Impact of New Mortgage Programs

In the federal budget two programs were extended to first-time buyers to help them enter the housing market. The first provided mortgage assistance for households making under $120,000 and the second increased the amount individuals could borrow from their retirement savings plan to put towards a down payment. These initiatives will be implemented nation-wide in the fall. This article analyzes their potential impact on Toronto’s market.

Looking first at the mortgage assistance program for first-time buyers there are a few quick facts that are important to know.

  1. It’s only for households making less than $120,000 that have the minimum 5% down payment
  2. The mortgage can only be four times the household’s income
  3. Recipients get 5% mortgage assistance if they buy a pre-owned home but 10% if the home is a new build
  4. The amount is repaid upon sale of the home

Estimates have varied at what the maximum price a home could be purchased for under this program from $490,000 to $600,000. Using the higher number would mean just under 40% of the homes purchased in the GTA last year would be within range for these buyers. The lower number shrinks the pool to below 25%, though still leaves a large number of units in most GTA municipalities.

fed incentiveSource: TREB, BILD – Altus Group, Six Housing Sense

The federal government is aiming to help 100,000 first time buyers with this program. If the GTA’s share is inline with the region’s percentage of the Canadian population, roughly 17,000 first time buyers in the GTA will benefit. Even if the maximum available to borrow was leveraged by each buyer, the program would still only add 1% to the amount spent on the housing market, new and resale, using 2018 sales figures. Although, given that the program seems to require the purchaser to qualify for their mortgage before they can receive the rebate, it is unclear if total spending will truly increase or if mortgage payments will simply be reduced.

Due to the income and borrowing caps placed on this program, its impact to the total market is less important than its impact on the segment of homes it will support. That said, even targeting the total spending of all purchases under $600,000, the program’s potential support could only increase spending in this price range by 2-3%. It will be significant to those benefiting from the support; however, it is unlikely to provide material buying power to the market as a whole. It could additionally hurt homes priced just out of reach of the program, as the mortgage support will create a wider mortgage payment gap, thus making these homes seem more expensive by comparison.

The increase of retirement saving plans borrowing from $25,000 to $35,000 will enable those who having been saving for both a down payment and the future to afford more. However, according to TREB’s 2019 Year in Review document, borrowing from an RRSP is not the most significant down payment source for first-time buyers. TREB’s study shows 18% of the average first-time buyer’s down payment comes from an RRSP. This would suggest few are currently maxing out on the previous $25,000 limit, and thus the increase will likely have little if any real impact at all.

The overwhelming rhetoric regarding these incentive programs is that they will fail to have any significant impact on the housing market, in particular in the expensive cites of Toronto and Vancouver. Certainly, our analysis and research support these beliefs. That said, if the best thing that can happen for first-time buyers is a fall in home prices, then perhaps these programs are perfect. They will offer aid, and some will benefit; however, they will not save the industry should a correction be pending. If prices do start to retract, new buyers will greatly benefit.

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