The newest measure by Vancouver’s policymakers – to match down payments by first time home buyers with interest free loans up to $37,500 is another example of the tail wagging the dog. Giving potential first time buyers help to buy overpriced real estate that they can barely afford is setting them up to take on excessive debt that will undoubtedly come back to bite them in the backside if mortgage rates go up and home values go down.
According to Canada Mortgage and Housing Corp. president Evan Siddall, “Ample support exists already for first-time homebuyers.”
Other experts, like Tom Davidoff of the U BC’s Sauder School of Business didn’t mince words when news of the provincially backed loan program made headlines two weeks ago. “I hate it. To be very clear I think it is really bad economics.”
Of course, in the short term, the new program will be a boon for developers and mortgage brokers who see the interest free loans as a way for new purchasers to speed their entry into the market. It is estimated that around 45,000 new buyers could enter the market with this kind of help.
The new loans — called the B.C. Home Owner Mortgage and Equity Partnership program — would be granted to Canadian citizens or permanent residents who have never previously owned a property and only apply to homes worth less than $750,000. (not easy to find in Vancouver!) A buyer must be able to pre-qualify for a mortgage and have a gross household income of less than $150,000. Applications open Jan. 16, and the program ends March 31, 2020.
The government would put a second mortgage on a property to reflect the amount it loaned, but not require any interest payments or payments on the principal for the first five years. After that, the 20-year repayment plan would be set at the prime lending rate plus 0.5 per cent, leaving the homeowner to pay back both the original mortgage and the down-payment loan at the same time.
According to The Vancouver Sun, “The loans are available for condos, townhouses or detached homes. On a property worth $600,000, the government loan could help a buyer meet or exceed the federally-set minimum down payment of $35,000. In one example, provided by B.C. Housing, a person who saved $30,000 could apply to get an additional $30,000 from the province, giving the buyer a $60,000 down payment.
“The fact is it does help first-time homebuyers and relieves the pressure on the bank of mom and dad,” said Neil Moody, CEO of the Canadian Home Builders Association of B.C.”
NDP housing critic David Eby said the province is encouraging buyers to go deeper into debt. He said it flies in the face of the Canadian Mortgage and Housing Corporation’s new stress tests, designed to gauge whether a buyer could still pay their mortgage if interest rates rose to the five-year standard rate of 4.64 per cent.
“The federal government is trying to rein this in with changes they’ve made, and the B.C. government is saying borrow more money,” said Eby. “It’s a huge risk to take.”
Tsur Somerville, UBC’s director of the Centre for Urban Economics, agreed.
“They’re trying to cool down the housing markets, and now you have Christy Clark (BC’s Premier) trying to give people extra gas (for the fire),” Somerville said.
Somerville and Eby both said the province should be building more affordable housing to help low-income earners.
It seems that the effects of the program in the short term will be positive – anything that can convert renters into owners is a good thing… but in the long term it could create a nasty debt bubble when the loan has to be repaid – and in most cases the initiation of the loan payment will coincide with the renegotiation of the mortgage – which could be at a higher rate. It could mean an increased monthly payment that might be more than the buyer can afford.