Speculation is mounting that the federal government is moments away from taking a radical step in an attempt to cool off Canada’s scorching hot real estate market.
According to the Financial Post’s sources, the feds have been studying proposals to increase the minimum down payment from its current 5 per cent. They are also reportedly looking at additional (as yet unspecified) restrictions for high-priced real estate to try to dampen the higher-end home frenzy in Vancouver and Toronto.
With interest rates falling even further than their already historic lows last week, which if anything is likely to further increase sales and prices, the possibility is becoming even more likely that Ottawa will take action.
“They are definitely looking into this but it doesn’t mean that they will do it,” one source told the Financial Post. Another source confirmed that Ottawa is continuing to look at increasing the minimum down payment.
The question is, would such a move actually succeed in guiding Canada’s real estate market into the feather-soft landing that many hope for and believe is necessary?
The answer is, probably not.
The problem with increasing the minimum down payment is that it targets exactly the wrong end of the homebuyer spectrum – namely, first-time buyers and those struggling to come up with down payments. Especially here in Vancouver: it’s tough enough for a lot of people to scrape together the money needed to put down on a house, even if the current low interest rates do otherwise enable them to buy into the market.
The industry is therefore understandably worried about this possible move.
"The challenge with further restrictions is they impact the first-time home buyer, which really isn't the issue here. They're not the ones buying detached homes worth more than $1 million," said Phil Soper, president of Royal LePage.
And Bob de Wit, CEO of the Greater Vancouver Home Builder’s Association, wrote earlier this week, “Increasing down payments for those with huge equity stakes is unlikely to dampen demand. Instead this will hamper first-time buyers in obtaining mortgage insurance on more modestly priced homes, and also push them to secure loans at higher rates with other institutions.”
Bob is right. Not only would first-time buyers likely be adding higher mortgage insurance premiums to their monthly bills, but also they’d be more likely to turn to other financial institutions for a loan at a much higher lending rate to help them over the initial hump. That’s only going to increase household debt at the lower-income end of the spectrum.
Sure, a rise in the minimum down payment might keep some people out of the market, meaning competition for homes (and therefore average prices) might come down a little.
But those young and low-income Canadians whom this move dissuades, or disempowers, from entering the real estate market altogether – what happens to them? The worst thing they could do is continue to be lifelong renters with no home paid off when they come to retire. (The perils of long-term renting were highlighted perfectly in a Vancouver Observer story this week, about the tribulations a long-term-renting Vancouver family who are now priced out of both buying and renting in their chosen neighbourhood.) Long-term renting is a win only for real-estate investors – it’s a lose-lose-lose for the renters (unless they are otherwise wealthy) and the taxpayers and government who will have to house them in their old age.
No, increasing the minimum down payment is not the right move, and we all have to hope that the head-scratchers in Ottawa consider the likely outcomes and scrap the idea. Maybe the Feds have some other – better – ideas up their sleeves...
Listen to REW.ca editor Joannah Connolly discussing this issue with Shane Foxman on CKNW Radio July 25...