The homeownership rate among Canadians, as of January 1, 2019, sits at 66.4 per cent. Canada rounds out the top seven nations in the G20 and accounts for the highest homeownership rate in North America. When we look closer at the rate among varying age cohorts, we find that millennials comprise a smaller number of owners when compared to baby boomers and seniors. In February 2019, RBC reported that while the homeownership rate of millennials is just shy of the national average, this number decreases significantly for those under the age of thirty-five to 43.1 per cent. To illuminate the disparities between rates of homeownership among age cohorts, “one can compare homeownership rates of baby boomers at age 30 in 1981 with millennials aged 30 in 2016,” as reported by the latest Census. Approximately half (50.2 per cent) of the millennials who lived in their own home at the age of thirty were owners, compared with 55.5 per cent of boomers in 1981.
The Financial Post recently decried that, “Rich, aging baby boomers will make it even harder for millennials to buy homes over next 10 years.” Just as is it is the case with other parts of the globe, “The ranks of seniors in Toronto is growing,” according to the Ontario Ministry of Finance. It is estimated that, “The average yearly population growth for the segment will be about 4 per cent,” carrying the share of seniors in Canada’s most populated city, Toronto, to “18 per cent by 2026 from the resulting 14 per cent” reported in the 2016 Census. The Canada Mortgage and Housing Corporation (CMHC) stated that in Toronto, “A quarter of homes … were owned by seniors age 65 and over in 2016, up 4.5 percentage points from the previous decade” and “the share of townhouses owned by seniors reached 17 per cent from 12 per cent over the same period.” These demographic changes in concert with the alterations to federal financing regulations, increased demand, lack of varying housing types have contributed to the reduction of the rate of homeownership among millennials, many of whom are considered to be first-time homebuyers.
In a more recent re-examination of the benefits of homeownership, William Rohe and Mark Lindblad (2013) through the Joint Center for Housing Studies at Harvard University reviewed studies pertaining to five social constructs including: social and political involvement, psychological health, social capital and neighborhood impacts, physical health, and parenting and children’s behavior. Rohe et al. (2013),
Largely uphold the link between homeownership and social capital
as measured by positive perceptions of neighbours that include greater
neighbourhood satisfaction, cohesion, connections, and beliefs that
neighbours will act in the common good … even after taking … con-
founding factors into account that result in greater participation in so-
cial and political activities, improved psychological health, positive
assessments of neighbourhood, and high school and post-secondary
Hence, longevity and participation in the real estate market is a concern for all levels of government. Provincial Acts and municipal policy which govern supply and demand through building and zoning laws and bylaws in concert with homebuyer incentives, the ensuing discussion, our focus will be on the direct involvement of the federal government of Canada in order to aid in the balance of the real estate market and overall economy.
Antecedent federal government incentives for homebuyers included The Home Buyer’s Plan (HBP), The New Housing Rebate, and tax credits. Firstly, The HBP enables you to provide yourself with an interest free loan from their Registered Retirement Savings Plan (RRSP) of up to $25,000 for the purchase of their first home in which one will designate and occupy as a principal residence. The loan is required to be repaid to your RRSP over a period of fifteen years. Secondly, The New Housing Rebate is extended to homebuyers that purchase a new home from a builder or developer to be used as a principal residence or rental property. The rebate is given on the GST/HST associated with the purchase and the amounts differ and depend on the purpose of the purchase. Lastly, Line 369 (the home buyer’s amount) grants that you can claim $5,000 for the purchase of a qualifying home in the year if both of the following apply:
- You or your spouse or common-law partner acquire a qualifying home
- You have not live din another home owned by you or your spouse or common-law partner in the year of acquisition or in any of the four preceding years (first-time home buyer)
On June 17, 2019, The Department of Finance announced that the federal government will do more in terms of bolstering the demand for housing from first-time homebuyers with the first closing on November 1, 2019. The Department of Finance is set to expand The Home Buyer’s Plan and introduce a “five-year, $100-million lending fund to assist providers of shared equity mortgages to help eligible Canadians achieve affordable homeownership,” according to the CMHC.
Coming into effect on September 2, 2019, the HBP will be increased $10,000 to allow you to withdraw a maximum of $35,000 from your RRSP per person for the purchase of your first home that will be designate as your primary residence. The Government of Canada has allocated $1.25 billion over three years for this program. The incentive will be available to first-time homebuyers with qualified annual household incomes up to $120,000.
Launched on July 31, 2019, the Shared Equity Mortgage Provider Fund will offer eligible proponents loans from two possible funding streams: Pre-construction (Stream I) and Direct Shared Equity Mortgages (Stream II). Stream I is for pre-construction costs to commence new housing projects that provide shared equity mortgages to home purchasers and Stream II is for funding of shared equity mortgages provided by the proponent directly to home purchasers. The buyer must repay the incentive after twenty-five years, or if the property is sold. No on-going repayments are required, the incentive is not interest bearing, and the borrower can repay the incentive at any time without a pre-payment penalty. Borrowers may also select to refinance (i.e., pull out equity or extend their amortization) without repaying the incentive. Only insured mortgages will be eligible, meaning this will be restricted to those with a down payment worth less than the conventional twenty per cent of the purchase price. The CMHC will contribute five per cent of a down payment for the purchase of an existing home (Stream II) or ten per cent for the purchase of a new build (Stream I). This feature of the program serves to confer a benefit on first-time homebuyers that do not have enough money saved for a conventional mortgage. Putting down less of your money means you will also have to pay the mortgage loan insurance mandated by the CMHC. Hence, when the property is sold or the twenty-five year time period allotted to repaying the equity investment made by the CMHC comes to maturity, not only will you have to pay back the initial equity investment to CMHC, plus their fair share in profit, you will have also paid the mortgage loan insurance either in one lump sum at the time of closing or as part of your monthly mortgage commitment.
Buyers will not be exempt from federal B20 regulations which sets for the stress tests administered by federally regulated lenders. The stress test is a mandatory mortgage qualification using the five-year benchmark rate published by the Bank of Canada or the customer's mortgage interest rate plus two hundred basis points (or two per cent).
There appears to be little evidence that these types of schemes work to benefit the end user. Whilst it is important for the CMHC to seek avenues to generate returns conducive to stimulating the economy in respect to housing and ensuring affordability; there is little evidence to support that it widely supports those it purports to help. For instance, home buyers in England receive an equity loan of up to twenty per cent (this amount increases to a maximum of forty per cent in London) of the market value of an eligible new-build property, interest free for five years. Buyers can purchase properties valued up to £600,000 (CDN $959,808). As measured between June 2015 and March 2017, thirty-seven per cent of buyers in England said they could not have bought without the support of the program; however, only four per cent of all property sales have been sold under the scheme in England between April 2013 and September 2018. Even more striking is that the province of British Columbia canceled its Home Owner and Mortgage Equity (HOME) Partnership program less than two years after its initial announcement because it attracted a dismal 3,000 applicants, as opposed to the optimistic 42,000 applicants it had been forecasted to attract.
The amount that can be borrowed has been limited to four times your qualified annual household income up to $120,000 and a purchase price limit of $565,000. The average price for all of Canada in June 2019 rose 1.7 per cent from the year before to a tune of $505,463. This means that first-time homebuyers in major, or tier one, markets will not be able to participate. What is the average price of a property in the GTA as of the same month? The answer is $798,000. A 3.6 per cent increase over June 2018. There is currently 5,352 listings available for sale in the City of Toronto and only fourteen per cent of these listings are priced below $500,000. That is a total of 773 listings for first-time homebuyers that want to participate in antecedent programs. The percentage of listings available under the purchase price cap in the SEMP reduces when you work your way out to Peel Region and even less in York Region. In order to find a fair amount of selections for qualified properties, you would have to look north of the GTA at Simcoe County. One-third of the listings available for sale in Simcoe County would qualify in terms of price for the SEMP.
Moreover, while the program serves to reduce the monthly mortgage carrying costs, many will come to find that they can afford more by not using the program. Recently, the mortgage qualifying rate utilized by financial institutions to administer the stress test has followed suit with the reduction in mortgage rates offered by the same financial institutions. Being able to afford more does not necessarily equate to straddling yourself with a greater debt burden or purchasing more house than you need. It can also mean that you are able afford the just the right amount of house for now and in the future considering your goals and in the right location. Hence, this program that this will not achieve enough to help affordability in Canada’s most expensive real estate markets.
Early analysis suggests that sales could be pushed up by two-to-five per cent through 2020 and further inflate the price of condominiums in the GTA and freehold properties in smaller communities outside of the GTA. So, what is a first-time homebuyer in Toronto to do? If you are looking to take advantage of the federal government’s First Time Home Buyer Incentive program and your annual household income is less than $120,000 , you will likely need to increase the boundaries of your search or think condominium. Don't want to branch out? Consider the alternatives: (a) co-ownership, (b) alternatively lending, and (c) pre-construction. Visit our blog in September for an expaned discussion on three alternative methods of taking that first step into the real estate market in order to build and fortify wealth.