I’ve heard a familiar story since I started as a mortgage agent and it goes a little something like this, “My parents/ grandparents/uncle that I only see at thanksgiving bought a house decades ago for $3 and a shoelace and now it’s worth millions. Obviously this is an exaggeration but the message rings true. That’s just the way it was years ago; houses were cheaper and there was less of a discrepancy from housing prices compared to annual income; although, interest rates cost an arm and a leg. At at least you had a property that was gaining equity. 

The housing affordability “crisis” that Canadians are struggling with is affecting millions and needs to be addressed in the coming election. In my opinion, one group of Canadians has been dealt the shortest straw. First Time Home Buyers (FTHB) or should I say aspiring first time home buyers are having a hard time getting into the housing market. The price of housing combined with the mortgage guidelines that lenders have to abide by are making home ownership for FTHB more and more difficult. 

Welcome to “Gillis Gets Political: Part 2” where I focus on what the three major political parties in Canada (Liberal, Convective and NDP) are doing for the FTHB. 

The Liberal Party are planning to include a deferred loan option for the FTHB incentive, Raise insured deal cap to 1.25 million, create a 40k tax free saving account for the purpose of purchasing a home, 25% less mortgage insurance and double the FTHB tax credit. 

The FTHB incentive is a failure and it is in desperate need of a makeover. “Portions of down payments would be provided, interest free, in exchange for a portion of equity in the home. There’s only one problem, it’s a failure (Alloway, 2020)”. The reason being is that it doesn’t really help you qualify; it just makes your payments slightly less once you do. You would then be giving up 5% of the equity you gain in a booming real estate market; it’s not worth it. The deferral loan would allow you to pay back the 5% you borrowed from CMHC at a later date (I’m assuming once the house is sold). This seems like a better option but it really depends on the interest rates they charge and if this loan affects borrowing power. 

Raising the insured deal cap is something that has to happen as housing prices increase but isn’t worth advertising as something that will help the FTHB. Currently if a house is purchased over 1 million it becomes an uninsured deal so you have to provide at least a 20% down payment. An insured deal allows the buyers to place a 5% down payment. So, if the cap is raised to 1.25 million, a buyer could purchase a house over a million and still put a 5% down payment. Only issue? Is there a FTHB that purchasing a home for over a million? Almost everyone who can purchase a home for over a million isn’t really struggling with affordability. 

I really like the 40k tax free First Home Savings Account; it works like an RRSP and TFSA to use up to 40k on a downpayment for a house. This will help a FTHB save a downpayment for a house and the idea of it will force young Canadians to think about homeownership earlier. If you want to learn more about this saving account and TFSA’s/ RRSP’s in general please reach out. 

25% less mortgage insurance and double the tax credit I have included together because it’s a nice offer that will save the FTHB a couple grand but doesn’t really help them qualify. Mortgage insurance is amortized with the entirety of the mortgage for usually 25 years so this really only saves around $10 to $25 a month (estimation that depends on purchase price). Doubling the tax credit would allow the FTHB to receive $1500 instead of $750 as a rebate. As you can see these are nice gestures but not life changing. 

The Conservative Party are planning to fix the stress test, increase insured deal cap and encourage 7 to 10 year mortgage terms.

When I first read that the conservatives are planning to fix the stress test I got really excited because this has a direct impact on borrowing power; however, they are only tweaking it. It’s a shame but it’s better than nothing. “Stress test ‘fix’ for small business owners, contractors and other non-permanent employees (Taylor, 2021)”. So, it will be a bit easier for Canadians who don’t have guaranteed employment like salaried or hourly workers; a step in the right direction, but how much will they actually “fix” the stress test? Only time will tell. 

Just like the Liberals, the Conservatives also plan to raise the insured deal cap making it over a million except they haven’t pinpointed an exact number. Whatever the number is, I don’t know many FTHB’s who are planning on buying a house over a million. 

The encouragement of 7 to 10 year terms is hard to comment on as I’m not sure if they will have some sort of government program that makes 7 to 10 year terms cheaper or will simply just encourage them. If it’s just a simple encouragement I’m unsure how this will help as 7 to 10 year terms have higher rates due to the chance that rates may rise within that time period. Also, 70% of Canadians break their mortgage in order to either refinance or purchase a new home so breakage fees would cost even more for the average Canadian. However, if rates skyrocket it could help Canadians keep these current rates for an extended period.

The New Democratic Party are planning to have 30-year amortizations for the FTHB for starter homes and double the tax credit. 

30-year amortizations are only available for uninsured deals at the moment which requires borrowers to have a 20% down payment. The 5 extra years allows payments to be spread out longer to make qualifying easier. Insured deals (which almost all FTHB’s get) have a max of 25- year amortization. Allowing the FTHB to have a 30-year amortization will increase the amount of mortgage and thus make them more competitive in the marketplace. 

The NDP has the same idea as the Liberals and want to double the tax credit making it $1500 instead of $750. Again, a nice gesture but not life changing. 

Final Thoughts

I like the fact that all of the parties are acknowledging that First Time Home Buyers need some support. It’s a step in the right direction. It’s hard to say if they’re doing enough. If you read my last blog I talked about how increasing supply is the best way to cool this housing market. It’s possible that increasing supply will make it more competitive for the FTHB without addressing any specific FTHB issues but I doubt it.  

The fact of the matter is that the FTHB (for the most part) are younger and because they’re young they have had less time to save money for a down payment and enhance their careers to earn a higher income so they depend on higher mortgage volumes to compete in the housing market. When they’re given the same guidelines as everyone else it becomes extremely hard to compete.

In my opinion, some extra initiative should be supplied to the FTHB. The First Time Home Buyer incentive is useless and either needs to be scrapped or needs some serious changes, possibly a deferral loan option with interest rates the exact same as inflation. A stress test fix that sees the FTHB capable of qualifying at a lower rate than others, even by a small margin would increase the mortgage amount. Another option would be a higher amortization limit to spread out payments. To be honest, there are tons of ways to help out the FTHB but we will see if the government lives up to their promises. 

Alloway, B. (2020, May 25). The first-time home buyer incentive is a Failure: Here’s how to fix it. ReaLawState. Retrieved September 13, 2021, from https://realawstate.com/the-first-time-home-buyer-incentive-failure/.

Gillis Mortgages is getting political! Well not really! I won’t bore you with my political views but I will let you know how this federal election might affect the housing market. 

A lot goes into the platforms of our political parties so I went through them and focused on what is important (please see the link at the bottom for more details). I also only focused on the three biggest parties (Liberal, Conservative and NDP) as some parties haven’t released their housing platforms.

There are two main topics I wanted to discuss that the parties have claimed they will focus on if elected; one is increasing housing supply which is the best way to cure this intense housing market to make it competitive for all and the second is the First Time Home Buyer Plan and this relates directly to most of my clients. For this blog I only focused on housing supply and will publish part 2 about the First Time Home Buyer Plans at a later date. 

SUPPLY PLATFORMS

The Liberal Party plans to build 1.4 million homes in 4 years, donate billions to various housing initiatives such as office space conversion, put a 2 year ban on foreign residential investment and impose a “flipper tax”.

The additional housing supply will definitely help make housing more affordable. This is a simple supply and demand economic law that tells us that if supply increases prices will fall if demand remains the same.  

The billions that will be donated is going to a wide range of causes that seems promising but are hard to comment on as we won’t know the benefits or challenges until later. For example; investing to convert office space into housing will create some supply but most of the vacant office spaces are in cities where Canadians are moving away from. If people want to move away from the city then will this initiative depreciate the city’s housing markets while surrounding areas become more and more expensive? Also, will this create a shortage of office space causing commercial real estate to appreciate at an unhealthy rate? These are the questions that will be answered years from now.

Putting a 2 year ban on foreign investment in residential real estate is a good idea. For the most part these foreign investors are capable of going firm and paying cash. Less competition in a market place is better for buyers and creates affordability. 

The flipper tax is interesting. If you buy a house and own it for less than 12 months you would have to pay 100% capital gains. This means you wouldn’t make any money on the property if owned for less than a year and you would most likely incur some loss due to closing costs. I don’t see the viability of the “flipper” tax in the long run as this would destroy some livelihoods and “flippers” normally purchase homes that the majority of buyers aren’t interested in, however, in the short run I could see this tax limiting competition. 

The Conservative Party plans to build 1 million homes in 3 years, incentivize builders and investors with tax programs, release 15% of  federally owned properties for bid and put a 2 year ban on foreign residential investment. 

Just like the liberals, the conservatives also plan to increase housing supply; just 400,000 less than their left counterparts.  

Incentivizing builders and investors with tax programs seems promising just like the Liberal’s donation strategy; however, we don’t know exactly what these tax programs are. What we do know is that builders will be incentivized to build housing that helps the middle class but mostly the renter market. “Those locked out of ownership find themselves trapped within rental markets where rising prices have made it prohibitively expensive to simply put a roof over one’s head (Zivo, 2021)”. 

Releasing 15% of federally owned properties would increase supply but from what I’ve read the release of 15% of federal owned properties is included in the plan to build 1 million new homes. “O’Toole called the federal government the largest real estate owner in Canada and vowed to release 15 percent of government-owned buildings and land to be repurposed in a bid to build one million new homes over three years (News Staff, 2021)”. So, they would be reallocating real estate instead of building new it seems. This also begs the question of what real estate will they be privatizing? Will the conservatives be converting social and affordable housing that the lower class needs? Again, these are questions that will be answered years from now. 

Conservatives and Liberals both agree that a 2 year ban on foreign residential investment is needed.  

The New Democratic Party (NDP) plans to build 500,000 affordable units over the next 10 years and put a 20% foreign buyers tax. 

The NDP takes a different strategy from the Liberals and Conservatives and dedicated their housing platform to help those who struggle the most in the current competitive market “Housing is considered affordable if it costs less than 30% of a household’s before-tax income (CMHC, 2018)”. Affordable housing depends on the government to subsidize payments whether it’s a rental or ownership. This will clearly help those who need subsidized housing but will it help with current affordability problems? Do they think the housing market will sort itself out? Only time will tell. 

They also take a different approach when it comes to dealing with foreign investment. Instead of a 2 year ban on foreign housing investment that the Liberals and Conservatives agreed upon, the NDP has opted for a 20% foreign tax. It’s possible that they believe foreign investment is too important for the Canadian economy and instead of banning foreign investment completely they can just tax more and thus profit more. 

FINAL THOUGHTS

You may be asking “What party has the most comprehensive plan to help make the housing market more affordable?” The answer is… time will tell.  Politicians have a funny way of not seeing their plans through; what they plan on doing and what they actually do are two completely different things. It’s possible that political plans can change based on unpredictable future events. Take COVID for example; I’m sure numerous initiatives were put on hold because the government needed to focus on a global pandemic.

There is one big problem with increasing housing supply that has the most influence on housing policy and it’s the same as the biggest benefit. Earlier in this blog I said, “if supply increases prices will fall if demand remains the same”. Prices falling is great for Canadians who find the housing market unaffordable but affects Canadians who already own a home. These homeowners will see either a reduction in their home value or a lack of appreciation that they’ve come to expect. These homeowners also hold great importance in elections! “So while the federal parties want to rein in housing prices for Canadians who’d like to buy, there’s an incentive to keep the gravy train going for homeowners, who are generally older, more affluent, and more likely to vote than renters. They’re also more likely to inflate the country’s GDP, giving the governing party economic bragging rights (Hauen, 2021)”. So, it’s possible that political parties could create less supply than advertised in order to entice homeowner votes.

I like to consider myself an optimistic person, so let’s say that the government lives up to their promises and homeowners vote with the belief that a healthy medium of affordability and appreciation is achievable, we still don’t have a magic number of homes to be built that will find that healthy balance between supply and demand. For example, the liberals want to build the most homes at 1.4 million. This may be too many and cause homeowners to lose equity in their homes or it may still not be enough and barely put a dent in Canada’s affordability problem.  

At the end of the day, the best party to vote for based on your own research is the party that supports the issues that you consider important. Liberals seem to have a “put eggs in multiple baskets strategy” that sees the most homes being built and also the most money donated. The conservatives are focusing more on the middle class and the renter market but are doing so by privatizing some public land. The NDP are focused on affordable housing for those that rely on subsidized housing and are going to be less strict on foreign investment.

I hope I helped you summarize the various political approaches regarding housing!  Please see link below for more information…

https://mortgageproscan.ca/advocacy/2021-federal-election?utm_source=SilverpopMailing&utm_medium=email&utm_campaign=Major%20Party%20Housing%20Policy%20Summary%20(English)%20(1)&utm_content=

Zivo, Adam. “Adam Zivo: Why the Conservative Housing Plan Really Is Better than the Others.” nationalpost. National Post, August 28, 2021. https://nationalpost.com/news/politics/election-2021/adam-zivo-why-the-conservative-housing-plan-really-is-better-than-the-others.