something really far out or old and crappy.
“The gross purchase price is too low. The stuff being offered for sale [at a low price] is just garbage, stuff that’s been rented out 20 or 30 years, with holes in the carpet, and reeks of weed. No thank you. The people who buy it are buying for investments. So they are buying properties they can rent, and the locations are pretty good, and they know the value will hold all the time.”
Lawrence Frank, professor of transportation and health at the University of British Columbia, who studies issues such as sustainable transportation, said the program only encourages sprawl in a market as pricey as the Lower Mainland.
A bigger condo, townhouse or even a small house, would require “driving until you qualify,” as the saying goes.
“It’s absolutely ridiculous that we have a program that would lend money to people for mortgages which is blind to the variation in transportation costs that come from living in an outlying area versus a more central area,” he says.
He argues for a lending program that takes into consideration the high cost of commuting. He prefers the idea of a “location efficient mortgage” (LEM), which was created as a pilot project in 1999 in the United States by a consortium of non-profit institutions, including the Center for Neighborhood Technology. Fannie Mae provided the financing to bring LEMs to markets in Chicago, Los Angeles, San Francisco and Seattle. The model helped low- to middle-income buyers in particular, and was aimed at boosting transit use, reducing energy consumption, improving air quality and designing better communities.
It’s typical for major lenders to consider a borrower’s household income and household debt. When transportation costs are factored in, the borrower without a car living in a dense area has a higher rate of qualifying. When all factors are considered, the walkable property’s higher cost is offset by less risk to both borrower and lender. Chiefly, it reduces the dependence on a car, which adds thousands of dollars to the borrower’s expenses. When people move away from dense areas, they need either one or two cars. Thousands of dollars a year spread out over a typical 25-year borrowing term adds up to significant extra cost. As well, there are the obvious health and environmental costs of commuting.
“That means that money that was going to go towards a depreciating asset, a car, could be invested into an appreciating asset – a home,” Prof. Frank says. “If the intent of these programs is to incentivize home ownership, if that’s the goal, then this [type of mortgage] isn’t just incentive, but it takes into account the reality that people who live in more walkable places spend less on transportation. That’s just fact. Why do we have a situation where we are ignoring that?
“It’s because we are in a car culture, and that looks normal to us within that bubble. But it’s not. It’s a distortion of reality.”
Andy Yan, urban planner and director of Simon Fraser University’s City Program, concurs that the federal program will put people in cars instead of on transit.
“What kind of Faustian bargain is being struck when you trade ‘affordable’ housing for a one-way, one-hour car commute?”
Kwantlen Polytechnic University geography instructor John Rose also believes the new program will incentivize suburban sprawl, and he criticizes the motivation behind the program in general. Dr. Rose released a paper in 2017 called The Housing Supply Myth, which argued against the prevailing idea that skyrocketing home prices were related to lack of supply. He found that housing prices had gone up in conjunction with a surplus of housing units, relative to the number of households. He also found that lack of affordability was more likely attributed to housing units being absorbed by non-residents. The question then became, he said, one of demand, and not supply. In other words, who is it we were building for?
“While couched in terms of helping out first-time home buyers, these policies are clearly geared towards propping up the housing construction industry, and, I suspect, to staving off a housing-led recession,” Dr. Rose says.
He takes aim at the government’s claim that it is helping to encourage home construction that is needed to address supply shortages, particularly in the largest cities. That claim is unsubstantiated and premature, he says.
“Effectively, then, what we have in this recent policy is a government subsidy to first-time homebuyers which indirectly supports home sellers and the construction industry.
“It stimulates demand to absorb unsold housing inventories and provides a kind of ‘price floor’ to contain the downward movement in prices that has begun in Canada’s major cities.”
The success of the program in Metro Vancouver will depend on a couple of factors, he says.
“The actual effect of this policy on demand will depend, I think, on the willingness of new homebuyers to trade off some of their ownership stake to the CMHC in return for greater purchasing power.
“And it will also depend on the degree to which we see continued price decreases across all housing types.”