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Canada Is Pumping More Credit Into Its Property Bubbles, Against Global Warnings

(Photo and article courtesy

Canadian real estate is in a melt-up, and the Government of Canada (GoC) was warned not to pour any gas on the fire. Naturally, they’re getting ready to pour gas on the exact fire they were told not to. On May 3, 2021, the GoC will expand the First-Time Home Buyer Incentive (FTHBI) program. The program is the type used to push prices higher and stimulate demand during a downturn. Instead, the government plans to expand the program in the frothiest markets. Let’s take a dive into how Canada will be speculating alongside homebuyers.

First-Time Home Buyer Incentive (FTHBI)

First a quick background for those that may have missed the initial rollout of the program. The First-Time Home Buyer Incentive (FTHBI) is a shared equity mortgage program. People that buy a home with the program get 5 to 10 percent of the purchase price as an additional down payment. No, it’s not free. The state is buying an equity stake in the home. It’s like taxpayers become a shareholder in your condo.

The down payment funds they give are considered a non-interest-bearing second mortgage. No principal payments are required, and the maximum term is 25 years, or when you sell the home. The repayment is based on the value of the home at the time you pay it off though. Until then, the government considers itself a part-owner of the home.

Since the government is speculating along with you, they share some risk. If the value of the home goes up during this period, taxpayers make money. If the value of the home falls, taxpayers lose money. Homeowners shoulder all maintenance and carrying costs. What could go wrong? 

To qualify for the program, households can’t have high incomes and there’s a maximum amount of leverage. Household income is capped at $120,000 per year, so no high-income borrowers. The maximum mortgage amount is 4x your qualifying income. Since the FTHBI is technically a second mortgage, it’s included in the total. The pitch is, it lowers your monthly costs. If home prices rise significantly, it can cost a lot more than the interest. The stated reason is, the program helps low-income households. The reality is, it’s trying to spur more demand from low-income households.

Let’s say your household makes $120,000 per year, and you have a down payment of $50,000. Under the current rules of the program, you may qualify for up to $530,000, and they’ll kick in 10% of the down payment. If you resell, you cover the maintenance and selling fees, and they collect 10% of the gross costs. 

Canada Is Expanding This Program In Its Frothiest Markets

When the program was launched in 2018, they said the limits were in place so they didn’t add fuel to hot markets. Now they’re changing their mind. Starting May 3, 2021, Toronto, Vancouver, and Victoria will see the max income boosted to $150,000. The leverage ratio will also increase to 4.5x, giving those buyers an extra 12.5% leverage. It’s not hard to read this as trying to pump city home price growth, since they now lag small towns.

Under the new rules, first-time buyers in Toronto, Vancouver, and Victoria can land a big investment. A household making $150,000 can now qualify. Using the same $50,000 down payment in the scenario above, this household can qualify for a purchase price of up to $725,000. The government will kick in up to $72,500 for a 10% equity stake. It’s like the worst episode of Shark Tank ever, and you’re pitching an apartment with a combination kitchen-bathroom.

Canada’s Largest Banks And The IMF Warned Not To Do This

Canada has been warned multiple times, over just the past year, not to make a move like this. The IMF warned them in their last mission, that first-time buyer incentives will lead to higher home prices and inequality. Scotiabank said more incentives don’t improve affordability, and make inequality worse. RBC said programs like this will increase inequality, and destabilize the economy. Canada is going against the advice of everyone from global NGOs to the country’s own banks. 

Will this program have any impact on home prices? Programs like these tend to only inflate the most affordable segments of housing. Homebuyers are now competing against other buyers with a down payment from the government. It does little to nothing when it comes to more expensive housing. By applying more demand-side pressure to affordable housing, they’re putting it out of reach for low-income households.

The big takeaway is the Government of Canada is revealing its intent. Despite many warnings to not expand a program like this, they’re doing it anyway. They were warned it would make housing less affordable, but they are ignoring those warnings. At this point the goal is clear — Canada wants less affordability.

The GoC is calling the bluff of young adults that are struggling with housing affordability. They very clearly think they have nowhere else to go, nor will they vote for another party. It’s gotten to the point where they’ll flat out go against the quality of life recommendations. On the upside, I hear Canadian real estate is still affordable for those with foreign income. Though I’m no longer sure if the government was bragging or complaining when they said that a few weeks ago.  

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