In September 2019, the Canadian government launched the First-Time Home Buyer Incentive, a nationwide program to encourage home purchases for first-time buyers. This will add to existing first-time homebuyer programs including the First-Time Home Buyer Land Transfer Tax Rebate.
The shared-equity incentive program lets buyers borrow 5% to 10% of their home’s purchase price from the government interest-free for up to 25 years or when the property is sold, whichever is first. In exchange, the government also gets the same percentage of any increase (or decrease) in the home’s value.
In the Greater Toronto Area (GTA), the program aims to help the many Canadians who have been priced out of the hot Toronto real estate market. But how effective will it really be?
For purchases closed after November 1, 2019, the government will pay for a portion (10% for new homes, 5% otherwise) of the home, and take ownership of the corresponding equity in the property. The buyer will need to pay back the future value of the equity in a lump sum (5% or 10% of the fair-market value) up to 25 years after closing.
Not every home buyer will qualify for the program. There are three main requirements:
- The buyer’s income cannot exceed $120,000.
- The buyer’s total borrowing (generally, the mortgage amount + the incentive value) cannot exceed four times his/her income.
- The buyer’s mortgage must be insured by the CMHC and have a LTV greater than 80%.
Practically, this means that the maximum home price from this program is $600,000 with a $480,000 mortgage. Not to mention, you would have to pay CMHC insurance premiums, which can be up to 4% of your total mortgage.
Less than 30% of buyers in the GTA are eligible
Figure 1 above shows the estimated distribution of sale prices for residential properties sold in Q1 2019. During this period, about 40% of residential properties sold in the GTA went for less than $600,000. This puts a sharp theoretical maximum on the potential adoption of the FTHBI — although, as we’ll see shortly, the true utilization is likely to be far less.
How many of these homes were bought by first-time buyers making $120k or less?
- Across the entire GTA residential market, about half of home buyers are first-time buyers.2
- About 80% of first-time buyers make less than $120k. In the GTA, about 93% of working adults make less than $120k.3 Those with very low incomes can’t yet afford to buy a home, while those with very high incomes are more likely to already own a home.
This means that roughly 30% of buyers are eligible, in the best case, which is quite different other housing markets in Ottawa or Montreal. Adoption of the FTHBI will be limited by the demand from willing buyers, and not the supply of eligible properties.
We’ve seen that a maximum of 30% of buyers could theoretically use the FTHBI. In reality, only a fraction would opt to use the incentive, for several reasons:
- If a buyer expects home prices to rise in the future, they’ll be unlikely to use the FTHBI. Furthermore, those who expect prices to drop or stagnate are also more likely to rent instead of buy. Combined, these effects mean that the first-time buyer market is skewed towards price optimists who are less likely to use the incentive.
- An increasing number of first-time buyers are opting for non-traditional lines of credit, such as informal loans from family. This negates some of the demand for the FTHBI, especially due to the limit on prices.
- The FTHBI requires the buyer to have mortgage insurance, which can have a premium of up to 4%. This can negate the 5% extra equity that the FTHBI offers. Most buyers amortize mortgage insurance premiums into their mortgage, which means they will pay interest on the premiums for the next 25 to 30 years.
That cuts the overall adoption of the FTHBI down to 15% of the residential market — not insignificant, but a smaller share than many have expected. Even though this new program may not help most buyers in the GTA, the area still benefits from Toronto’s property tax rates, which are some of the lowest in Ontario.
- Data were estimated by fitting a Student T distribution to log-price data from July 2016 and adjusting the median and scale to fit recent statistics. This was repeated for condo apartments, condo townhouses, and detached houses. The combined data is a mixture model with appropriate overall percentages.
- Altus Group, Better Dwelling, 2019
- Census, 2016