Wednesday, December 13, 2017

Calculated Thought: New risk to housing market

January 4, 2017 by Sean Annable, contributing writer

As of January 1, first-time homebuyers can apply for a loan from the BC government to help with that pesky mortgage down payment. Cleverly dubbed the B.C. Home Owner Mortgage and Equity Partnership program (HOME Partnership), it has specific stipulations: the person applying for it must be a first-time buyer of a principal residence that costs less than $750,000 (good luck, Vancouverites), they must have a household income less than $150,000, and they must have saved enough for at least half of their down payment. They must first be pre-approved for a high-ratio mortgage (less than 20 percent down), and meet the above criteria, and—presto—they get a government loan that is interest free for five years, payable over the next 20 years at current rates.

Calculated Thought is a column dealing with student finances that is featured in every issue of Nexus.

Maxing out at five percent of the purchase price—$37,500 if you push it to the $750,000 sticker price—the program effectively lets some buyers get away with a 2.5-percent down payment, while the government chips in the other 2.5 percent to reach the five-percent minimum required to be approved for a mortgage.

These high-ratio mortgages have economists and pundits worried when looking at Canadians’ record-setting household debt. Governments responded to swelling debt and unaffordability with big changes over 2016; foreign-buyer and vacant-home taxes in Vancouver were approved, and mortgage-lending criteria was made more stringent and based on a “what if rates rise?” scenario.

These measures were meant to cool and reduce risk in heated markets. What does this new program do? Increases demand in those very markets—which tends to increase prices—and increases risk to participants who borrow with more leverage.

Current sellers will benefit by the bump in demand and price, but borrowers are set to buy when the market is arguably at its peak in many places and interest rates are set to inch higher.

I applaud that the government wants to help first-timers get over the hurdles of home ownership, but whether or not this is the most prudent course of action remains to be seen.

And, it’s worth remembering that provincial elections are just around the corner. Coincidence?

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