Free Money to Buy a Home?? How?!

Back in March, the Federal government and CHMC announced that they would be injecting money into the real estate market via “contributions” to first-time home buyers of up to 10%. It was unclear what the details were… that is, until last week.

The Details – Now we have some further details to share – the following is a summary of the program:

  • This program starts in September 2019
  • Eligible for 5% of a resale home
  • Eligible for 5% or 10% of a pre-construction home
  • Household income must be less than $120,000
  • The total amount of the mortgage plus the CMHC’s contribution must not be greater than $480,000
  • The maximum purchase price is $565,000
  • The loan is interest-free
  • The government will share all appreciation and depreciation of the home, proportionally to the amount contributed
  • Must pay off the loan after 25 years or when the property is sold
  • The government has set aside $100 Million for the program

The Verdict – In a nutshell, it seems like the Federal government is investing in real estate via first-time home buyers. I find that interesting. My initial opinion on this whole program still holds true after the learning about the details of the program as per my previous Insight Article post, which can be found HERE. This product sounds so niche that it seems like they are trying to fix something with nothing.

Reference Point for the Cap – Do allow me to explain further. When you think about the criteria for the program, one of the first few thoughts that come to mind is what can you really afford with a program that is capped off at $565K. To put this cap into perspective, here is what $565K can buy you:

  • 500 SQFT condo in Downtown Toronto
  • 550 SQFT condo in Midtown Toronto
  • 600 SQFT condo in Mimico
  • Freehold in Durham

So when Jean-Yves Duclos, the Liberal MP and cabinet member in charge of CMHC said, “Even here in Mississauga and Toronto, first-time home buyers will have many starter home options. The savings will be significant.” Other than condos, I don’t know what other type of starter home he is referring to that goes for $565K. Then he also mentioned this, “If you facilitate the purchase of new homes by young, middle-class Canadians, then apartments will be in lower demand and that means the price of rentals will also be kept more affordable.

Surge in Small Unit Demand – This is ultimately going to push even more new home buyers into the condo market because it has essentially incentivized first-time home buyers to buy pre-construction; they can get 10% instead of 5% contribution from the government. All of this is going to drive the demand for the smallest pre-construction units even higher. This same asset class is EXACTLY the type of units that investors are looking to pick up as well. Talk about a double demand whammy! Oh, here’s the kicker: the city limits the number of 1-bedroom units that a developer can build because they mandate that there must be a proportionate amount of larger units as well. All of this just points to smaller pre-construction units being in even higher demand than now, which will lead to further price increases in that market segment. Wonderful, isn’t it… only if you are an investor!

The Tax Man Strikes Again! Where do you think the government is getting money for this program? If you answered from taxes, then you are correct. This means that non first-time home buyers are essentially subsidizing for first-time home buyers. When it comes to government-run programs, nothing is technically free. It will ultimately cost someone something, somewhere.

Political Ploy? The fact that this program becomes effective only 1 month before the Federal election seems like one big “coincidence” to me. I can already envision commercials pandering to the Millennial generation for votes. “See, we implemented the first-time home buyer incentive for you, vote for us and we’ll remove the stress test”. The real estate market is going to get really wacky at that point!

The Wrap – At the end of the day, this program is so niche that I don’t think it’ll affect the real estate market that much, except for a small uptick in demand for the smaller condo units. This just looks like another political initiative that’ll essentially go nowhere. CMHC gets an A for effort, but will probably get an F for results. That said, only time will tell!

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