National Post (National Edition)
B.C.’s homebuyer betrayal
The B.C. government gave Vancouver homeowners a lovely present just before Christmas with the announcement of a new program that will use taxpayer funds to boost demand in the real estate market, raise the value of houses, and make anyone who already has one even richer.
The notion that any level of government would want to take action to boost Vancouver home prices defies logic. Runaway prices in that city have been called a crisis, with ownership already out of reach for so many, and many warning of an unsustainable housing bubble. In fact, recent actions at various levels of government have already been taken to try cooling off the housing market, including the provincial tax announced in the fall targeting foreigners acquiring homes in Vancouver. Then, in December, the province went and made things worse again.
The B.C. government’s newly unveiled “Home Owner Mortgage and Equity Partnership Program” will be giving out loans to first-time homebuyers who won’t have to make payments or incur interest for the first five years after buying (then, the interest starts at the buyer’s bank mortgage rate). The 25-year loans will match what buyers have saved for their down payment, doubling the amount, up to a maximum of five per cent of the purchase price or $37,500.
The announcement came at a time when there are signs that the Vancouver housing market had been starting to finally cool off. The most recent Bank of Canada Financial Sector Review had noted a downturn in resale activity in the region after the B.C. government introduced the foreignbuyer tax. That had some calling for Ontario to bring in a similar tax in the heatedup Toronto market. And yet, experience shows that B.C.’s plan to subsidize buyers will only inflate prices again.
In fact, policies supporting first-time homebuyers elsewhere were specifically designed with the goal of increasing prices. In 2008, the U.S. Congress passed legislation in 2008 to try stabilizing the housing market’s slide by providing a new refundable tax credit for first-time homebuyers of US$7,500. As housing demand sagged in the financial crisis, the tax credit was increased and even extended to people who weren’t just buying for the first time.
The plan all along was to put upward pressure on prices by subsidizing down payments. The widespread collapse of America’s real estate market was obviously unstoppable, but later evaluations did suggest that the tax credit appeared to shore up prices somewhat because there was a significant fall in housing demand as soon as the tax credit ended, after costing the government considerably more than its original budget.
An initiative by the Australian federal government also resulted in upward pressure on home prices. The First Home Owner Grant (FHOG) scheme was introduced in 2000 to offset the effect of the GST on home ownership. The amount of the grant was boosted between 2008 and 2010 in response to the global financial crisis. One study found the scheme to be a major contributor to housing-price increases and concluded that “the FHOG has been effective in driving home sales and construction … however if the success or effectiveness of the policy is to assist new home buyers into (getting into) the market, this policy may have resulted in the opposite effect.”
After the U.K. government recently introduced its new first-time homeowner program, providing government loans to new buyers, it was criticized by both the Bank of England and the IMF, which said that while the policy might “temporarily help boost confidence in the housing market… there is a risk that, in the absence of an adequate supply response, the result would ultimately be mostly house price increases that would work against the aim of boosting access to housing.”
Making her announcement of the new homebuyer subsidy in a Vancouver suburb, B.C. Premier Christy Clark said she wanted to make it “easier for first-time homebuyers to find their way into a really tough housing market right here.” By pushing up prices, it will likely have the opposite effect. Even worse, if housing prices actually fall over time, the cost to taxpayers could prove to be significant.
The program is unique in that it creates a payment structure similar to adjustable-rate mortgages with “teaser rates” in the earlier years, with the free interest on the provincial loan. Should interest rates rise in the next five years and housing prices decline, participants in the program could find their mortgages underwater, with their debts to their mortgage company and the government adding up to more than their house is worth. That’s happened before, too, when Australian taxpayers in New South Wales ended up covering hundreds of millions of dollars in defaulted mortgages. It’s odd that B.C.’s government seems intent on repeating the same mistakes that so many others have already made.
POLICIES SUPPORTING FIRST-TIME HOMEBUYERS ARE SPECIFICALLY DESIGNED TO RAISE PRICES.