Politicians just can’t help themselves. In its last budget the BC government waved a wand and eliminated $13,000 in property transfer tax for any moisters buying a new house or condo worth up to $750,000. The rigorous requirements: be a citizen and live there for a year. This came atop a zero-tax break for first-timers buying any resale property for about half a million.
Days ago the Ontario government did the same. It doubled the tax break for newbies buying anywhere in the province – waiving up to $4,000 in tax that everyone else pays when they close. Of course, this is in addition to the $50,000 a Millennial couple can suck out of RRSPs tax-free for a downpayment, plus a bevy of tax credits, deferrals and outright grants given to kids so they’ll trade their freedom and youth for bricks and debt.
Now, these are the same governments who claim they’re worried sick that homes cost too much. They’ve mercilessly taxed non-Canuck buyers. Jacked taxes on top-end properties. Punished investors. Whacked empty houses. Brought in a stress test. Thumped the mortgage business. Shortened amortizations. Then they pivot, goosing demand with gifts to first-timers. Suck and blow. Nobody does it better.
The worst possible combo. Prices stay high. The children are forced into massive debt. And Boomer sellers walk off with a historic, tax-free windfall. It’s an inter-generational transfer of wealth of epic proportions – flowing uphill. The long-term consequences of profoundly indebting sons and daughters will be interesting, if not Trump-inspiring.
Well, this might change, as the T2 government gets ready for Stage 2 of its assault on house lust. Stage 1 came on October 3rd, with the MST in effect now for exactly a month. The chill on mortgage brokers was immediate, and the impact will likely be seen in sales and price stats surfacing between now and the Spring. Since then, the bond market went nuts after the US election. Mortgage rates rose this week as a result. Yesterday we told you about Ottawa’s housing internal stress test, which showed if rates continue to escalate the economy’s probably pooched. Real estate could plunk 30%.
But there’s more.
If we assume CMHC actually speaks for the government in terms of housing policy, further changes may be coming. The agency is now openly lobbying for higher minimum down payments (currently 5% for properties under $500,000, 10% to a million, and 20% beyond that), and mortgages which are tied to what a borrower actually earns, and not just the ability to pay.
On Friday the agency’s CEO (Evan Siddall) said tough love is needed to counter the destructive impact low interest rates have in making houses unaffordable and to negate dumb provincial measures (like those massive tax credits) creating more demand.
“Politicians are tempted to help first-time home buyers enter the market, but low down payments may be part of the problem adding to affordability pressures and macroeconomic vulnerabilities,” he said in a speech. “I have yet to be convinced that people in our country “need” access to 19:1 leverage to buy homes. In fact, it may be a fool’s bargain with the extra demand simply feeding higher house prices: the benefits of the policy accruing to wealthier home sellers rather than to the young first-time homebuyers it purports to help.”
Damn straight, Evan.
So his solution is to require buyers to come up with a lot more cash before they can jump into homeownership, plus a loan-to-income cap. That would automatically establish the maximum amount buyers could borrow, based simply on their incomes – a rad departure from the stress test now in place or the calculation of debt servicing ratios.
There are loan-to-income caps in places in several jurisdictions such as Britain and Ireland. In the UK, the maximum amount normally loaned to any purchase is 4.5 times annual income. Applying that to Canada, it means a couple with a joint income of $125,000 could borrow a max of $560,000. If they didn’t want mortgage insurance and had a 20% down payment, the most expensive house they could consider would be under $700,000.
The whole point of this? A soft landing. The feds understand the status quo cannot continue. They worry about $1.2 trillion in mortgage debt, which is growing at four times the rate of inflation and three times income growth. They know any country where 15% of GDP is dependent on something as emotional, flaky and hormonal as residential real estate, is a nation at risk. And it’s not as if examples elude us. Just look south.
The big question is whether or not a soft landing is possible. A gentle deflating of the Hindenbubble so the borrowing orgy stops, sales and prices waft gently lower, affordability is enhanced and the middle class ain’t gutted. It’s what they dream about on the Rideau.
Of course, no bubble in history has ever ended nicely. But we’re Canadians.