Opinion: Proposal to Increase Minimum Down Payment is Nonsensical

Peter Kinch
June 7, 2016

The overheated housing markets in Toronto and Vancouver are once again stealing headlines – it’s like the story that keeps on giving. This time, though, there are different players entering the fray that’s got everyone talking – Canada’s chartered banks.

Over the past week we’ve heard from RBC, Scotia, BMO, CIBC and National Bank – from CEOs to chief economists – everyone has an opinion as to what should be done to curb what is seen as a growing concern. The issue? Overheated housing markets in Toronto and Vancouver. The solution? Well, that’s where it gets interesting and where everyone has an opinion. And many of those opinions seem to be pointing fingers at Ottawa to do something about it.

I find it interesting that during a period of time where our chartered banks are reeling from large losses due to loan write downs in the energy sector (National Bank’s earnings are down 48 per cent, by the way), they seem to be using the housing market as a way to deflect attention back to Ottawa , but the suggestions they are making simply don’t make sense.

Both Scotia and National Bank have suggested that Ottawa should consider increasing the minimum down payment to 10 per cent. So let’s think about this for a moment.

Let’s agree that the Organization for Economic Co-operation and Development (OCED) is correct in the assertion that Vancouver and Toronto have overheated housing markets. If you took a poll asking Vancouverites what they think is the single biggest cause behind the exorbitant price increases, I guarantee you that “first-time home buyers” would not be on the list. Yet, a simple analysis of increasing the minimum down payment from five per cent to 10 per cent will show you that the only group affected would be the first-time home buyer purchasing a property under $500,000.

Let’s look at a few simple facts:

  • Any changes Ottawa makes to mortgages can only impact CMHC-insured mortgages, and CMHC only governs high-ratio mortgages (any purchase with less than 20 per cent down).
  • To qualify for CMHC insurance you have to be buying your home as a residence – not a rental or spec property to flip.
  • CMHC will no longer provide insurance for mortgages worth over $1 million. That alone rules out a large percentage of Vancouver homes.
  • For mortgages between $500,000 and $999,000, the rules have already changed regarding the minimum down payment and you now have to put 10 per cent down on the portion of your mortgage over $500,000. So you could argue that this measure already covers any mortgages in excess of $500,000.
  • That leaves us with mortgages that are less than $500,000. Both Scotiabank’s Brian Porter and National Bank’s Louis Vachon are calling for Ottawa to raise the minimum down payment on all properties to 10 per cent as a way to combat the overheated housing problem.

Memo to Ottawa – that’s not the problem here!

It doesn’t take a forensic scientist to figure out that most home buyers in Vancouver and Toronto buying below $500,000 are first-time buyers and lower-income home owners. Penalizing these buyers is not a solution to solving the fact that the average house in Vancouver is now over $1 million. In fact, that will only exacerbate the problem for those who are already being affected by the rising cost of entry-level housing.

Here’s the challenge. Trying to find the problem, so that we can solve it, assumes that there is a singular answer. The truth is the rising cost of housing, in Vancouver particularly, is a multi-faceted issue and one that does not have a singular solution. We have to factor in our city’s world-beating desirability, geographical constraints, generational wealth transfer, interest rates and the supply-and-demand imbalance.

Let’s talk about that demand for a moment. Restricting the ability for first-time home buyers to enter the market will have a negligible effect on the supply-and-demand equation. The elephant in the room is the offshore buying – Chinese buyers in particular. Combine this with a low Canadian dollar that puts Vancouver real estate on sale to US buyers and you have a recipe for increased demand. And this doesn’t even factor into account foreign money that is expected to come from the Middle East. Let’s face it – global money seeks safe harbours and Vancouver and Toronto are considered safe harbours. As long as that foreign money is looking for a home and parking it in places like Vancouver continues to be an easy process, the demand side of the equation will continue to be overweighted.

It seems obvious to me that if Ottawa truly wanted to do something about the over-heated housing prices, their energies would be far better spent looking at ways to slow down the offshore investment in our cities, rather than shifting their sights to the Canadian first time homebuyer.

Sorry Brian, sorry Louis – they’re not your problem.

Peter Kinch is a best-selling author, award-winning mortgage broker and investment adviser with Tri-View Capital. Peter has been in the mortgage and investment business for over 20 years and is regularly featured as a real estate analyst on CTV Morning Live, BNN and the Real Estate Therapist Show on Roundhouse Radio 98.3FM.