Canada has only seen higher interest rates for a month, and a mini-bailout is already in action. The Government of Canada (GoC) delivered its 2022 Budget with a heavy focus on housing. There is a whack of new policies, but what stood out is the number of demand inducement schemes. Some of Canada’s top economists previously warned it’s a bad idea to increase subsidies and leverage at this time. That didn’t stop the government from proposing them anyway.
The Tax-Free First Home Savings Account
First up is the Tax-Free First Home Savings Account, an account to save a deposit. It’s tax-deductible as the money goes in, and there are no taxes on using the funds to withdraw for your down payment. It’s kind of like an RRSP when the money goes in, and your TFSA when it comes out.
Contributions will be capped at $8,000/year and $40,000 in total for the first-time buyer. The government estimates it will cost taxpayers $725 million in lost tax revenue. Essentially taxpayers will be subsidizing down payments.
Does it make housing more affordable? No, this is a demand inducement scheme and more demand means higher home prices. In tight markets, the seller will always capture additional subsidies and leverage.
Doubling The First-Time Home Buyers’ Tax Credit
The First-Time Home Buyers’ Tax Credit will be doubled to $10,000. This will allow home buyers to carry higher housing costs more easily. Generally allowing buyers to absorb price increases more easily results in higher prices. It’s the same concept as low interest rates, which the Bank of Canada determined only increased home prices.
Extending The First-Time Home Buyer Incentive
Canada will extend the First-Time Home Buyer Incentive, and become your investor. The government can take a stake of 5% or 10% for a new condo, 5% for an existing home, or 5% for a resale mobile/manufactured home. The idea is they’ll be your silent partner, lowering your monthly payments. You then have to buy the government out later, with taxpayers sharing the gain or loss.
This is another incentive to purchase a home. It’s demonstrated poor uptake, and with good reason. If you believe home prices will continue to rise more than mortgage rates, why would you take the money? In that case, you’re asking for a really expensive loan.
This isn’t a comprehensive budget review but highlights the demand pressures Canada is trying to create. Most measures were expected, so it shouldn’t be too much of a surprise if you were paying attention. It is an odd take to create more inflationary pressures for housing when excess demand is the issue.