The Decibel - The problems with the First-Time Home Buyer Incentive

Episode Date: May 9, 2023

In 2019, Prime Minister Justin Trudeau promised to help millennials hoping to buy a first home with a new program, called the First-Time Home Buyer Incentive. It was supposed to help 100,000 Canadians buy their first home but, according to real estate professionals, the program was doomed from the start.To understand what has gone wrong, economics reporter Matt Lundy crunched the numbers. He explains why the program has fallen short of its goal and how it is failing to address the real problem in real estate.Questions? Comments? Ideas? Email us at [e-mail]

Hi, it's Manika. Your support means a lot to us here at The Decibel, and your feedback matters too. And we want to know what you think of the podcast. So we've set up a quick survey where you can tell us your thoughts. And as a thank you, there's a chance to win some prizes. We'll tell you how at the end of today's episode. Oh, let's take a look at this. This place just looks kind of fun. Fun? Oh, yeah's take a look at this. This place just looks kind of fun.

Fun? Oh, yeah. Okay, here we go. So... I don't know. So take a look at... This is incredible. Under the listing description, it says there's 450 square feet of a private rooftop terrace where you can tan naked!

Selling point right there. Wow, okay. $1.3 million to be naked at home. In the middle of Toronto. Yeah. At some point, you've probably done what economics reporter Matt Lundy and I were doing. Doom scrolling through real estate listings. How often do you look at listings, Matt?

I'm ashamed to say that it's like every other day. Really? And I'm not actively looking for a place, but I'm just like, I'm so curious about what's out there. I feel like I get more and more depressed every time I do look at the listings. Affordability is such a problem that the federal government has been pressured to do something about it. But one policy for first-time homebuyers isn't really helping that many people. Today, Matt's back on the show to explain the challenges with the first-time homebuyers incentive program, especially in Canada's most expensive cities.

I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail. So let's just start by bringing people back in time a little bit to an announcement that the Liberals made before the pandemic, way back when, in 2019. And this was an announcement about helping people buy homes. Tell me about that announcement, Matt. Yeah, so in the spring of 2019, the Liberal Party or the federal government announced the first-time homebuyer incentive. We listened to Canadians over these past few years talk about the fears that they or their children will never be able to own their own home. And because we believe in investing in our people and our communities, we decided to act.

So this was happening at a time of, we were coming off years of huge appreciations in home prices, affordability was getting stretched. A lot of this was really concentrated in like the lower mainland of BC and in southern Ontario. This was also an election year in 2019. Right. So I think there was a lot of impetus for the government to look at millennials being a larger voting bloc. They were getting into their home buying years. A lot of them were struggling, especially for younger people buying homes. I spoke with a real estate agent recently in Toronto who said 80 to 90 percent of the millennial buyers he sees are getting financial help from their parents. So this was coming at a time when things

were pretty bad and the federal government wanted to give a little extra financial incentive to people. And just remind us, what were housing prices like back then? Yeah, so the benchmark home price in September of 2019, which is when this federal program launched, it was about $530,000. Now we're at about $730,000. So we've gone up in the span of about three and a half years, about $200,000 on sort of like a typical home. It's up 37%. So I mean, if anything, these affordability concerns have just gotten worse. Yeah. Yeah. And of course, it's an average. If you look at big cities, it's more expensive, and then rural areas, it's less expensive. But that's the average there. And so, as you said,

the government announced this first-time homebuyers initiative. What exactly was the goal of that? If you look at the original pitch for it, they say it's about making home ownership more affordable. Millennials are facing unique and daunting challenges as they make important life decisions around housing. Young Canadians hoping to settle down and buy their first home, like their parents did a generation ago, are facing a tough housing market.

House prices- So I think a lot of people, when they first saw this, it was, okay, we're gonna help first-time homebuyers or people become first-time homebuyers. Really what it's about is reducing monthly mortgage payments. So what they're making more affordable is that monthly payment that you're making.

And effectively, they're finding a way to get rid of a couple hundred dollars on your bill. That is largely what this is. So the way that it works is after you've already saved enough for your down payment. So you have to save for your down payment. You have to save for your down payment. They're not helping you hit that threshold yourself. If you don't have enough money for a home, you're not going to be able to use this program. What they're doing is they're kicking in more once you have that minimum down payment. So either 5% or 10% of the purchase price of the home, this reduces your mortgage and therefore your monthly payments. Okay. Okay. So it'll help you out. Like once you've purchased

the house month to month, you're going to be paying less on your mortgage every month. Essentially. Yeah. Okay. Okay. Let's get into more of the specifics here Okay. So it'll help you out. Like once you've purchased the house month to month, you're going to be paying less on your mortgage every month. Essentially. Yeah. Okay. Okay. Let's get into more of the specifics here then. So the government kind of helps you out with that. What do they get in return? Because I would imagine there's some kind of equation that's happening here. Yeah, exactly. So this is not free money from the government. What you're getting is a shared equity mortgage with them. It's sort of like a no interest loan, but the bill does eventually come due. So if the government is kicking in 10% toward the purchase of a home, they have a 10% stake in your home. So when you sell that property or after 25 years, you owe them 10% of that home's value.

And of course, your home probably over 25 years has gone up in price. So the government shares in that appreciation. They can come out of this ahead, essentially. And to that point of the government owning a portion of your home, like what if you make improvements to your house, which a lot of people do, right?

If you do kitchen renovations or finish your basement, I mean, that's gonna increase the value of your home. Like what if you make improvements to your house, which a lot of people do, right? If you do kitchen renovations or finish your basement, I mean, that's going to increase the value of your property. Does the government get a share in that too then? Absolutely. Yeah. I don't think they're netting out like all the extra work, putting in a deck, a kitchen, as you mentioned. And of course they're not contributing to that renovation that you've done either, but they do see the financial upside. So let's go through an example of someone who's bought a house and how that money works out then. Yeah. So let's use an example of a $400,000 home. The minimum down payment for that is 5%, which is $20,000.

So you're looking at a mortgage of around $380,000. Now, with the incentive, if it's a resale house or existing house, the government will kick in 5%. Or if it's a new home, it's 10%. So let's say you want 10% because it's a new home. That's $40,000, 10% on $400,000. So the difference is, in the first example, you had a $380,000 mortgage. Take another $40,000 on $400,000. So the difference is in the first example, you had a $380,000 mortgage, take another $40,000 off of that, you're left with $340,000 and that's just not going to cost as much to pay off, right? So the difference is that in the first example, it's $2,200 roughly a month at today's mortgage rates. But with the incentive, you're looking at about $250 less a month on your mortgage.

So $1,950, which, you know, for a lot of people, if I can save $250 a month on my mortgage, like why not do that, right? And there are thousands of people who have used this program. The trouble is that there are a lot of limitations with the program and a lot of reasons why people might not want to use it. Okay. So what are some of these limitations then? Okay. So one of the big issues with this program is around how much you're able to borrow under it with your like main mortgage here. So the rule is that you can have a maximum annual household income of $120,000 and borrow up to four times that amount. So you can only qualify for this program if you have a household income of $120,000

or less then? That's right. Okay. Yeah. And so the most mortgage you could get would be four times that for $180,000. So one of the troubles is that basically with those lending parameters, if you are making a minimum down payment and make the most amount of money allowed, the most you could buy a house for is about $505,000. So that is problematic in that, especially lately after the sort of pandemic home buying boom we saw where like home price appreciation was going wild everywhere. There's just less and less inventory that you can possibly buy for about half a million dollars. And a lot of those buyers, they can spend more by not using the program. So when we're getting into bidding wars and trying to be as competitive as possible with what we're able to spend, you're often better off just not using the program.

So can you explain that to me? Like, why would people be better off not using the program. So can you explain that to me? Like, why would people be better off not using the program? Because often you will be able to borrow more with a lender outside of this program because you're not having these restrictions on through the program four times your income, for instance, right? So you can take out usually, depends on the buyer, there's all sorts of considerations here, but you can often borrow a fair bit more outside of the program. And so if things are really competitive out there, why be constrained by this program? And the $500,000, that number is really interesting because when you're talking about the average home price, it's actually higher than that right now. So this must be an issue in places with really hot markets like Toronto and Vancouver. It sounds like this wouldn't actually be that

helpful in those places. One thing that I've found here is that very few people in Toronto and Vancouver, as well as Victoria, BC, are actually using this program. Fewer than 400 people have used it in about three and a half years that the program's been around. Federal government two years ago actually changed the rules for buyers in those three areas, Vancouver, Victoria, and Toronto. Not just in the cities,

but like the entire suburban areas of those cities, right? But the rules did not change for the rest of Canada. As far as that like half a million dollar like max price that we're looking at, that stayed the same. So now you could make up to $150,000 and borrow 4.5 times that amount. So this basically made the max purchase price under the program over $700,000, about $722,000. It's better. It's still not great for a market like Toronto. It's better, but it basically means that in Toronto, like you're looking at, okay, well, I could buy a condo. Or maybe if you go out to some far-flung communities in the GTA,

like maybe there's a new build, townhouse, that sort of thing. But you're really constrained still, even though they have expanded the program in the priciest markets. This might be a really basic question, Matt, but if the government's aim here is to help people afford homes, I mean, why didn't the government just decide to give people help with their down payment? Because that's a huge thing that people have to save up for. So why not do that instead of setting up this complicated process? If we were just giving out money to help people with their down payments, I mean, that would probably just push up home prices even more, right? Like that would be – that would start getting baked into the prices. People would have even more money to spend.

People who didn't have the money before would suddenly be in the housing market looking for places. So all of that would probably push up prices and make our affordability troubles even worse. We'll be right back. All right. So given all of this, let's actually look at how this program has performed since it's rolled out. How many people have actually used this program? The goal was to help 100,000 families in three years use this program. Fewer than 20,000 have used it so far. So one, we extended the program after three years,

we've kept it rolling, and it's going to be going through May of 2025. But yeah, we're nowhere near the pace of helping as many people as the government originally thought. Okay, so we know it hasn't been used much in the big cities like Toronto, Vancouver, Victoria, you mentioned as well. But you did say, Matt, that close to 20,000 houses have been purchased this way. So who is using this program? It's proven most popular in Quebec and Alberta. In Edmonton in particular, they have over 2,600 people or buyers. And why Edmonton? Things are way more affordable.

Like if we talk about this program being difficult in situations where you need to like bid the most possible that you financially can. Edmonton just has a lot more inventory that falls within the parameters of this program. You can get a condo in Edmonton for under $200,000. The average price is about 190, right? Wow. So suddenly, yeah, suddenly like you've got a minimum down payment on a $200,000 condo. You're looking at 10 grand for a down payment. And then, you know, you're ready to buy and hey,

there's this added incentive that will knock off some money on my monthly bill. Yeah, sure. Why not? Right. So I think it's an easier decision to make in some of these markets that, frankly expensive, like Toronto and Vancouver, where people are really having a hard time finding a place to live. I guess, Matt, why wouldn't the government just set this program up to be more helpful to people in those cities as well? That's a good question. I think with this program, the federal government, one, wanted to minimize some of its risk. They clearly didn't want to help people bid on $2 million homes in Toronto, right, who financially couldn't do it. So I think they had some pretty strict parameters there for a reason. If you look at the initial news coverage of this program in 2019 when it launched, the Globe actually published an op-ed called

The First Time Home Buyer Incentive is Bad Policy. So that was, so that was immediately right off the bat that people thought, hey, this thing doesn't quite work. Yeah. It sounds, I mean, in some ways it sounds like this program wasn't really meant for people in those pricey markets. It was meant for other markets. It certainly feels that way. And the numbers bear that out, right? Like where it's being used is not in these really unaffordable markets. So it's really difficult to understand where the government was coming as far as the design of this. Matt, do people even know about this program? I mean, couldn't that be part of

the reason why numbers are so low? A lot of people in the real estate industry say that the program is poorly marketed, that people, frankly, don't know about it. My only contention with that is if you go on MLS, if you're on realtor.ca, a lot of the listings, a lot of the stuff that's, you know, on the, frankly, quote unquote, more affordable side. You know, I'm looking at a listing for something that's like $600,000 right now. It says fairly predominantly on this listing, do I qualify for the first time home buyer incentive with a link for people to learn more? So if this is on all of the listings under which you could use the program, I would say that it's marketed pretty widely. And what about the government here? I mean, what do they say about the fact that this program isn't being used the way they thought it would be?

They say, you know what, we have a national housing strategy. It's got a bunch of different programs. We weren't trying to solve affordability with the first-time homebuyer incentive. We have a bunch of other things going on. We're trying to promote construction of homes. We're spending, frankly, more money. This program had $1.25 billion allocated to it. We've spent only one quarter of that so far. But when you look at the national housing strategy, it's like $82 billion.

So we're trying to do all sorts of other things to make homes more affordable. It's debatable how that's going so far. If you're looking for a home or you're getting hit with like $2,500 a month rents right now, you probably don't think we're doing so well. So just lastly here, Matt, I mean, you've identified some major issues with this program in particular. You've talked to a lot of experts on this. Is there a better way to tackle the issue of housing affordability? I think in some sense, the federal government is like misdiagnosing the issue. The problem is not how to help people make their monthly payments. We have stress tests in Canada showing that people

can afford higher mortgage rates if interest rates go up. People still have to go through the qualifications. In this case, people have a minimum down payment in hand. We're basically just knocking a couple hundred bucks off of the monthly payment. The real issue is that home prices are exceptionally unaffordable throughout the country, and people can't even get that down payment to begin with. One thing that I've detected in recent years, like pre-2020, we spent, at least governments were spending a lot of time looking at demand measures like this, things that were helping people to buy or helping them with their payments in this case.

More recently, I think governments, you know, from municipal up through federal have realized that supply is really what we need to be looking at, right? The reason why people can't afford homes in the first place is because we don't have enough of them. That's why they're so expensive. And so I think just about any conversation

we're having with regard to affordability in the housing market needs to start with getting more supply online. And I realize that takes time. It can take years, especially with like a high rise purpose-built apartment from idea through, you know, actually people moving in can be like seven, eight years that that takes, right? So these things, it's frankly too slow moving

for a lot of people, but we need way more supply. I think that's really the rub here. Matt, thank you so much for speaking with me today. Thank you. So about that survey on the decibel, we want to know about you and what you want to hear on the show. Just go to thedecibelsurvey.ca, fill it out, and as a thank you,

you'll be automatically entered to win one of three grocery gift cards worth $100. Again, that's thedecibelsurvey.ca. We can't wait to hear from you. That's it for today. I'm Mainika Raman-Wilms. Our interns are Wafa El-Rayis, Thank you.