So, I’ve had some time to contemplate the federal government’s moves to make buying a home easier and more affordable for first-time buyers, and I’m now having some second thoughts.
I’ll be honest, at first I was excited about the changes. The Home Buyer’s Plan has been expanded to allow for a $35,000 RRSP withdrawal by a first-time buyer to put towards a down payment on a home, and an interest-free loan program backed by the Canada Mortgage and Housing Corporation was the main attention grabber.
For the Home Buyer’s Plan, first-time buyers were already allowed to withdraw up to $25,000 from their RRSPs, so the increase in limit may help a little bit, but I’m not sure this is targeting the right type of first-time buyer. Those with $35,000 or more in their RRSPs likely aren’t the first-time buyers that need down payment assistance the most.
The First-Time Home Buyer Incentive is for first-time buyers with insured mortgages, meaning they put less than 20% down on a home. For new construction homes, CMHC will provide 10% to go towards the down payment, and 5% for resale homes. This results in a shared-equity mortgage. The interest-free loan doesn’t have to be paid back until the home is sold (potentially with appreciation factored in, but those details haven’t been released yet).
There are other stipulations though, like household income can’t be more than $120,000 to qualify, and the mortgage amount, plus CMHC's contribution, can’t be more than four times the household income. This seemed reasonable when I first heard about the Incentive, but then I did some math.
According to the Building Industry and Land Development Association’s latest new home sales figures for February 2019, the average price of a new single-family home in the GTA is well over $1.1 million, and the average price of a new condo is nearing $800,000. Seems like a first-time buyer can’t get much in the GTA, but these are averages, so there are new single-family homes and condos priced lower than this.
For the sake of example, let’s pretend a first-time buyer is buying a new one-bedroom condo in the GTA for $450,000 (these exist, you just need to find them). If the first-time buyer puts down $22,500 (5% is the minimum required to qualify for mortgage insurance), CMHC will provide $45,000. That equals $67,500 down and a $382,500 mortgage. That means the first-time buyer’s household income has to be more than $100,000.
I read an article in the Daily Hive about how much it costs to live in Toronto alone. After factoring in everyday costs and modest spending on fun and entertainment (you still gotta live), it was determined that if you made around $50,000 a year before taxes, you can probably save around $300 a month.
So, let’s pretend that two people making a combined $100,000 a year before taxes are living together in Toronto and saving up to buy their first home. If they saved at least $600 a month, it would take just over three years to save up for the 5% down on the condo unit mentioned above. That’s actually not that bad to me! Let’s assume they advance their careers and make more money each year. I wouldn’t be surprised if they saved enough in less than three years. In this scenario, the Incentive makes perfect sense.
But here’s the thing - I don’t see how this addresses housing affordability. The Incentive just seems to help people who are already able to buy a home. I feel like we need more first-time buyer programs for those who don’t stand a chance in today’s market. There are single-person earners with children in Toronto who make less than $50,000. Under the new Incentive, they won’t even qualify for a $200,000 mortgage, and that’s if they manage to save 5% for a down.
I realize it’s important to remember that this is a national Incentive, it’s not just for Toronto residents, but that said, Toronto is one of the cities struggling the most with affordability issues. One of my fears is that the Incentive actually encourages young, talented professionals to take their families and search for a home outside of Toronto in an effort to qualify.
I think the First-Time Buyer Incentive is a step in the right direction and no one should scoff at an interest-free 10% loan on a new residential purchase, but I wish those truly in need were being taken into consideration.
My team has reached out to Options for Homes, a local builder who has been offering a similar program for years, to see what they think of the new Incentive. I’m very interested to hear back from them. They’ll have a special feature in our blog this week, so check back tomorrow.