The goal of the federal government’s First Time Home Buyer Incentive (FTHBI) is admirable: The new $1.25-billion housing program aims to help young Canadians buy their first house by having the Canada Mortgage and Housing Corporation (CMHC) take on a portion of their mortgages. However, the incentive is unlikely to improve access to home ownership for many of the young Canadians it is meant to help.
Most of Canada’s young adults live in the country’s urban centres, where housing supply is heavily constrained. Providing a means to buyers who have been previously priced out of the market to increase the amount of mortgage they can afford will simply increase competition in the country’s hottest markets.
The other issue with the FTHBI is that it exposes CMHC directly to the possibility of mortgage losses, setting a potentially dangerous precedent. These are significant risks for a program that benefits relatively few people.
A budget centrepiece
The program was a centrepiece of this year’s federal budget along with measures to address the supply of available housing in urban centres. If the government is serious about addressing housing affordability, tackling the shortage of supply is where more focus needs to be.
As a brief explanation, the FTHBI allows CMHC to offer shared equity mortgages – essentially, interest-free loans in which the Crown corporation takes a small position in the value of a home purchased for the duration of the time the borrower owns that home. The benefit is limited to 5 percent of the value of a borrower’s mortgage for a resale purchase and 10 percent for a new build, and borrowers must be eligible for mortgage insurance, have a household income of no more than $120,000, and the total borrowed is limited to four times income.
This aims the program squarely at lower- and middle-income Canadians who have been priced out of their local housing markets and are looking at homes priced at no more than $505,000.
But the success of this program is predicated on there being an ample supply of houses selling for less than that threshold when this new segment of homebuyers enters the market. This will certainly be the case for some first-time homebuyers, but not many. The average apartment in Vancouver cost $660,000 in February 2019, according to the MLS home price index. In Toronto, that figure is $516,000. The program barely meets the minimum price for the most affordable housing option in these two cities.
Of course, in most every other city in Canada, prices are far more affordable. In Regina, single-family homes cost, on average, $272,000; in Montreal, it’s $370,000 – well within the range of the program. But even in more affordable areas, there still may be challenges.
Home prices in all markets have risen tremendously in the last 15 years. In Regina, prices have risen by 146 percent since 2005. In Toronto and Vancouver, those figures are 163 percent and 153 percent respectively. In the 18 regions covered by the MLS home price index, even the slowest increase has exceeded 50 percent, with the average being about 130 percent. The fact that these increases are so broad-based is evidence that high home prices are fundamentally a function of supply-demand imbalances in our urban centres. If there were a dearth of demand for homes valued at less than $500,000, a more affordable market like Regina would not have seen such significant home price gains.
A supply constrained environment
And therein lies the crux of the problem. In almost every urban centre, the FTHBI will not necessarily provide a pathway to homeownership because in a supply constrained environment, housing is a zero-sum game. Providing the means for a new segment of borrowers to increase the amount they can afford only allows them to compete with the existing pool of buyers for the supply of housing at that price point.
This is not to say that the program will be completely ineffectual. There are smaller markets across the country that do face a dearth of demand – rural areas, smaller cities and communities on the periphery of larger urban centres, for example – in which the incentive will likely have its intended effect. However, the reality is that younger Canadians are increasingly favouring large urban centres.
According to the Census, between 2006 and 2016, the population aged 25-39 grew by 10 percent in the 3 largest census metropolitan areas in Ontario – Toronto, Ottawa and Hamilton. In the rest of the province, that same age group grew by just 1.8 percent. Six in 10 young Ontarians now live in those three cities alone. In Alberta, the share is even more stark, with 70 percent of 25-39-year-olds living in just greater Calgary and Edmonton.
In other words, the large majority of young Canadians will likely not benefit from the incentive simply because they live in supply-constrained urban centres. To truly address affordability concerns, we need to be focusing on those constraints.
To the government’s credit, there were several measures in this year’s budget that focus on supply. The two noteworthy measures are the launch of an expert panel with the BC government and what is essentially a $300 million crowdsourcing effort that hopes to leverage local expertise to find ways to address affordability and supply concerns. These are a step in the right direction – both legitimately ask the question of what a federal role in housing looks like and underscore that this issue is, at its heart, a local one and that local expertise will be part of the solution.
A risky change of role for CMHC
This is where more focus ought to be rather than on measures like the First Time Home Buyer Incentive, which mainly impacts the demand side of the equation. This is because one lesser-discussed aspect of the program is its potential risks – specifically how it changes the role of CMHC.
The Crown corporation plays a critical role in our financial system. It insures more than $450 billion in mortgages and guarantees another $480 billion in mortgage-backed securities. Financial institutions, large and small, are highly dependent on these tools for funding purposes. The ability to have a government-backed institution insure one’s mortgage portfolio and guarantee one’s securitized mortgages mean that financial institutions have access to lower funding costs and so can offer more competitive borrowing rates.
That dependence, however, is a two-way street. Should CMHC ever run into financial difficulties, financial institutions could potentially lose that critical funding tool and could come under pressure themselves. This is how a housing correction is magnified – if financial institutions start to fail, a domino effect can turn a downturn into a crisis.
So, the financial security of CMHC is of paramount importance to the stability of Canada’s financial system.
Traditionally, its exposure to risk has been quite well managed. First, being in the insurance business means that its exposure is limited to compensating financial institutions for losses – which can be minimal in a healthy housing market.
Second, strict mortgage insurance regulations, such as income stress testing or limits on amortization rates, have meant that credit quality has improved over time, meaning the odds of widespread borrower defaults are quite small. The share of mortgages in arrears has been on a consistent downward trend since 2009, according to the Canadian Bankers Association, falling from a peak of an already low 0.45 percent to a near record low of 0.24 percent as of November 2018.
The First Time Home Buyer Incentive, however, changes that exposure. CMHC will now have to hold enough capital to be able to absorb direct mortgage losses, something it has never had to do. In addition, the program being aimed at borrowers who have been previously priced out of accessing credit markets may introduce lower credit quality borrowers into the mix.
This is by no means saying that CMHC is at imminent risk of failure. A $1.25 billion exposure is miniscule, considering its combined insurance-in-force and securities guarantees amounts to nearly $1 trillion. Moreover, it is far from certain that the new segment of borrowers who access the program will be of a lower credit quality. It could, however, be setting a dangerous precedent as the CMHC becomes more exposed than ever before.
Ultimately, the FTHBI, though well-intentioned, is unlikely to succeed in increasing access to homeownership among young Canadians. Moreover, there could be unanticipated consequences of allowing more Canadians to take debt. And at a time when interest rates are bound to rise and household debt is already at a record high, those potential consequences are not worth the risk.
Photo: Shutterstock/By Jon Bilous
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