Desmond Brown

Smoke and mirrors in latest federal budget

10 April 2019
Desmond Brown

The anticipation leading up to the last month's federal budget announcement  had me and many others on the edge of our seats. There were the leaks to the media that the federal government was going to bring in earth shattering initiatives to make home ownership more affordable for first time buyers. What would these measures be? The elimination of the stress test where borrowers have to qualify for 2 percentage points more than the actual set rate? Amortization periods of 30 years again instead of 25 years to bring down monthly payments? Non repayable grants? Then on March 19th federal Finance Minister Bill Morneau delivered the budget, and what a disappointment! Living and selling real estate in Toronto, I was hoping the feds were going to solve our shortage of product. As I told Global News, I thought Morneau was going to announce they were going to make more land! 

Here's the boldest move as broken down by Dr. Sherry Cooper, Dominion Lending Centre's Chief Economist: 

The CMHC First-Time Home Buyer Incentive

A $1.25 billion fund administered by the Canadian Mortgage and Housing Corporation (CMHC) over three years will provide 5% of the cost of an existing home and 10% of the price of a new home through what amounts to an interest-free loan to be repaid when the property is sold. The money would go to first-time home buyers applying for insured mortgages. The key stipulations are:
• Users must have a downpayment of at least 5%, but less than 20%;
• Household income must be less than $120,000;
• The purchase price cannot be more than four times the buyers' household income.
For example, say you’re hoping to buy a $400,000 home with the minimum required 5% down payment, which works out to be $20,000. With the new incentive, you could receive up to $40,000 (for a new home) through the CMHC. Now, instead of taking out a $380,000 mortgage, you’d need to borrow only $340,000. This would lower your monthly mortgage bill from over $1,970 to less than $1,750. The incentive is 10% for buyers purchasing a newly built home and 5% for existing homes.

Homeowners would eventually have to repay this so-called 'shared mortgage,' likely at resale, though it is unclear how this would work. CMHC might share in any capital gain (or loss)-- receiving 5% or 10% of the sale price (not the purchase price). At the time of this writing, these details had not been hammered out.

Unfortunately, these stipulations effectively limit purchases under this plan to properties priced at less than $500,000. This may help first time buyers in smaller cities where you can actually buy a home for that price, but not in Toronto! If anything, it will add to the crazy demand we're already seeing in the Toronto condo market. And to top it off, these measures won't come into effect unless Justin Trudeau and his Liberals are re-elected in October!

There is one initiative that is effective immediately. First time buyers may now withdraw an extra $10,000 from their RRSPs to a maximum of $35,000. This tax-free withdrawal will also apply to people who have experienced a marriage or common-law partnership break-up, and that's a good thing. A great number of people going through break-ups are basically starting over, so this measure will definitely help. 

However, these limited measures by the federal Liberals will do little to solve affordability in Toronto or any of the other major cities across Canada. It will be just more of the same for the majority of young people who will have to continue to dream of ever owning a home.