First-time buyers: Weighing the benefits and potential pitfalls

When it comes to housing policy, there are never easy answers, and there are always trade-offs that need to be balanced. When the federal government recently announced increasing amortizations to 30 years for first-time homebuyers along with increasing the cap on insured mortgages from $1-million to $1.5-million, it was the first loosening of mortgage regulations in over a decade. 

The policy was largely met with cheers from the real estate sector, where activity has slumped, while also garnering concerns about a counter-productive demand stimulus at a time when prices are high and debt burdens heavy. 

How affordability challenges have intensified

Beyond the cynical take that this shift in policy is simply outreach to young voters by a struggling incumbent party, it is worth examining why a change in policy is needed. The truth is that the pandemic radically exacerbated pre-existing affordability issues all across Canada as demand diffused into smaller markets. 

Without adequate supply to absorb that sudden flood of demand, prices skyrocketed. As a result, affordability, especially for young people, has only become more challenging. Prices are high, saving for a down payment is an ever-increasing hurdle and the multi-decade downtrend of mortgage rates has ended. 

B.C.’s unique struggle

In B.C., where affordability is particularly difficult for young people, housing frustration is at an all-time high.  This is best illustrated by the share of people aged 25 to 35 not living in what is known as a “minimum household unit”—that is, a situation where people live together but would rather live apart—is at a 40-year high. More than 40 per cent of that age cohort is living in a less-than-desired form of household. 

The announced changes to mortgage regulations will help that frustration in three ways:

Expanded amortization

First, allowing first-time homebuyers to qualify and structure payments at a 30-year amortization will help with monthly cash flows by lowering payments. This will also allow first-time homebuyers who were at the margin of qualifying under a 25-year amortization to enter the ownership market. 

Yes, these measures will mean paying more interest over the life of the mortgage, but as these families prosper and grow their incomes, they can make pre-payments or adjust their payments in ways to mitigate the added burden. What’s more, gains in home equity from even gradually rising home prices will offset some of the added cost. 

Higher insured mortgage limits for young families

Second, increasing the threshold for insured mortgages will help young families that have sufficient incomes but little savings to qualify for family-oriented housing in large cities, where finding an extra bedroom or two often means a million-dollar price tag. 

With the status quo, the move from $999,000 to $1-million meant a leap in the required down payment from about $75,000 to $200,000. As such, many families that would have liked to move up to more adequate housing were locked out from doing so, causing overall turnover in the housing market to decline. 

Increasing the threshold to $1.5-million will prevent the bunching up of demand that we observe under the current $1-million price threshold, taking pressure off prices by spreading demand across the price distribution. This should also free up more affordable housing and rental units as growing households move up the housing ladder–a process known as “vacancy chains.”

Incentivizing new construction with policy changes

Finally, Canada has a significant housing supply deficit and there is no scenario for improved affordability that does not require a record amount of new construction over the next decade. Allowing 30-year amortizations for buyers of new construction will help to induce demand for new units, facilitating a much-needed investment in new housing supply.

Can the market absorb a boost in demand?

As for the downside of these policies, there is always the risk with demand stimulus that prices are driven higher, particularly given that demand should also be given a boost by falling interest rates. However, initial conditions matter. These policies are coming into effect at a time when sales activity is running about 10 per cent below normal across Canada and closer to 20 per cent below normal in expensive markets like Vancouver and Toronto. Moreover, the total inventory of homes for sale has accumulated to healthier levels over the past two years, and governments are finally pursuing supply-side stimulus as well. 

Here in B.C., the government expects changes to zoning will boost new home construction by between 200,000 and 300,000 units beyond the status quo over the next decade. Consequently, markets should be able to absorb an uptick in demand without putting undue pressure on home prices.

Ultimately, we must weigh the benefit of better housing options for young Canadians facing the worst…