With everything that has happened in 2020, you'd think housing markets would be behaving like little lambs. Flying along under the radar, the markets have been lions! Especially the Toronto Market.

Dated: March 21 2019
Views: 3958
Listening to the Federal Budget being announced this week was disappointing to say the least. There were so many changes that could have been made to right the wrongs that have negatively affected housing affordability. As we heard the introduction of the measures the Federal Government feels will spur market activity, it became clear that they are disconnected with reality and the issues that have kept buyers on the sidelines.
The main issue concerning Housing Affordability is, and always has been, supply. As demand increased over the past few years, supply issues came to the forefront and the solution would have been to find ways to increase supply. As you recall, Ontario’s Liberal government addressed the supply issue back in 2017, or at least they thought they did. What they actually did was throttle demand by introducing ways to make it tougher for buyers by decreasing purchasing power for Ontarians. Then came the stress test, which added another hurdle that would see purchasing power deteriorate further. This created one of the hottest rental markets in decades and drove rental prices through the roof. Now people were faced with rents that were out of control as well as stringent criteria that saw them being declined for a mortgage. It became quite clear that home ownership was even further out of reach due to the measures the government introduced to bring it back. The Housing Market - which is the engine that drives our economy - came to a halt. The spin off revenue that is put back into the economy off each home sale is said to be approximately $60,000. All of the sudden, this disappeared. Municipalities started to lose money from the loss in Land Transfer Tax revenues. This caused some municipalities to raise property taxes or cut services to cope with the decrease in annual revenues. The increase in property taxes to existing home owners continued to erode purchasing power and kept current home owners in their existing home thereby decreasing supply even more.
Fast forward to this week’s “pre-election” Federal Budget. Expectations were for supply issues to be addressed with concrete solutions (no pun intended), as well as a major overhaul to the Stress Test. What we received instead was a lot of sizzle but no steak. Let’s take a look at the two big “solutions” that were announced:
Great news right? Before you decide on that, let’s break these down.
Let’s take a look at the RRSP withdrawal amount first. After ten years at $25,000, the amount has been increased $10,000 to $35,000. This brings the total a couple can withdraw from their RRSP’s for their first home to $70,000. Previously this amount would have been $50,000, so the extra $20,000 will certainly help. To help with this increase, the government should have increased the repayment time from the current 15 years to possibly 20 year, or even 25 years to match the amortization period of a mortgage. For the couple that does manage to have $70,000 collectively in RRSPs, the pressure of having to pay back an extra $20,000 in the same time just adds to their debt level and adds stress. The bigger question remains “How many young couples have $35,000 each in their RRSPs for this to even be a consideration?”. The reality is that these buyers have been in the workforce for a relatively short period of time, and even at the max contribution level for their entry level salaries, they wouldn’t be able to hit the $35,000 max, let alone a $25,000 withdrawal. What could have been done to enhance this program? Allow all home buyers to utilize the RRSP withdrawal option and provide an extra five or ten years to repay the same. Without that, all we really have a pretty weak incentive that maybe 5% of the buyers out there could be in a position to take advantage of.
Now we get to the Interest Free, Shared Equity Mortgage. In order to take advantage of this, your household income cannot exceed $120,000. You must go through CMHC and have a minimum downpayment of 5% and maximum of 20%. Your total debt (insurable mortgage amount plus your shared equity “incentive”) cannot exceed four times your household income. For a couple making the max $120,000, their total for mortgage and the incentive cannot be more than $480,000. Once you add in their downpayment amount, you’re looking at $480,000 being between 95% (for those putting 5% down) of the purchase price to 80% (for those putting 20% down) of the purchase price. Therefore, the couple that makes $120,000 could purchase a home between $505,263 to $600,000. Let’s think about this for a minute. We were so concerned about home buyers hitting historically high levels of debt recently, so what did the government do? The government has just authorized an increase to household debt by allowing buyers to purchase a home that they normally would not have been able to afford under current criteria. Sure, they say it is interest free, but it’s still an extra 5-10% debt that will have to be paid back. This debt may be subject to an additional percentage depending not the capital gain on the property when you go to sell your home. Details are to follow, but what could this be? Could it be 2% of the capital gain? 5%? 10%? You may save $100-$200 on your monthly payments with this “interest free loan” program but at what cost in the long run? It’s concerning that we do not know the details for repayment as yet. I’m pretty sure if any lender had come up with this strategy, the government would have been quick to deem it illegal and shut it down. What if a Realtor had said, “I won’t charge you a 2.5% commission when you purchase this home, but when I sell your home we will split the profit”? Unethical? Cash Grab? Those would be some of the ways to describe this practice for sure. The other concerning fact about this initiative is that it does not take effect until September 2019. Traditionally, the busy time for buyers and sellers ends in August. Inventory is usually at a low by September. By providing buyer incentives at a time when inventory is lowest, the result will be multiple offers/bidding wars which will force buyers to pay 5-10% over asking on these properties. Depending on the buyers’ income level, when you apply the “4x income calculation”, the bidding wars will jeopardize the buyers’ ability to purchase a home with this incentive. Why would a resale buyer wait for this incentive to take effect anyway if they’d be paying 5-10% more to receive essentially a 5% “2nd mortgage” that would have to be paid back anyway? The thought process behind this incentive is flawed. From a local perspective, if you are looking at the GTA, there is not much that a buyer could purchase under this program in the $500,000 - $600,000 range. Looking across the nation to Vancouver, this won’t help anyone there either. There are two markets in Canada that the consumer complains about affordability in, Toronto and Vancouver. These changes will do absolutely nothing to help buyers in Canada’s hottest cities for Real Estate. How does this increase affordability at all?
It seems the government has taken a page out of the auto industry. The car leasing phenomenon sees drivers go out and lease vehicles according to what they can afford in monthly payments. By advertising that you can now own a home and lower your monthly payment for the time you are in this home, isn’t it the same type of mindset as car leasing? When you sell, you pretty much have a “buy back”, which is the cost of the interest free loan (a.k.a. second mortgage plus any share of equity). Household debt is being increased with little regard for equity, however the monthly payments fit. Not sure if this is where we wanted to go when we asked for means to increase affordability and DECREASE household debt. The government has just found ways to increase household debt and decrease affordability.
What SHOULD have been done?
Here’s what I believe should have been addressed in the budget.
The above five changes would have done a lot more in bringing affordability back to the forefront. As for what was tabled in the budget ….. it's a bit of a slap in the face for Canadians that were excited for true changes that would bring affordability back.
Asif Khan
chat.onthemarketradio.com
Asif Khan is a Certified Luxury Home Marketing Specialist and Owner at RE/MAX Prime Properties, Asif is a member of the CLHMS Diamond Guild, the RE/MAX Hall of Fame, Diamond Club, Chairmain's Club, Pl....
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