Justin Trudeau's New Home-Buying Incentive Won't Help the People Who Need It Most
Economists say what’s proposed in the federal budget isn’t going to cut it in the hottest markets.
The exorbitant cost of living in downtown Toronto has become a running joke for 24-year-old Merna Riad. Her family lives in Waterloo, Ontario where everything, especially housing, is much more affordable.
“My dad pays off the mortgage and feeds a family of four and––I’m not kidding––my monthly expenses for one person are more expensive than his for an entire family,” Riad told VICE. “So we joke around about that a lot, and they have a lot of sympathy for me.
She makes it work because she has a good job as a project manager at one of Canada’s big banks, and a roommate (who is her BFF) to split costs with. But she’s two years out of university and still has student debt.
Her parents have asked her to move back to Waterloo to save money, but Riad isn’t budging.
“I used to live in Waterloo and you have to drive everywhere. In Toronto, everyone’s out and about, whether it’s on a run or a bike ride or getting food. I love the city. It makes me feel like I’m in the hustle and bustle of things.”
This drives demand for homes that are accessible and affordable for millennials and Gen Z. Because there aren’t enough ‘starter homes’ to buy and to rent to keep up with demand in these urban hubs, it creates all kinds of problems. It’s a tough nut to crack, and solving this problem without policy that specifically targets supply is pretty much impossible, according to Fong.
Merna is the poster child for a phenomenon that the Chartered Professional Accountants’ Chief Economist, Francis Fong calls a “return to the core,” where young professionals are choosing to live downtown in spite of the skyrocketing cost of living. It’s a complicated issue driven by employment trends, shifting cultural and generational preferences. And it’s of particular interest to Fong who, at age 35, is a millennial himself and one of the youngest Chief Economists in Canada.
“It’s a combination of preference for life in an urban centre and it’s a consequence of where the job growth is for knowledge sector workers,” Fong told VICE. “One of the key challenges for our generation is you’re starting out fresh, you don’t necessarily have a car or a place to park it, so by default you have to move into the downtown core where supply is incredibly limited, whether that’s Vancouver, Toronto or Montreal.”
This desire––or need––to live downtown, coupled with an entry-level salary means it’s tough to make the leap into home ownership. Another major hurdle is the limited amount of “starter homes” in high-demand urban hubs, especially the country’s two most expensive markets, Vancouver and Toronto. The lack of supply of widely-affordable dwellings is the root cause of this housing misery. Targeting anything else, is just a band-aid solution.
And yet, policy fixes are in demand. Housing affordability is one of the big things that people want to hear about from politicians heading into this fall’s federal election, and probably one of the most pressing for millennials. A recent poll by real estate platform Zoocasa shows that 82 percent of respondents say housing affordability is a major issue that is negatively impacting Canadians.
The Liberals’ policy solution, unveiled this week in the 2019 federal budget, has two key proposals aimed at first-time homebuyers. One of them is a shared-equity mortgage with the Canada Mortgage and Housing Corporation (CMHC), which is essentially an interest-free loan covering five percent of the price of a resale home or ten percent of a new build. It will be available to buyers with a household income of less than $120,000 a year (the price of the home can’t be more than four times their annual income) and who have a down payment of less than 20 percent.
Fong says this approach likely won’t help the young people who need it the most. That’s because the measure is just going to allow more people to compete for a limited number of homes in the $400,000 to $600,000 range. Imagine having a limited number of parking spots and a lot of cars vying to park. Giving everyone more gas, doesn’t solve anything.
If anything, the long-term consequences include stoking prices in markets where there will be bidding wars. Economists at TD Bank estimate that the new incentive could push up home sales and prices by two to five percent by 2020.
But this boost won’t necessarily be across the board. Certain types of homes get a lot of interest because of their accessible price point for first-time buyers. That “sweet spot” is right around where Riad figures her starting home budget would be, about $500,000, which doesn’t go far when you consider that the price of an average home in Toronto was $767,800 in February.
With the First-Time Home Buyer Incentive potentially available to everyone she would be trying to outbid, the policy doesn’t necessarily get people like her closer to home ownership.
The second measure offered to first-time home buyers is a lifting of the maximum amount, to $35,000, that you can withdraw tax-free from your RRSP to use towards a purchase. While Riad says she’s very good at budgeting, between the high cost of living and her student loans, she doesn’t have anything close to that amount in RRSP savings.
Fong points out the obvious, that people who have managed to sock away $35,000 in RRSPs probably don’t need the government to help them get into the housing market. He worries that this sends the wrong message to young people as well––that it’s OK to pull money out of an investment vehicle that is traditionally used for retirement to pay for a home. He feels that it encourages a demographic that is already struggling with record levels of debt to pile on even more.
NDP leader Jagmeet Singh, unsurprisingly, issued a statement taking aim at the proposals: “This budget shows how disconnected Trudeau’s Liberals are from Canadians’ everyday reality. There is no sense of urgency to act on skyrocketing housing costs.”
The NDP’s house leader and finance critic Peter Julian told VICE this issue is a priority for the party and they are proposing four key things: incentives to create 500,000 new affordable housing units across Canada in the next decade, a doubling of the current tax credit to $1,500 for first-time home buyers, the re-introduction of 30-year mortgages (which several economists have warned against) and a housing subsidy for low-income renters.
Opposition leader Andrew Scheer called the entire federal budget a “$41 billion dollar cover-up” in a statement, painting it as new spending to distract from the SNC-Lavalin scandal. While his party didn’t respond to VICE’s request for comment, housing affordability has been touted as a key issue for the party. In the past, Scheer has said his approach would include changes to current mortgage qualification rules and addressing the lack of supply by bringing more units onto the market.
On the issue of supply, Fong says if more supply doesn’t become available soon in the hottest markets, any policy proclamations will have little impact. The federal budget does include $300 million to launch a new Housing Supply Challenge––it’s not clear exactly how that money will be spent though.
The plan is to crowdsource solutions to increase supply from local experts. The thinking is that what is needed varies a lot from city to city. All of this has been welcomed by housing advocates as a good first step, though they all have ideas to make things even better.
Paul Kershaw, who is the founder of the BC-based young adult advocacy group Generation Squeeze told VICE that he applauds the Liberals’ approach because it didn’t give in to pressure from the real estate industry to juice the market simply because home sales are no longer at record highs. “The government bravely resisted calls to soften stress tests and amortization policy that would have encouraged younger people to borrow more than we should,” he said.
This brings us to the question of whether this issue is as dire as the headlines would have you believe. There’s no doubt that home prices––even though they’ve cooled in the hottest markets––continue to march higher and that the rental markets in urban centres like Vancouver, Toronto, and downtown Montreal, are tighter than they’ve been in years. But what is the home ownership situation really like for young people across Canada and does Ottawa actually need to intervene?
A recent report by RBC shows that the proportion of Canadian households that own a home is one of the highest among advanced economies. In fact, when you look at ownership rates for people 35 and under, the national average is 43 percent. Even in a pricey market like Toronto, the number of young households who own is 38.9 percent. Which raises the question: is it reasonable for that number to be much higher?
Fong says maybe not, but try telling that to more than half of the millennial and Gen Z population that would like to break into the market.
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