We know for a fact that millennials are not buying property as early in their lives as Gen X or baby boomers, but an important question the Government of Canada faces is how to increase the number of new homeowners?
On March 19th, 2019 the Government of Canada under the leadership of Justin Trudeau and the Liberal Party of Canada released that it would support qualifying mortgages with an additional 10% interest free financing for new homeowners who want to mortgage a first time home purchase, and 5% for new homeowners who want to mortgage re-sold homes.
The new program initiated by the current Government of Canada vastly expands the role of the CMHC which currently serves to insure all mortgage loans in Canada.
In this new system as well as the old system, all loans with under a 20% down payment require the borrower to purchase CMHC insurance.
As this new program only applies to households making less than $120,000 per year and caps out at 4 times the applicants’ annual income meaning it only applies to homeowners looking to buy properties where the mortgage plus CMHC insurance total less than $480,000.
The federal government’s portion of the loan is essentially interest free and only to be paid back after a certain duration of time (not announced yet), or at the time of sale. To qualify for this program, first time home owners must contribute at minimum a 5% down payment on their new property, and the government will issue additional funds given all conditions are met.
This proposal has sparked many strong voices and opinions within the Canadian housing community. We want to use this blog to explore both sides of this extremely complicated debate.
The main goal of this type of program is to allow first time homeowners to enter the housing market without requiring as large of a down payment as was necessary before the program. By having the government finance a portion of mortgage (interest free). The idea is to sponsor the purchase of real estate among a group of people who are not currently buying houses.
As discussed in another blog of ours, millennials have higher levels of student loan debt than any previous generation and are far less likely to take on more debt, even going so far as to postpone using credit cards as a method of limiting future debt.
The First Time Home Buyer Incentive program proposed by Finance Minister Bill Morneau in March of 2019 aims to counteract wealth inequality by providing new home ownership incentives. Many millennials feel as though their debt situation is unbearable and this program may give young people the currently unrealized opportunity to start their home ownership experience.
Why would I want the government intervening in the housing market? Housing prices are already extremely high in metropolitan areas across Canada and having the government finance “discount” mortgages would only shrink the supply of houses available for purchase. Providing mortgage solutions to people who are not able to qualify without government support means that middle income, aspiring homeowners are now competing with those that are supported by this program for less houses thus theoretically resulting in a net price increase for a shrinking supply of Canadian homes.
The truth is that the program has been tried before on a provincial scale for a similar purpose and failed spectacularly. Funny enough though, the reason this program failed was not because of the major disruption it caused, but because of a change in government and a failed turnout in applications from what was expected.
The B.C. Home Owner Mortgage and Equity Partnership Program launched in January of 2017 by the then liberal provincial government only managed to gain roughly 3,000 mortgage approvals versus the expected 42,000 within three years. This program was such an astounding failure that it was scrapped by the newly incumbent NDP, B.C. Provincial government in March of 2018, with the funding being shifted to HousingHub to fund affordable housing developments instead (source).
What happens when government enters a new industry?
Assuming people utilize the program: Big Changes!
Though the turnout for the B.C. Home Owner Mortgage and Equity Partnership Program was low, the impacts of a nationwide program could be enormous. Both programs target new homeowners and provide interest free financing for 5% of the loan. The main difference in these programs is the additional 5% the federal government is willing to contribute to mortgages on new houses.
We can be fairly certain that government entering the housing market in a strategic manor and providing major incentives for first time home owners will have an effect on housing prices if it does in fact result in more people buying homes. The question of who will win is not necessarily as simple as you might think.
Picture you are trying to sell property and you hear that the federal government will back mortgages taken out by first time home owners. You now have a massive new client base that is willing to pay your price, and partially with taxpayer money. Sellers would enjoy an artificially inflated market while potential buyers whom do not qualify for the same government programs will see themselves priced out of the market entirely.
There are a number of factors that impact this question. Canadians already have a very high percentage of homeownership when compared to a number of its peers.
2016 census data shows that 67.8% of Canadians owned their homes. Compared to the U.S. average of 63.4% and Paris and Berlin averages of 33% and 37% respectably, Canada blows away the competition (source). If so many Canadians already own their homes, why should we assume that there will be a high turnout rate in this new program. Given multiple dimensions of analysis it is very difficult to make an assumption whether Canadians who do not already own their homes, will start the mortgage process now.
Eventually home ownership may become more readily available for millennials, but at this point it is hard to see a major shakeup to the housing market without a titanic change in millennial spending habits. Given the large percentage of student debt among young people in Canada it is unlikely that millennials will be making large down payments any time soon.
What we do know that we live in an extremely interesting time in human history, and the major demographic changes we can expect in the coming years will continue to keep us asking questions about where our future will lead us.