The screw-up

Are downpayments outdated? When half of the kiddos without houses say saving enough for that initial lump sum is impossible, why do we cling to this anachronistic rule?

The question’s being asked more lately. No wonder.

A National Bank study on affordability found that for many young people… there is none. Fuhgeddaboudit. Ain’t happening.

The reason: the downpayment. Amassing the quarter-million needed to buy the average detached in Vancouver, for example, is estimated to take between 38 and 50 years. No typo. Thirty-eight to fifty. In Toronto, it’s way easier. The time required is a mere 25 to 39 years. Condos are better, of course – less than a decade.

A BC credit union CEO made some waves the other day by suggesting this system sucks. Why are we not extending financing to people who can afford the payments, rather than forcing them to show up with a bag of savings? “I just think it’s a really outdated way of determining worthiness and readiness for homeownership,” says Brian Harrris.

The young may not know this, but Canada tried to make exactly this reform twenty years ago. I know, because I was there. And I tried to stop it.

It was 2006. Stephen Harper was the boss, wee Jim Flaherty was the finance minister, and I was a troublesome MP with a bad rep. The Con government brought forth a radical plan to make home ownership massively more affordable. The crown agency in charge of real estate financing, CMHC, would be allowed to insure mortgages with super-long 40-year payback periods, and to people who had put nothing down upon closing. Zero. Nada. No downpayment whatsoever.

The 0/40 mortgages were revolutionary and a Canadian response to the NINJA loans being made then in the US. (That referred to borrowers who got real estate financing despite having No job, No Income and No Assets.) The American housing market was on steroids because of new innovations, like teaser rates, interest-only loans, lending against a property’s value instead of a borrower’s ability to pay and the securitization of home loans – bundling them into packages that were then sold to investors. It was burning up Wall Street, making bankers massive profits.

Until it collapsed.

When real estate values topped, the inevitable happened. Owners without equity (but big debts) bailed. Mounting default rates rendered those mortgage products toxic and ultimately led to the Credit Crisis of 2008-9 plus the collapse of major US banks. We came close to a global depression, all because of kids in Cleveland buying bungalows with no money.

So, while this was starting to wobble and unwind, the Harper government pushed ahead with 0/40 – setting Canada up for exactly the same outcome. And pesky little MP Garth tried to stop it by insisting on a Parliamentary hearing, then voting to halt the process.

Alas, my Con colleagues outvoted me. The reforms passed. It would not be too much longer before the prime minister threw me out of the government caucus, to wander piteously towards inevitable electoral defeat and a hopeless life imprisoned within a pathetic blog.

You know the rest. US housing collapsed. Canadian house prices vaulted forward. The Harperites freaked. As Wall Street toppled Flaherty abruptly banned zero downpayments in July of 2008, replacing them with a 5% reqirement. Those long amortizations were also chopped down to just 25 years.

What did we learn?

Risk, that’s what. When buyers are given 100% financing, a few risky things happen.

Folks who don’t have a lot of money, savings or assets also have little ability to withstand a financial shock. So if real estate values fall sharply those with no equity end up owing far more than they own. Why not default rather than go down with the ship?

Second, if you don’t need a downpayment, you can buy more house. Prices inevitably rise when the bar to ownership is lowered. By creating more demand the government ensures the market will be busier, bidding wars and multiple offers more common, and sellers rewarded. If nobody needs a bag of money before they can make an offer, then a lot more offers will materialize. Up she goes.

Look what happened in Toronto during that 2006-8 window when downpayments disappeared. The average property price rapidly surged 14.8%, and sales volumes exploded, hitting more than 98,000 in 2007 – an historic high that was not achieved again until years later.

In meaningful ways, this was the beginning of the end of real estate affordability in Canada. All because politicians tried to make it more affordable.

Must we do it again?

About the picture: “People send me pictures of their dogs, just because, like you, I appreciate them,” writes Pete. “This is from Debra from Salmon Arm BC. I’ll keep you in pictures so you don’t have to post cats. This is Einstein. It took a while to get this Border Collie to calm down enough to get his portrait taken among the daisies.”

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Source: https://www.greaterfool.ca/2026/10/21/the-screw-up/