Homeownership: The disappearing dream

What needs to be addressed to increase homeownership: market sustainability or affordability?

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From the November 2015 issue of the magazine.

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(Illustration by Sébastien Thibault)

(Illustration by Sébastien Thibault)

In election 2015, one of the most hotly contested financial issues has been the proposed changes to the Home Buyers’ Plan—the federal program that lets first-time buyers borrow money from their RRSPs to purchase a house, without tax penalty. The Conservatives promise to increase the HBP limit from $25,000 to $35,000, while the Liberals pledge to relax HBP rules so it also becomes available to home buyers facing challenging circumstances—such as job relocation, the death of a spouse or divorce. But which initiative better serves Canadians?

The Liberals’ plan wouldn’t change the HBP maximum withdrawal limit of $25,000—and some call that a big mistake. “Over the years the Home Buyers’ Plan has failed to keep pace with rising home values,” says Randall McCauley, head of federal affairs for the Canadian Real Estate Association.

First introduced in 1992, there’s been only one increase to the HBP withdrawal limit—when it jumped 25% from $20,000 to $25,000 in 2009. But during that same period, housing costs more than doubled: In 1992, the average home price in Canada was $149,864, whereas it was $320,020 in 2009. By August 2015, the average home price jumped to $433,367—a 189% increase from 1992 prices.

Still, some are worried the Conservative plan will only fuel already unsustainable prices. “Encouraging households to invest more at a time when housing is widely believed to be hugely overvalued would create even greater imbalances in the economy,” says David Madani of Capital Economics.

But the question remains: Is the real problem market sustainability—or housing affordability? Even as detached homes in Toronto and Vancouver sell for close to $1 million, on average, analysts are reminding us that Canada’s two hottest markets are anomalies.

“The federal government doesn’t customize policy to correct two hot markets,” says
McCauley, noting that data show housing in the rest of the country is correcting or stabilized. While he supports the Liberal plan, he says the Conservative plan gets at the root of the problem by “effectively addressing the erosion of purchasing power.”

2 comments on “Homeownership: The disappearing dream

  1. Before the creation of the TFSA, the HBP was definitely a boon for new home buyers. Since the creation of the TFSA in 2009, I fail to understand why the HBP still exists, but if it must, I think the arguments in this article which treat the HBP as an important source of savings for a downpayment are myopic.

    With no limit on the amount that can be withdrawn and no payment schedule to repay the funds, the TFSA is a much better savings vehicle for the purchase of a house. Additionallly the recent increase to TFSA contribution limit give it a huge boost over the HBP.

    As a hopeful first time home buyer myself, I personally see the proposed changes to the HBP as a non-issue and a distraction from the fact that home prices are increasing at rates that outpace increases in earnings.

    A new home buyer in this market will (at least in my case) be cash strapped for a few years after the purchase, why add on the additional stress of having to pay back the HBP? Leave the money you’ve earned marked for retirement alone, use your TFSA.


  2. Building on what was said by JBrook there are a few other useless points made in this article two of which are dangerously misleading. Firstly, the statement by McCauley who obviously has a very specific vested interest in the ‘residential home building’ industry. McCauley states, “Over the years the Home Buyers’ Plan has failed to keep pace with rising home values…,” this one liner assumes the following a) the ‘Home buyers’ plan’ is a good and effective mechanism to assist in homeownership, b) that somehow it was intended or presumed to keep pace with inflation and that somehow it isn’t doing its job. Wrong on both accounts. Ironically ‘home buyer plans’ are detrimental to the affordability of the housing market. People use these plans to purchase homes they otherwise couldn’t or wouldn’t afford. On a case by case basis this is not obvious but in the aggregate these home buyer plans increase demand without creating any corollary in the supply of housing, result; higher prices. These plans are advertised by members of the industry and the politicians who run on these platforms as a benefit to ‘the regular taxpayer’ (notice taxpayer and not citizen). The idea is a populist one appealing to the vast majority of the voting public who don’t have any discernible ability to evaluate the effect of such policies on the housing market. All voters see is the marginal individual benefit that they can take from plans like this and so in this regard JBrook was perfectly on the mark when s/he chose to use the word myopic.
    The ‘residential home building’ industry is obviously going to lobby for the right to build more suburban housing and they will probably make the point that if there was more housing then affordability would increase but things aren’t that simple. It is well known that housing density must increase to reduce that costs associated with housing – the elephant in the room that seems to have been left out of this article. The immediate and obvious consequence to this fact emphatically contradicts any further urban sprawl.
    So if suburban living isn’t the answer, if density must be increased to lower costs and coupled with the fact that there is a severe shortage of affordable housing in Toronto and Vancouver then there are only a handful of viable solutions. Two of which I will illustrate; relax rules governing redevelopment in urban areas to increase the incentives to property owners to increase density. There is way too much NIMBY-ism in Toronto supported by shortsighted populist politicians. Secondly, end rent controls. Why? Well we have a housing shortage, there is a lack of rental stock in the city and if landlords thought they could get a decent return (depending on what the market had to offer and not some subjective idea about what amount of profit is fair) then there would be tons of new rental housing; some more affordable and some less so but overall supply would be way up. As it stands if you have a problem tenant you can’t evict them easily. Housing costs have been rising faster than the allowable rent increases every year for over a decade and these costs can’t be recouped in housing built before 1991 – a vast majority of the housing stock. As a realtor I can personally tell you that rents have been decoupled from the price of housing for over a decade.
    Everyone likes to talk about real estate but most people don’t really know how it works and things will only get worse unless and until there is a correction. We need to take steps to increase supply without affecting demand, home buyer plans can’t do that.


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