Lubrication

Oliver’s a Millennial. He admits it. “35,” he says. “Make about 90k a year, DB pension, managed to save about 80k in a balanced portfolio of ETFs. 0 debt. I drive a Kia, so you already know I’m depraved, but I hope you’ll be able to give me some advice, anyway.”

The context: we’re exactly two weeks away from a federal election which has only two clear themes (since nobody seems to care about climate change, Albertan hurt feelings or Blackface). They’re tax cuts and, above all, sucking up to needy people like Olly. First-time homebuyers are the target demographic of both Trudeau and Scheer in the first election in which moisters represent the largest voting bloc.

As you know, Cons would gut the stress test and bring back 30-year mortgages. Libs have upped the RRSP homebuyer limit, will bring in yet another anti-Chinese-dude tax and have rolled out a shared-equity mortgage for properties up to $800,000 in the bubble cities.

Everybody whose livelihood doesn’t come from selling/financing properties or has a brain free of house-lusty hormones agrees: these are seriously bad ideas. They’ll increase demand and drive up the price of a limited supply of homes. And, really, how does it make sense to allow a couple to use $70,000 in money they got a big tax credit for to buy a house that’ll give tax-free gains? How did the system become so perverse? And why is the election of 2019 – where all parties would run budget deficits – making it worse? Oh right – nobody cares about the deficit. Silly us.

Anyway, back to O.

“I read in a blog comment you responded to the other day – “never leave free money on the table”. How does this apply to the new Federal Home Buyers Incentive Plan?

“I currently rent a decent 1-bed in the GTA for just shy of 2k/month plus utilities (new building, not rent-controlled in Ontario).

“With a buyers incentive of 5% on a 400k condo and 20k down, my monthly payments would be about 1500 plus condo fees (max $500/month), which puts me at my current rent – but with a monthly mortgage carrying cost guaranteed for the first 5 of 25 years.

“My job is secure, but it does not offer much in the way of mobility, so I can’t exactly take off to more affordable pastures. Do I take the plunge? It is free money, after all. Thanks for being a voice of reason.”

The ‘incentive’ is the shared-equity mortgage. Olly can by a resale condo and get CMHC to foot 5% of the cost in a mortgage he doesn’t need to pay back until he sells, or 10% if the condo is new. If he unloads down the road for a loss, the feds eat it. If he sells for a profit, Ottawa gets its slice. The top qualifying house price has just been raised by T2 to $800,000 in the GTA, Van and Victoria, and the max income of borrowers is $150,000.

So, yes, it smells like free money.

Of course the more ‘incentives’ the government provides for people to buy houses, the more personal savings are plowed into real estate and the more personal debt is accumulated. Oliver is considering giving up 25% of his nestegg and taking on a $380,000 loan to get a condo which is likely identical to the one he rents – and for the same monthly outlay. He may know what his mortgage payment is for the next five years, but property taxes will likely rise, the condo fees are subject to change and there could always be a special assessment to repair the garage or replace the windows.

In short, he’d trade liquid wealth and freedom for debt and uncertainty. There’d be no physical or financial improvement, plus the end to personal mobility. And nobody ever spends their adulthood in a condo. So how does that even start to make sense? The only way he could benefit is through the capital appreciation of his unit – after closing costs to buy and commission to sell. There’s no guarantee this will occur.

That’s the thing about incentives. They exist to make you do things which are probably too stupid to contemplate otherwise. Oliver should stop and wonder why it is the federal government would want him to buy instead of rent. Yes, his vote is being bought. But more consequential is the amount of capital that will be sucked out of his hide. Fees to realtors, lawyers, mortgage brokers and lenders. Property taxes to municipal government. Insurance payments to brokers and insurers. More fees to condo corporations, their agents and property managers. Yet more fees to appraisers and home inspectors. And don’t get Ikea, Wayfair and Itsy, because everybody wants to fluff the nest. HST galore.

This is why governments promote real estate. By holding out the carrot of tax-free gains, then slathering on ‘incentives’ when that isn’t enough, they turn over the job of economic stimulation to all of the little risk-takers, gamblers and amateur speculators who fall for it. Never fails. Oliver may be  next.

So, kid, go ahead and take the money. But never call it free.