A FOOT IN THE DOOR
Does provincial program to get first-time buyers into the market help?
Alicia Winnett calls it a “bit of an obsession.”
Every day, she pores over the real estate listings for the Lower Mainland.
And every day she feels frustrated and disappointed.
“The way the prices of housing have soared makes it stressful to watch from the sidelines, especially being at the point where we’re hoping to start a family,” says the 30-year-old who lives in a one-bedroom apartment in Mount Pleasant with her husband Adam Winnett.
The couple have been there six years and now, with her debts finally paid, they are looking for bigger, better digs.
Yet it has proven more difficult than imagined.
“I grew up in a suburb, and it’s amazing how we can’t even afford a home there,” says Winnett, whose blog, Alicia Fashionista, covers the Vancouver lifestyle.
Certainly Vancouver is world renowned for its desirable lifestyle. But its reputation has helped drive real estate prices to unreasonable heights, creating an affordability crisis particularly for younger generations.
That is why the B.C. government introduced late last year a loan program to help first-time buyers. Called the B.C. Home Owner Mortgage and Equity (HOME) Partnership, it offers qualified first-time buyers a loan of up to $37,500, interest- and paymentfree for the first five years, to assist with a down payment.
The program is expected to pro- vide more than $700 million in funding over the next three years for more than 40,000 “households entering the market for the first time,” B.C. Housing states.
While the program aims to ease the burden of saving for a home, critics argue it will have little impact in making housing more affordable.
“I think the B.C. provincial government deserves credit for its intention,” says Paul Kershaw, a professor at the School of Population and Public Health at the University of B.C.
“It’s the first time a provincial government has really acknowledged the housing market has evolved in a way that is really harming a young demographic.”
As the founder of Generation Squeeze — advocating for Canadians under age 50 on issues like housing — he says high real estate prices make Vancouver unlivable for young adults seeking to build a career and start a family.
“So the province gets an A for intention, aiming to develop some kind of housing policy to bridge the gap between home prices and what young adults are earning right now,” he says. “The problem is they get a failing grade for execution.”
One of HOME’s challenges is it adds to the debt loads of first-time buyers often already on the edge of qualifying for a mortgage.
“The buyer still has to qualify for the mortgage with regards to income, credit and debt ratios,” says Rebecca Awram, a mortgage broker with Origin Mortgages in Vancouver.
For example, HOME’s loan would be included in the gross debt service ratio. This guideline for lenders limits the amount that borrowers can access by ensuring debt payments, property taxes, strata (condo) fees and heat do not exceed 35 per cent of gross household income.
Additionally, the program’s positive effects are muted because of recent changes to mortgage rules by the federal government that stipulates borrowers must qualify for a mortgage at the Bank of Canada’s five-year fixed rate, which is generally substantially higher than most mortgage rates.
Aimed at ensuring buyers can absorb rising interest rates on borrowing costs in the future, the new guideline effectively reduces buyers’ purchasing power by 20 per cent.
“Helping this same group with a slightly bumped up down payment does not compensate for that,” Awram says. “In fact, buyers who have a five-per-cent down payment saved and match it with the program barely add any borrowing capacity to their qualification.”
For borrowers with larger down payments, the new B.C. loan will extend their purchasing power, “but not dramatically,” she adds.
Moreover, HOME only provides funding for a down payment up to 19.99 per cent. She says it would help more buyers if the limit increased to 20 per cent, boosting purchasing power because they would no longer have to qualify at the five-year benchmark rate, be constrained to a 25-year amortization, or pay the CMHC insurance premium.
Still, the loan initiative is being welcomed by realtors because it is helping first-time buyers previously unable to get into the market today, says realtor Dan Morrison, president of the Real Estate Board of Greater Vancouver.
“One of the things I hear from first-time buyers is: ‘If we wait another six months, or another year, the prices go up and we’re still behind the eight ball even though we’ve saved more.’” HOME helps address that issue. “If they can get in at today’s prices, assuming prices will keep rising, then they are better off borrowing that money today to get into the market,” he says, adding these buyers will benefit from the growth in equity in their home, offsetting at least partly the additional debt from the program.
Overall, the program will be helpful for first-time buyers with “modest aspirations,” Awram says, adding it can be used in conjunction with the federal Home Buyers’ Plan that lets them borrow from their RRSP.
But HOME won’t aid individuals like Winnett and her husband, who are not first-time buyers.
Despite having equity in their condo, Winnett says it will still be very challenging to purchase a townhome in their price range of $600,000.
“When you look at $1 million and up listings so long, that amount might seem cheap by comparison,” she says, adding most listings meeting their criteria start at $800,000.
“But it’s not because it would still be by far the biggest purchase of our lives.”
The way the prices of housing have soared makes it stressful to watch from the sidelines, especially being at the point where we’re hoping to start a family,