Is it the role of governments to help Canadians get a foothold in a hot housing market?
Clearly, our governments believe the answer is yes.
On Thursday, B.C. Premier David Eby announced a new initiative to enable a small number of first-time homebuyers to acquire property at 60 per cent of its market value — with the government putting up the rest.
This followed on the heels of Ottawa’s own pledge, three days earlier, to increase the size of insured mortgages for which homebuyers are eligible. The federal government billed its changes as the “boldest mortgage reforms in decades to unlock homeownership for more Canadians.”
Both measures are misguided in that they stoke demand in a supply-constrained market.
To be fair, B.C.’s initiative — which was developed in partnership with the Musqueam, Squamish and Tsleil-Waututh First Nations — is intriguing, and has some features to recommend it.
The most interesting feature of B.C.’s Attainable Housing Initiative — which will apply to about 2,600 new builds in Vancouver’s Heather Lands district — is that the government will be acting like a co-owner, rather than a lender. It will not charge homebuyers interest, but will instead be entitled to 40 per cent of the appreciation of the homes’ value once sold.
The rules are also structured to discourage property flipping. If a homebuyer sells a property within the first year, the government will be entitled to any and all appreciation. If the owner sells in years two or three, the government will take 80 per cent and 60 per cent, respectively. Interestingly, the announcement makes no mention of a downside scenario, where property prices fall (a scenario many Canadians seem to have ruled out as a possibility).
However, other features are more questionable.
B.C. has billed the initiative as one that will enable “middle-class people to break into the housing market.” The government plans to achieve this goal by limiting the income of purchasers to $192,000 and their accumulated savings to $250,000.
The Heather Lands properties range from $620,000 to $1.5 million, meaning except for the smallest units one would almost certainly need a six-figure income to qualify for a mortgage — even a mortgage for 60 per cent of the property’s value.
With the province’s median income coming in at $102,000, this program would largely benefit families well above the middle class.
In addition, if the province is serious about using limited provincial funds to increase homeownership, downtown Vancouver is the least efficient place to do so. A dollar of subsidy would go much further in, say, the Kootenay or Northern B.C. regions.
Ottawa’s initiative, too, will largely benefit Canadians in the upper-income brackets. Although it may leave some of them feeling awfully stretched.
As of Dec. 15, Canadians will be eligible to obtain insured mortgages from the Canada Mortgage and Housing Corporation for homes valued as high as $1.5 million, versus a previous limit of $1 million. If a borrower qualified for the minimum down payment on a $1.5 million home, they could put down $125,000 and take out a whopping $1.375-million loan.
The idea of both housing initiatives, of course, is to enable some Canadians to purchase homes they could not otherwise afford. This aim seems fine in principle, until you zoom out.
Why should governments be encouraging the purchase of homes when affordability is already an issue? These policies stimulate demand, in a housing market where supply has proven to be stubbornly inflexible — that is, incapable of responding quickly to more demand.
This dynamic means prices will only rise further, making homes more unaffordable for all Canadians.
What is needed instead are measures to cool demand and remove some of the supply-side constraints that have made the housing market so inelastic in the first place.
Recently, Ottawa has taken some steps to limit demand by reining in immigration in some categories that have grown explosively in recent years. Conservative leader Pierre Poilievre has been more explicit about his intention to ensure alignment between how many immigrants Canada admits and how many homes it builds.
As importantly, governments at all levels need to be taking steps to urgently address the regulatory barriers that have made it impossible for housing supply to keep pace with demand.
In this respect, B.C.’s Attainable Housing Initiative is actually an example to be followed. The Musqueam, Squamish and Tsleil-Waututh First Nations, who own the land on which the Heather Lands properties are being developed, are not subject to the various zoning restrictions that have inhibited growth in other parts of Vancouver.
Unburdened by regulatory restrictions, these First Nations have chosen to build a community that is bigger, denser and taller than any in Canada.
More supply, not subsidized demand, should be the priority to restore affordability in the housing market.
Editor’s Note: This article was updated to reflect technical rules released Sept. 24 that clarify the down payment requirements for Ottawa’s new mortgage insurance limits.
