Loans for Vancouver Down Payments Risk Fueling Canada's Debt Bingeby
First-time homebuyer loans may aid sellers, not purchasers
Program at odds with federal rules to tighten lending
A Canadian province has an unusual offer for first-time buyers struggling to enter one of the world’s hottest property markets -- a cheap loan to bulk up their down payment.
It’s a gift that may end up fueling a Canadian debt binge and padding the pockets of sellers instead.
Starting Jan. 16, British Columbia -- home to Vancouver, the nation’s most expensive real estate market -- will start a program to match the nest eggs saved by buyers for their first house by up to C$37,500 ($28,000) or 5 percent of the purchase value.
“If there’s no new supply, giving people more money just leads to higher prices,” said Tsur Somerville, an economist focused on real estate at the University of British Columbia. Andy Yan, director of Simon Fraser University’s City Program, said, “What does this C$37,000 enticement do but encourage people to take on more debt?”
The unconventional step comes as policymakers scramble to respond to surging home prices in Vancouver and Toronto that have turned Canada into one of the world’s fastest-appreciating real estate markets. Households have racked up a record C$2 trillion in debt amid rock-bottom borrowing costs, triggering concerns about the stability of the financial system.
Yet just two weeks earlier, the head of Canada’s housing agency warned against the wrong kind of help.
“Ample support exists already for first-time homebuyers,” Evan Siddall, president of Canada Mortgage and Housing Corp., said in a speech in Vancouver. “Too much encouragement to buy homes exposes vulnerable people to excessive financial risk, pushes prices higher where acute supply inelasticity exists – like here in Vancouver – and jeopardizes our economic prospects.”
Policy measures to cool the market have all addressed demand, not supply. They include a 15 percent tax on foreign buyers in B.C., stricter federal government mortgage rules, and plans to tax empty homes in Vancouver.
Supply, on the other hand, has stalled, failing to respond to a nearly 40 percent increase in Vancouver prices earlier this year. The inventory of homes for sale is at its lowest in almost a decade, even as the price of a typical single-family home surged to C$1.5 million, about 20 times what the median household earns in a year.
B.C. Premier Christy Clark, whose Liberal Party faces re-election in May, insisted the new program doesn’t encourage risky loan taking, saying only those who meet the newly tightened federal mortgage rules will qualify. It will also be restricted to households earning up to C$150,000 and purchasing a property that’s worth C$750,000 or less.
“There are those who can qualify for a mortgage but can’t scrape together the down payment,” she told a news conference on Thursday. “Those are the ones we’re trying to help.”
Some real estate experts are scratching their head.
“She couldn’t have talked about this with an economist,” said Thomas Davidoff, head of the University of British Columbia’s Centre for Urban Economics and Real Estate. If a home buyer is willing to pay C$500,000 and is presented with an extra C$30,000 of interest-free money, he’ll just end up bidding C$530,000, he said. “Worse, those poor buyers will end up paying higher property taxes than they would’ve otherwise.”
The 25-year loans will have no interest or repayments for the first five years. After that, the government will charge interest at the Royal Bank of Canada’s prime rate plus 50 basis points and reset every five years.
Lenders won’t treat that government funding as equity because it’s a loan, meaning it won’t reduce the burden on the buyer of saving up -- it just lets them pay less for the first five years, Somerville said.
The Bank of Canada said Thursday before B.C.’s announcement that elevated levels of household debt and imbalances in the housing market remain the primary risks to the country’s financial system, but that new rules -- including mortgage-tightening ones introduced in October -- will mitigate those dangers.
“You have the federal government wanting to cool down the market by making it harder for first-time buyers,” said Somerville. “Then you have the province coming in and saying, ‘Here, first-time buyers, have some more money.’”
“There are different things moving in different directions,” he said.