Heather Tremain is the CEO of Options for Homes, an organization that helps low and moderate income families become homeowners with shared equity mortgages.
Trudeau’s new homebuyers incentive is the right financial tool for a targeted group of people at a critical time in terms of housing affordability in Canada. Photo by Christopher Cheung.
In a nutshell, a shared-equity mortgage is a loan that helps increase the affordability of a home and bridges the gap for those who are able to afford to costs of carrying a mortgage but might not have a big enough down payment. It does so by reducing the amount of mortgage required and thus monthly carrying costs.
Opinions on the incentive abound. Some of them I agree with – like the fact that its effectiveness will depend on the details, which are expected this fall. Some I don’t. A recent Tyee article by Paul Willcocks titled “Trudeau’s New Budget and the Cult of Home Ownership” falls into that latter camp.
Why do I disagree? It’s not because he’s a critic of a model that I know works from my experience at Options for Homes, an organization that helps low and moderate income families become homeowners with shared equity mortgages. Everyone’s entitled to their opinion.
I’m on the other side of the coin, because I feel his characterization of the government playing fast and loose with taxpayers’ dollars to help “subsidize” home ownership is unfair and misses the point of the nuanced and strategic incentive.
There are four myths to which I’d like to provide an alternate view.
Willcocks writes, “The program offers a subsidy to people rich enough to buy a first home in today’s overheated urban markets.” He also characterizes it as “essentially an interest-free loan.” On both points I disagree.
Firstly, this measure is not intended for the “rich.” Yes, it serves a demographic that could potentially afford home ownership, but this is about fostering a healthy middle class.
Since CMHC introduced the mortgage stress test last year, it resulted in a 33-per-cent drop in first-time home purchases, according to the Canadian Home Builders Association, which estimates 147,000 first-time home buyers couldn’t access the market because of it.
The stress test was a necessary measure to cool down an overheated real estate market, but in doing so it cut out credit-worthy first-time buyers, millennials who will likely have rising incomes, from stepping into the market.
This incentive is not about helping the rich; the fact that it’s only available to first-time home buyers with a household income of $120,000, and the maximum value of a home to be purchased is four times their income, shows it is quite targeted.
As for this being a subsidy or “interest-free” loan, it’s not. The government is not giving away taxpayers dollars or not collecting any interest; it’s simply agreeing to defer any gains on the loan until a time in the future.
We don’t have the details yet; they won’t be available until later in the year. But we can look to Options for Homes for clues as to how it will work, since the incentive was broadly based on our model.
With the Options Down Payment Loan, there are no scheduled loan or interest payments and repayment of the mortgage happens when a homeowner sells or moves out of their house. With Options, any equity gain is shared by the homeowner and us as the equity provider.
So with our model, rather than collecting interest over the course of the loan, we share in a proportionate amount of the equity gain at the end. So if we loan a purchaser 15 per cent, we benefit in 15 per cent of the equity gain when the loan is repaid.
Myth #2: Renters get left out and bear an unreasonable burden
To characterize the First-Time Home Buyers Incentive as an expensive plan that means “renters will be paying taxes to help their more affluent neighbours buy houses or condos” fails to take into account the full picture.
Yes, the incentive’s cost of $1.25 billion seems like a lot until you consider that’s only $416 million a year across the whole country. That money will be spread very thin.
Willcocks’s assertion that this incentive subsidizes relatively affluent homebuyers and is much greater than the $110 million a year earmarked in the budget for rental also ignores the fact that the federal government’s National Housing Strategy pledged $40 billion to rental and supportive housing with nary a mention of affordable ownership or shared equity mortgages. (It also overlooks the fact that taxpayers are paying for rental, too, particularly affordable rental.)
Rental is not being ignored; this single incentive does, however, recognize that there is a value in supporting people getting into affordable ownership.
But more important than who’s getting what money is the fact that housing needs exist along a continuum, and ignoring any part of it affects the entire ecosystem.
As Jeff Evenson, director of the Canadian Urban Institute, told the CBC earlier this year, young middle-class people are stuck. They’re stuck in rental and they’re not able to make the leap to ownership that they expected.
This at a time when the rental market, particularly in urban centres like Toronto and Vancouver, are in desperate need of movement. If these people don’t move to become homeowners, they create a bottleneck. Every new affordable ownership unit frees up a rental unit because people move. I would argue this is the cheapest way to produce new rental units.
Improving housing affordability isn’t a one-trick pony. It’s not about rental OR ownership. It’s about all of it. We need solutions to address the pain points all across the housing ecosystem.
Myth #3: It will increase demand
There is this idea out there that the First-Time Home Buyers Incentive will somehow flood the market with demand, driving up prices. But analysts say that’s just not true.
As CIBC World Markets Inc. deputy chief economist Benjamin Tal told the Globe and Mail, “It will make a change for those people who take it, but from a market perspective it will not be a game changer for the housing market as a whole. It’s simply not big enough.”
Yes, the rollout of this program will allow those who had been squeezed out of the market the chance to get in. But as I mentioned earlier, $400 million a year nationally is relatively small. To put that figure into perspective, Options alone is putting over $20 million in second mortgages into the Greater Toronto Area market this year, with an additional $15 million coming soon for The Humber.
We’re immensely proud of our impact, but we’re certainly not tipping the supply-demand scales in any dramatic fashion. We shouldn’t expect this incentive to tip those scales either.
Myth #4: Home ownership is an outmoded idea
Willcocks says that “Canadians have fetishized home ownership since the veterans came back from the Second World War” and that the budget aims to keep the obsession alive while pointing to other countries where renters are the majority.
I hear this a lot when talking about rental versus ownership, and I always say the same thing. It’s like comparing apples to oranges.
Take the example of Austria, which is lauded in the housing sector for its housing policy. They have high rates of rental, but there are also robust state pension plans. We do not have that in Canada. Only 30 per cent of Canadians have pensions, and the private sector here has increasingly moved away from them.
The reality is that most Canadians hold real estate to reduce their costs in their senior years, to support their retirement and possibly fund their care. What is the impact if we take this opportunity away from future generations?
Home ownership may be viewed as an investment by many homebuyers, but it’s much more than that. Home ownership contributes to better health and professional outcomes for families, offers stability and security of tenure that doesn’t come with rental, and the equity gains in a home help stave off the negative impacts of unforeseen life events such as illness or change of employment.
While many may respond to this First-Time Home Buyers Incentive with some skepticism, I know that the technique works. For 25 years, Options for Homes has been providing shared equity loans, and for 25 years we’ve seen how home ownership is more than a financial transaction or an investment; it changes lives for the better.
That’s why I feel this move by the government is the right financial tool for a targeted group of people at a critical time in terms of housing affordability in this country. This, along with the investments in rental and supportive housing are a good step in the right direction to helping improve housing security for all Canadians, including future generations.