Strategies to help first-time home buyers get a footing on the property ladder

In the first year of the pandemic, the number of first-time homebuyers in Vancouver increased by 51 per cent over a two-year period, driven by the ultralow interest rate.

 

There were 1,530 first-time purchasers in 2018 and by the end of 2020, there were 2,315, according to Canadian Housing Statistics Program data analyzed by Prof. Andy Yan, director of Simon Fraser University’s City Program.

 

The harder part for policy-makers is drawing those first-time buyers into a higher interest rate market through government incentives. Policies are often ineffectual when confronted with the barrier of high prices, particularly in Vancouver.

 

“You can see in this data what is most likely the effect of pandemic-era, ultralow interest rates, and how the ability to become a first-time homeowner in the city of Vancouver requires a capacity to incur and maintain debt,” says Prof. Yan.

 

“The first rung of the property ownership ladder begins in a pit of debt.”

The problem for buyers, and policy-makers, is they are dealing with two unprecedented booms in the last few years, both promoted by the federal government, says David Williams, vice-president of policy for the Business Council of B.C., and former senior economist with the Bank of Canada. There is the population boom and resulting demand shock. And then there is the shock of household debt – the amount of mortgage credit borrowed against housing stock climbed from $1.6 trillion in 2020 to $2.1 trillion three years later.

 

“I would like to see the federal government look at the levers they control around credit and population growth,” says Mr. Williams.

 

Senior government has responded with several policy adjustments to try to attract those new to the housing market. At the end of March, the Canada Mortgage and Housing Corp. quietly cancelled the First Time Home Buyer Incentive, an unpopular program that failed to offer relief from high home prices. Not only was the program unhelpful, but it was confusing, says mortgage broker Alex McFadyen, who saw few first-time buyers last year.

 

“It was a complete failure by most accounts,” he says. “People thought it was a down payment assistance program, which would have been a much better program. That would have been helpful. What it was was a reduction in mortgage amount, which was essentially useless. It was an equity loan … that didn’t help somebody qualify for more and get their down payment, which are the issues people are facing.”

 

In April, the federal government increased the withdrawal limit on the RRSP Home Buyers’ Plan, from $35,000 to $60,000. First-time buyers can now withdraw that amount from their RRSPs to use as a down payment. As well, those buyers will now have five years to begin repayments instead of two.

 

First-time buyers are now also eligible for a 30-year amortization on insured mortgages for a newly built home. Previous rules only allowed a 25-year amortization if the down payment was less than 20 per cent of the purchase price. While Mr. McFadyen believes the property transfer tax exemption should have a real impact, he wasn’t so enthused about the extended amortization period.

 

“It’s only on new development properties, and I can’t even fathom the reasoning behind that, other than to incentivize developments that aren’t existing, or that people don’t want to buy,” he says. “I just don’t think it will have any notable impact on the average person. … This isn’t going to incentivize them to [buy] or help them necessarily – at least not in this market.”

 

Policy-makers encourage first-time buyers because they play a key role in the economy, say industry experts. Ownership is a way to accumulate wealth and borrow against equity. But policies can also turn homes into investment assets, which works against first-time buyers.

 

Mortgage broker Eitan Pinsky says government just needs to do the right thing to help the younger generation.

 

“This is the first generation ever that we will be less well off than our parents,” said Mr. Pinsky, who is a Millennial. “You could say it’s an optics thing.”

He also said that he seldom sees a single person purchasing their first property any more. Almost all his clients are high-income couples.

 

“You usually had one person being able to purchase in the past,” he says. “Now, the vast majority are two people with good incomes, and they are all purchasing in the $1-million to $1.5-million mark.”

Vancouver realtor Hasan Juma said that he’s seeing first-time buyers pay more for a home than they did in years past, but it’s got nothing to do with policies.

 

“From what I’ve experienced, first-time homebuyer purchase prices have gone up because of more financial support from family, whether that is in the way of increased down payments or parental co-signers to help them qualify for larger mortgages,” says Mr. Juma.

 

Others, he says, just leave the urban core to buy elsewhere.

 

For example, only 508 transactions in Vancouver involved first-time homebuyers who qualified for the tax exemption program in 2020, according to Prof. Yan’s analysis of property transfer tax data.

 

A first-time buyer is defined as a B.C. resident who’s never owned a principal residence anywhere in the world at any time. Before a recent increase, the province only allowed an exemption on properties up to $500,000 in value. Considering how few properties in Vancouver could be found for that amount, there was little take up, with those eligible representing only 4.7 per cent of the total sales transactions that year.

 

 

Not surprisingly, the B.C. program has had more success in less expensive markets since it was introduced.

 

A greater amount of first-time buyers took advantage of the tax break in Surrey, Prince George, Abbotsford and Kamloops, according to Prof. Yan’s analysis.

 

As of April 1, the province raised the threshold for eligibility to $835,000 fair market value, which should enable more first-time buyers in Vancouver to qualify.

 

“One of the most common and significant concessions made by first-time homebuyers is the location of their purchase,” says Mr. Juma. “Most have been priced out of Vancouver.”

 

He isn’t surprised that the senior levels of government are trying harder to draw in first-time buyers, especially in expensive urban cores.

 

“I think they understood that up until this year, our incentives for first-time homebuyers were essentially non-existent,” says Mr. Juma. “But secondly, incentivizing first-time homebuyers – from a political standpoint – is a way to appeal to the masses and appease virtually everyone. … It really is a win-win scenario for the government, to offer incentives to first-time purchasers and secure public support and future votes along the way.”

 

 

 

The article was first reported by the Globe and Mail