How the Liberals missed the boat on affordable housing

Now that we've had a couple months to digest the most recent federal budget, we can now safely say Ottawa missed the boat on affordable housing.Indeed, the Liberals had a golden opportunity to make some simple tweaks to the mortgage system in Canada that would have allowed more first-time buyers to get into the housing market and assist second-time buyers to move up, without major changes to the policies implemented over the last two years to cool the market. Industry groups across the country including the Canadian Home Builders' Association, Ontario Home Builders' Association, various real estate associations, boards of trade, lenders and housing advocates, have all beseeched the government to take some steps to ease up on the various stress tests and mortgage restrictions. Most of these requests were embodied in a list of recommendations from the Chair of the Federal Liberal Housing Affordability Caucus, Francesco Sorbara. Sadly, only one of the many recommendations was implemented.

Little impact

Instead, the Liberals decided to use taxpayer money to the tune of up to $1.25 billion to assist first-time buyers to purchase homes by advancing up to 10 per cent of the purchase price of new homes and a five per cent of the price of resale homes in conjunction with a CMHC-insured policy. Incomes were capped at $120,000 annually, and the loan portion cannot exceed four times annual income. Effectively, the program by its very capping of the loan portion, excluded major centres such as Vancouver and Toronto, which have suffered significant declines in both sales and prices over two years. Much criticism has already been levelled against the proposed program as having little impact on increasing housing affordability.There is no question that these proposals will assist first-time buyers of homes in less expensive areas with the biggest beneficiaries being places like Montreal and western provinces. However, the government will have t0 advance significant sums of taxpayer monies by way of repayable loans plus significant cost to administer the program.This is not to say there isn't some merit to this program. However, there are many private, non-profit institutions such as Trillium and Options for Homes which offer similar second mortgage loans and share in the equity upside with purchasers. The government has not totally revealed how the sharing will work, but has indicated that there would be no interest costs during the term of the loan.On the other hand, the recommendations of the Liberal Housing Affordability Caucus would not cost the government a single dime, and would have allowed a broader section of the marketplace, including those in Vancouver and Toronto, to gain access to housing markets which have now been closed to them because of the new and tightened mortgage rules.

Some of these proposals included:

1. Exempting mortgage renewals from the stress test. Currently, institutions, whether those refinancing existing loans with the same borrower or new institutions, areapplying the new stress test to existing loans. This can put a homeowner in danger of having to pay down his loan in order to qualify even though he has been fully complied with all of the obligations;
2. Extending the amortization period for blended payment mortgages from 25 years to 30 years. Although this seems like a small adjustment, it would lower overall carrying costs for buyers and materially expand the number of eligible purchasers for financing. Again, 30-year amortization is fairly standard in most countries and in Canada it was raised to 35 years at the height of the financial crisis in 2009;
3. Modify the current stress test. Requiring purchasers to be able to carry a mortgage which is two per cent above the quoted rate or meet the posted five-year rate (which is usually higher than the real five-year rate) has done enough damage, particularly in the Toronto and Vancouver housing markets, but more so, has impacted on other markets that were not overheated. Some minor adjustments would have made a big difference. The suggestion was to have a declining rate stress test such that the percentage over the proposed mortgage rate (now two per cent) would decline the longer the term of the mortgage that was being obtained. For five- or seven-year mortgages, purchasers are locked in and protected from having to face significant interest rate increases for many years and did not need such a stringent stress test to protect them from increased rates.
4. Increase the Home Buyers' Plan which allows purchasers to borrow from their RRSPs. This proposal was in fact partially implemented with the limit of $25,000 being increased to $35,000; and
5. Increase the GST/HST rebate thresholds of $400,000 to reflect today's current marketplaces, as proposed by the Canadian Home Builders' Association. When GST came out in 1991, the level of $400,000 was supposed to be adjusted periodically for inflation. There has not been one adjustment since 1991 and there is no recognition of variations between regions of average prices. Again, this recommendation was ignored.

Markets on ice

In reality, the Liberals were looking for flashy, vote getting, news catching type of proposals that would show that the government is putting its money behind first-time buyers. Making adjustments to the stress test and amortization period really isn't sexy, but would have had a far greater beneficial impact with no cost to the government. The Liberals have responded to this criticism that the prior changes in the stress test are doing their job in cooling the markets and should not be changed at this time. In fact, many markets have not only cooled, but have been put on ice – such as the lowrise market in GTA for instance.Leor Margulies is a partner at Robins Appleby LLP and a member of the board of directors of BILD.