Canada’s federal government will soon participate in the property bubble in a direct, equity-owning way through its new First-Time Home Buyer Incentive. But the merits of the program are questionable.
Since the end of the Second World War, it’s been federal government policy to help low-income would-be home buyers via Canada Mortgage and Housing Corp. (CMHC).
This Crown corporation is tasked with mortgage insurance and other assistance to this large and growing cohort of property acquirers.
CMHC has been accumulating more and more debt, and diversifying into more types of residential real estate and housing financing.
While CMHC is diversified by geography and type of financing and buyer, it has still taken on more financial and economic risk. It’s not clear it should take on yet one more kind.
The government assures us that the program is likely to remain small, as it constitutes simply having CMHC top up buyers’ down payment deficiencies so they can qualify for CMHC-insured mortgages.
However, there could be many more of these types of buyers than the government estimates. Indeed, the program may generate more interest and induce more renters to entertain the idea of becoming home owners. This could make the current home affordability issue even worse.
Promoting increased home buying, particularly by cash-flow-challenged renters, may be a good thing. Potential benefits include that home ownership tends to foster responsible personal, financial and employment behaviour.
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Nonetheless, this creates ever more demand for houses, townhouses and condominiums. And that escalates property prices and aggravates the affordability problems that led to this new program, and earlier ones, in the first place.
The federal government has said that the amount CMHC gives to first-time buyers to top up their down payments will become equity that CMHC owns in the home that’s purchased. This is meant to reassure taxpayers that they will profit if the home goes up in value.
However, if the home should decline in value – which can and does happen in every part of Canada, not just energy-roiled Alberta or Newfoundland – CMHC and, ultimately, all of us lose money when the home is sold.
It’s small comfort that the homeowner will also lose.
The risk of price declines piles onto the risk CMHC already takes on when insuring mortgages. What happens when recession hits and unemployed people are compelled to sell their homes into a depressed, overwhelmed real estate market? The actual mortgages are issued by banks and other financial institutions; the default insurance is CMHC’s alone, and claims come in thick and fast in an economic downturn.
If there are just a few thousand shared-equity homes in the program when that happens, it could be tolerable. But if there are hundreds of thousands at an average of several thousand dollars each, the losses could mount into the hundreds of millions or even billions of dollars, on top of the mortgage insurance payouts involved in those homes and the others CMHC already covers.
It’s also chilling that government will now be co-owner of private dwellings, making it even more intrusive in people’s lives – right into their living room. Government has already invaded our lives through healthcare, all sorts of insurance, telecommunications, employment, transport and so much else.
This new venture could mean one’s home will not entirely be one’s castle anymore.
Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.