Canada Is Pumping More Credit Into Its Property Bubbles, Against Global Warnings

Canadian real estate is in a melt-up, and the Government of Canada (GoC) was warned not to pour any gas on the fire. Naturally, they’re getting ready to pour gas on the exact fire they were told not to. On May 3, 2021, the GoC will expand the First-Time Home Buyer Incentive (FTHBI) program. The program is the type used to push prices higher and stimulate demand during a downturn. Instead, the government plans to expand the program in the frothiest markets. Let’s take a dive into how Canada will be speculating alongside homebuyers.

First-Time Home Buyer Incentive (FTHBI)

First a quick background for those that may have missed the initial rollout of the program. The First-Time Home Buyer Incentive (FTHBI) is a shared equity mortgage program. People that buy a home with the program get 5 to 10 percent of the purchase price as an additional down payment. No, it’s not free. The state is buying an equity stake in the home. It’s like taxpayers become a shareholder in your condo.

The down payment funds they give are considered a non-interest-bearing second mortgage. No principal payments are required, and the maximum term is 25 years, or when you sell the home. The repayment is based on the value of the home at the time you pay it off though. Until then, the government considers itself a part-owner of the home.

Since the government is speculating along with you, they share some risk. If the value of the home goes up during this period, taxpayers make money. If the value of the home falls, taxpayers lose money. Homeowners shoulder all maintenance and carrying costs. What could go wrong? 

To qualify for the program, households can’t have high incomes and there’s a maximum amount of leverage. Household income is capped at $120,000 per year, so no high-income borrowers. The maximum mortgage amount is 4x your qualifying income. Since the FTHBI is technically a second mortgage, it’s included in the total. The pitch is, it lowers your monthly costs. If home prices rise significantly, it can cost a lot more than the interest. The stated reason is, the program helps low-income households. The reality is, it’s trying to spur more demand from low-income households.

Let’s say your household makes $120,000 per year, and you have a down payment of $50,000. Under the current rules of the program, you may qualify for up to $530,000, and they’ll kick in 10% of the down payment. If you resell, you cover the maintenance and selling fees, and they collect 10% of the gross costs. 

Canada Is Expanding This Program In Its Frothiest Markets

When the program was launched in 2018, they said the limits were in place so they didn’t add fuel to hot markets. Now they’re changing their mind. Starting May 3, 2021, Toronto, Vancouver, and Victoria will see the max income boosted to $150,000. The leverage ratio will also increase to 4.5x, giving those buyers an extra 12.5% leverage. It’s not hard to read this as trying to pump city home price growth, since they now lag small towns.

Under the new rules, first-time buyers in Toronto, Vancouver, and Victoria can land a big investment. A household making $150,000 can now qualify. Using the same $50,000 down payment in the scenario above, this household can qualify for a purchase price of up to $725,000. The government will kick in up to $72,500 for a 10% equity stake. It’s like the worst episode of Shark Tank ever, and you’re pitching an apartment with a combination kitchen-bathroom.

Canada’s Largest Banks and The IMF Warned Not To Do This

Canada has been warned multiple times, over just the past year, not to make a move like this. The IMF warned them in their last mission, that first-time buyer incentives will lead to higher home prices and inequality. Scotiabank said more incentives don’t improve affordability, and make inequality worse. RBC said programs like this will increase inequality, and destabilize the economy. Canada is going against the advice of everyone from global NGOs to the country’s own banks. 

Will this program have any impact on home prices? Programs like these tend to only inflate the most affordable segments of housing. Homebuyers are now competing against other buyers with a down payment from the government. It does little to nothing when it comes to more expensive housing. By applying more demand-side pressure to affordable housing, they’re putting it out of reach for low-income households.

The big takeaway is the Government of Canada is revealing its intent. Despite many warnings to not expand a program like this, they’re doing it anyway. They were warned it would make housing less affordable, but they are ignoring those warnings. At this point the goal is clear — Canada wants less affordability.

The GoC is calling the bluff of young adults that are struggling with housing affordability. They very clearly think they have nowhere else to go, nor will they vote for another party. It’s gotten to the point where they’ll flat out go against the quality of life recommendations. On the upside, I hear Canadian real estate is still affordable for those with foreign income. Though I’m no longer sure if the government was bragging or complaining when they said that a few weeks ago.  

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  • David Reiss 2 years ago

    It’s getting more difficult to pretend higher home prices aren’t the goal. How much of a hit do taxpayers take if prices fall now?

    • Mortgage Guy 2 years ago

      Total loss is limited to $1.5 billion, but let’s be honest. It’s not a particularly popular program, they’re doing this because they know it creates moral hazard.

      “oh, the government will just start buying the homes at these prices!”

  • Ahmed 2 years ago

    If you think home prices will rise, why would you even take this program? If you bought a cottage with it, and prices are up 42%, you already paid more in interest than if you paid that over 25 years.

    This is predatory stuff for people that don’t quite understand their own finances. Sad to see the government do this sort of thing.

    • Mortgage Guy 2 years ago

      This is exactly why any decent mortgage broker would advise against it.

      $50k costs $63,500 after 25 years of interest at 2%.

      $50k costs $71,000 after 1 year of price gains at 42%.

      Congrats, you just paid an extra $7.5k for one year.

      Brokers that are suggesting this are most likely trying to get people to close as quickly as possible, so they can “capitalize” on the savings.

  • Nassim 2 years ago

    I can’t tell if this is bullish or desperate. I’m guessing they’re doing it to prevent prices from falling though. Let’s see if diamond hands can catch knives

  • Mortgage Guy 2 years ago

    An important issue not highlighted (since it’s not fully related).

    This program was created while mortgage rates were climbing, to help offset some of the impact on households. Now mortgage rates are near record lows, what? You need the carrying costs to be even lower than the lowest rates in history? Just admit you’ve priced money incorrectly.

    • David T. 2 years ago

      So, the market relies on ultra accomodative policies (nominal rate, QE and FTHBI. Now what is the room for price growth. I mean to sustain such growth like in the past years, what tools they could use?

  • Vahan 2 years ago

    A question…. lets say the gov contributed 50,000. Then the house appreciated from 500,000 to 1,000,000. Do I still owe the gov 50k when I sell? It it is now 100,000?

    • James Ling 2 years ago

      100k, the government effectively owns 10% of your home

  • Axel McLion 2 years ago

    At this point it would probably be wise to use this program. There’s more downside than upside over the next 25 years, let the government (taxpayers) eat 10% of the loss.

  • Tim Fiorito 2 years ago

    Finally…..someone said the magic words…..Quality of Life……sad

    I heard this song 18 years ago or so from Ireland, Spain and Greece. how are they doing 20 years later…….

    Keep up the great work BD.

  • Aron 2 years ago

    Canada is so “liberal” that they offer lump sum payments to qualified upper middle class home buyers while ignoring the homeless through laissez-faire social housing policies.

    Canadians are way too complacent. Toronto world class city, but tent cities are increasing across the city.

  • RainorShine 2 years ago

    The concept of shared-equity has been around for quite sometime with varying degrees of success in other Countries. The most successful programs that I’ve seen were administered by private enterprises rather than the state. Its definitely not for everyone, but it does have its place in the market and as Axel mentioned these programs can spread the risk around in the event of a downturn.

  • Jason 2 years ago

    They are going to run the country into the ground and there won’t be any money to pay off these loans. It is going to be very ugly in the future and all the arrogant people are going to be humbled.

  • Ashley 2 years ago

    I think we are all just negative people here, govt. must be very smart in planning things. Once in majority, govt. would just top up everyone’s pay cheque and all the worrisome talk regarding inflated house prices will just disappear.
    I don’t know why but govt. should just tell banks to approve mortgages without any income/credit check, anyways govt. is holding the bag in case of default. Why waste borrowers time and effort. The only criteria for how much mortgage one can get should be based on the number of voters in the household.

  • Panther 2 years ago

    Hey guys I just wanted to say thanks to Stephen and the team for this website. Great content!!! Also the comment section is great too, need a place with good information. Keep it up everyone!!!!

  • Rob 2 years ago

    Guys GOV. wants to own everything- from airlines to personal home. Just think we have worst economic time of our life. House price went up 30%. Just think it is going to best time. House price will easily go up 100%. No immigration, no inter national student still up 30%
    Current gov is doing it for election. Those have no jobs getting help every month, business are getting help they are happy. Those have houses happy since their house paying more that they are earning from job. Now only made people are those who are buying houses. Now gov has package for them too. So Gov covers all the bases– for the election

  • vatodeth 2 years ago

    Taxpayers are funding home prices so that real estate agents can keep making big money after a 13 year bull run. This is insanity.

  • Alena 2 years ago

    Home prices becoming unaffordable. Quality of life is going down. So if I want to own condo/home I need to resign myself and my family to life where we need to stop taking vacation, going out and enjoy our life.
    No than you!

    At the same time our hard earned money are being given away to supply family that should not be buying in the first place.
    Very disappointed in Trudeau. He is making Toronto life unaffordable. He should be trying do do the opposite. What about our kids. They way rent and home prices are going they’re won’t be able to afford to stay in the city.

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