ERICA ALINI (GLOBAL NEWS) - Arguably the most talked-about measure of the Liberals’ latest federal budget is the First-Time Home Buyer Incentive.
Under the plan, the government would help some first-time buyers by advancing up to 10 per cent of the purchase price of a home so they can take out a smaller mortgage and keep monthly payments lower.
The program would be administered by Canada Mortgage and Housing Corp. (CMHC), the crown corporation that insures most Canadian mortgages on homes purchased with a down payment of less than 20 per cent of the price. Indeed, the new incentive would only be available for CMHC-insured mortgages.
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There are number of other caveats. Buyers must pony up their own cash for a down payment — at least five per cent of the home price. And they must have a household income below $120,000 a year. Also, the amount of the insured mortgage plus the CMHC incentive would be capped at four times the home buyers’ annual incomes, or up to $480,000.
That means the most expensive home you can hope to buy under the plan would be worth somewhere between $500,000 and $600,000, depending on the size of your down payment.
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The CMHC would give out up to $1.25 billion in incentives over three years starting in September. Buyers of newly-constructed homes would get 10 per cent of the home price, while those purchasing an existing property would get five per cent.
How exactly will you need to repay the money?
Home buyers would eventually have to repay the CMHC, either when the home is sold or, if they wish, sooner. It’s not clear, though, whether homeowners would simply repay the sum the CMHC originally advanced — which would make the money an interest-free loan — or whether the government would get a share of the sold price — five per cent or 10 per cent, depending on the equity share it originally contributed.
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This is an important detail, and some simple math shows why. Say you’re buying a $400,000 home with a 10 per cent CMHC incentive worth $40,000. If your home value rose to $600,000 over the years, a zero per cent loan would mean that you’d still have to return only $40,000. An equity-share type of arrangement would mean you have to return $60,000, which is a much better deal for the government and taxpayers.
If your home value dropped, say from $400,000 to $300,000, you’d still be on the hook for the original $40,000 at resale with a zero per cent loan. On the other hand, a shared equity arrangement would mean that the government’s 10 per cent slice of your home is now worth just $30,000 — better for you but a loss for taxpayers.
How exactly will your income be assessed?
Another hazy part of the plan is how that $120,000 household income cap will be applied. Presumably, the government will do more than just assess your income in a single year. Otherwise, there would be a strong incentive for some buyers to stay below the cap just so they can get the housing incentive, as personal finance commentator Preet Banerjee noted in a tweet.
Having a sharp income cut-off also means that home buyers with incomes just under $120,000 would have a significant advantage over those just above the threshold, who would not qualify for the CMHC incentive.
How would the new policy impact home prices?
The basic worry here is that if the government helps more people buy homes without a corresponding increase in the number of available homes for sale, buyers will bid up real estate prices.
TD economists estimate the new mortgage incentive could help push up home sales and prices by between two and five per cent by 2020. But their calculation also includes the expected effect of another budget measure that would allow first-time homebuyers to use up to $35,000 — rather than $25,000 — of their funds held in a registered retirement savings plan (RRSP) for a home purchase without tax consequences.
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Speaking only about the CMHC incentive, Heather Tremain, CEO of the housing non-profit Options for Homes, characterized the likely impact on prices as “marginal.”
Noting that the government is committing only around $400 million a year to the program, Tremain argues it will have a limited impact.
The federal government’s stress test ensures borrowers will be able to keep up with their debt repayments even at higher interest rates.
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Thomas Davidoff, a professor and housing expert at UBC’s Sauder School of Business, is of a similar mind. If the program is structured as shared equity rather than as an interest-free loan, it will have a moderate impact on housing demand, he predicts.
Davidoff was a harsh critic of a 2016 B.C. program that gave interest-free loans to first-time homebuyers. The government was topping up British Columbians’ down payment with a contribution of up to five per cent of the purchase prices (for a maximum dollar value of $37,500). The loan was payment- and interest-free for five years.
The program was essentially a “give-away,” Davidoff said. The provincial government was not taking an equity stake and was effectively lowering the amount buyers would have to save for a down payment, he noted. It was a fantastic deal for buyers and one that had a “very large” impact on housing demand, which only increased pressure on prices.
A shared-equity arrangement, though, would be less attractive, according to Davidoff, which is why he expects a smaller buyer take-up and a limited impact on prices if the federal government opts for that scheme.
Who would benefit?
With a maximum home price range of $500,000-$600,000, the program is likely to be of little help to buyers in Vancouver and Toronto, where average home prices sit at $925,000 and $765,000, respectively.
Because of this, take-up for the program in the country’s two most expensive real estate markets will be minimal, predicted John Pasalis, president of Toronto real estate brokerage Realosophy.
From Pasalis’ point of view, the government faces a fail-fail predicament on this one. If the incentive proves popular, it will push up home prices. If it doesn’t, it means it only made a difference for a small number of homeowners. He believes the latter is more likely.
Davidoff thinks the measure could still make an important difference in less pricey markets. The average home price in Canada, excluding Vancouver and Toronto, is around $370,000, fully within the scope for the new program.
In these markets, the CMHC incentive would “take the edge off the stress test,” Davidoff said.
Under the new program, mortgage applicants still have to qualify under the federal stress test. But the incentive would essentially lower the bar for test takers, as applicants would have to qualify for a lower mortgage.
A CMHC shared-equity mortgage would “undo the [impact of the] stress test in markets where it was not needed,” Davidoff said.
What’s the risk for taxpayers?
Another question surrounding the plan: what’s the chance that the government — and by extension, taxpayers — would lose money on this?
Options for Homes runs a share-equity program for low- and middle-income families that’s remarkably similar to what the federal government described in the budget. The non-profit offers a “down payment loan” of between five and 15 per cent of the purchase price to low- and middle-class-families that qualify for a conventional mortgage. When the homeowner sells or moves, the non-profit takes between five and 15 per cent of the sold prices, depending on how much was loaned.
Options for Homes has been operating for 25 years and helped more than 3,600 households buy a home. It has only seen five homeowner defaults, three of which were due to exceptional circumstances related to a specific building, Tremain said.
The lender’s risk in home-equity share programs is low, according to Tremain.
“These are homeowners who live in their homes,” she said. “If real estate prices drop, they’re going to say, ‘We’ve gotta stay and hold on.'”
The long-run rate of appreciation for residential real estate is around three per cent, so the chances that the home purchase price would be lower than the inflation-adjusted sold price at the end of, say, a 25-year mortgage are close to nil.
Still, the real risk is homebuyer defaults in a recession, Pasalis said. People often struggle to make mortgage payments when they lose their job or their hours at work are trimmed. And the kind of homebuyer who would need to resort to the CMHC incentive to buy a home would likely be more sensitive than average to this kind of financial shock, he added.
One way in which the government could lower its exposure to this kind of risk is basing the rate of CMHC insurance on the size of the home buyers’ down payment, rather than the size of the mortgage, Davidoff said.
CMHC currently charges higher insurance rates for smaller down payments. This is because, the more a buyer need to borrow compared to the value of the home, the riskier the loan and the higher the housing default-insurance premium.
But a buyer who makes, say, the minimum five-per-cent down payment, and gets a five-per-cent top-up from CMHC incentive, would have to get a mortgage worth only 90 per cent of the home value, rather than 95 per cent.
Davidoff hopes the housing agency will choose to charge such a buyer the higher premium associated with a 95-per-cent mortgage. But, as with so many other things around this policy, that detail remains TBD.
The Bank of Canada is confused. And when it’s confused, it stops what it’s doing until it figures things out.
KEVIN CARMICHAEL (FINANCIAL POST) - Canada’s central bank left its benchmark interest rate unchanged at 1.75 per cent on March 6 and signalled that policy has entered an extended period of stasis.
Stephen Poloz, the governor, and his deputies on the Governing Council expected slower global economic growth, but the slowdown has been “more pronounced and widespread” than forecast in January, the central bank said in its latest policy statement.
Similarly, they assumed Canada’s economy would stumble, but the fall in the fourth quarter was “sharper and more broadly based” than they predicted, the statement said.
The recalibration was made necessary by Statistics Canada’s latest tally of gross domestic product, which shows the economy nearly stalled in the fourth quarter.
Years of outsized borrowing appears to have caught up with households, which have cut their spending significantly.
The housing market no longer is red hot. Exports and business investment have gone cold, as weak oil prices and the trade wars sap business confidence.
Policy makers said the gap between actual economic output and its estimate of what the economy can produce without stoking inflation is wider, although they won’t have a new estimate until April.
Still, the central bank is less worried about losing their grip on prices, meaning it can leave borrowing costs low for longer.
“Governing Council judges that the outlook continues to warrant a policy interest rate that is below the neutral range,” which is 2.5 per cent to 3.5 per cent, the statement said.
“Given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook.”
Those words suggest the Bank of Canada’s slow march to higher interest rates in now on hold, perhaps until 2020. There was no hint in the central bank’s statement that policy makers contemplated cutting interest rates.
The goal remains getting back to higher levels, eventually.
“With increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets and global trade policy,” the statement said.
Some on Bay Street and Wall Street — and in Calgary — might have wanted a more declarative statement of alarm from Canada’s central bank.
In the United States, the Federal Reserve has made sure that everyone knows that it is no longer inclined to raise interest rates, even though the economy grew at an annual rate of almost three per cent in the fourth quarter.
StatCan reported March 1 that GDP grew at an annual rate of 0.4 per cent in the fourth quarter, less than half as fast as what the Bank of Canada predicted in January.
If there was a North American central bank that needed to pivot, you might have thought it was the Canadian one.
But the Fed and the Bank of Canada are in different places. The U.S. dollar is strong and constraining financial conditions; the Canadian currency is so weak that it’s probably undervalued, according to Derek Holt, an economist at Bank of Nova Scotia.
And inflation in Canada still is higher than benchmark interest rate, suggesting borrowing costs remain stimulative. The Bank of Canada did a half pivot in January, when it said it planned to take the benchmark rate to a neutral setting “over time.” Those two words reflected deteriorating economic conditions and showed that policy makers were in no rush to raise interest rates. They are in even less of a hurry now.
REAL ESTATE BOARD OF GREATER VANCOUVER - The deadline to complete the annual declaration to claim an exemption for the provincial government's Speculation and Vacancy Tax is coming up on March 31.
Bill 45: Budget Measures Implementation (Speculation and Vacancy Tax Act) was introduced in the legislature on October 16, 2018. The name of the tax has changed since it was first proposed in the February 2018 provincial budget. Legislation is in place and received royal assent (became law) on November 27, 2018.
The tax will apply in these designated taxable regions of BC:
For 2018, the tax will be 0.5 per cent of a property’s assessed value for all properties subject to the tax in the designated taxable regions.
For 2019 and subsequent years, the tax will be levied at:
Residential property owners in the designated taxable regions will have to complete an annual declaration to claim exemptions. If there are multiple owners of a home, each owner must complete a declaration by March 31.
Information on how to declare has been mailed to residential property owners within the taxable regions.
Are there exemptions?
There are exemptions for principal residences and long-term rentals.
Exemptions are also available for:
LIST OF EXEMPTIONS
Principal residence exemptions
An owner is exempt on their principal residence. Owners with multiple homes must determine which home is their principal residence. Couples are deemed to have one principal residence for the purposes of the tax. To be eligible for this exemption an owner must be a Canadian citizen or permanent resident who is a BC resident for income tax purposes and isn’t part of a satellite family.
Others eligible for the principal residence exemption:
Rental exemptions are available for homes occupied by tenants. To qualify, the home must be occupied for at least six months of the year in increments of one month or longer. For 2018, tenants need to occupy for only three months in increments of one month or longer for the owner to qualify for this exemption. Only one residence must be rented for the property to be exempt.
Exemption for hazardous or damaged property
Owners of a property may claim an exemption if a residence is uninhabitable due to a hazardous condition or the property has been substantially damaged or destroyed. The property must have been uninhabitable for at least 60 days in the year. This exemption is available in the year the property became uninhabitable, and in the following year if the property remains uninhabitable for at least 60 days in the second year.
Medical exemption for second home
Owners are exempt for a calendar year on a secondary residence if it is periodically occupied by the owner (or owner’s spouse or child) to obtain treatment needed in the opinion of a medical practitioner, and the treatment facility is in close proximity to that second home.
Year of acquisition exemption
Owners are exempt in the year they buy a property if the transaction was exempt from property transfer tax for one of these reasons:
Spousal separation exemption
Married couples, or common-law spouses living together in a marriage-like relationship for at least two years, are eligible for an exemption on family property if they have separated and live apart (due to a breakdown in a spousal relationship) for at least 90 days in a tax year.
An owner or a trustee in bankruptcy is exempt from the speculation and vacancy tax if the owner’s property has vested with the trustee for at least 60 consecutive days in the year, or is vested with the trustee in bankruptcy on December 31.
Exemption upon death
If an owner of a property dies in a taxation year, all owners of the property at the time of death are exempt in the year of death and the immediately following tax year. The owner’s personal representative is also exempt, even if they weren’t on title at the time of the death.
Exemption for testamentary trusts for minors
The speculation and vacancy tax does not apply to property held in trust for a minor child, if the trust was established by a deceased parent or guardian of the child.
Exemption for properties with rental restrictions
All owners of a property where a covenant or a strata bylaw prevents the property from being rented out in a manner that would allow a rental exemption are exempt for the 2018 and 2019 tax years, if the rental restriction was in place on or before October 16, 2018.
Exemption for strata accommodation unit
Units in strata hotels are exempt for the 2018 and 2019 tax years.
Licensed daycare exemption
Properties that are used as licensed daycares are exempt from the speculation and vacancy tax.
Vacant land exemption
The speculation and vacancy tax will not be levied for the 2018 tax year for land that contains no residential property.
Other exempt properties and entities
Other exempt properties and entities include:
Exemptions for land under development
Owners of property under construction or substantial renovation are exempt if reasonable steps are taken without undue delay to develop or renovate the property. These exemptions cover phased developments, vacant new inventory (unsold units in a building) and heritage properties undergoing conservation work. To be eligible for the exemption, the owner must be carrying out eligible building activity. “Building activity” is defined to include the following types of activities:
The following exemptions are available to eligible owners who own land that’s under development:
Exemptions for Corporations, Trustees and Partners
Corporations, trustees, and parters that own residential property may be exempt. To be eligible for a principal residence exemption, a corporation, trustee or partner must take account of its corporate interest holders, beneficial owners or partnership interest holders:
Generally, corporations, trustees or partners can also claim other exemptions in a similar manner, providing their corporate interest holders, beneficial owners or partnership interest holders meet the same requirements that individual owners would need to meet.
Tax credits include:
All revenues will be directed to affordable housing projects in the impacted regions.
Amendments to the legislation from the Green party are expected.
Read Frequently Asked Questions.
Subscribe to receive updates as new information about the speculation and vacancy tax is available.
BC Real Estate Association lobbied for exemptions to this legislation. Thanks to their work, the exemptions listed were enacted as part of the legislation.
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