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The recently announced "First-Time Home Buyer Incentive" is a new way for government to stimulate demand for new housing and for mortgages, while representing the program as 'helping' young Canadians into the market.  Inducing young people into long-term debt obligations is not necessarily in their best interests. 

Under this program, the Canada Mortgage and Housing Corporation ('CMHC', a crown corporation) agrees to be a 'co-owner' of the qualifying property.  In addition, the borrower will have a CMHC insured high ratio mortgage, for which they pay a good fee.  In effect the buyer has to put up less savings to make the deal work.   

In economic terms, this kind of program brings new buyers into a market which puts upward pressure on prices.  This is one of the points made in a recent piece by Rita Trichur in the Globe.  Paradoxically, up price pressures are not benefiting new buyers who have limited debt servicing capacity. 

Additionally, the criteria for qualification may make the program irrelevant in the over-heated markets of Greater Vancouver and Toronto. The program criteria say household income may not exceed $120k, and the property value cannot exceed four-times that income (or $480k).  

Administratively, the program adds complications by introducing a new set of qualifications. In doing so it makes the process more cumbersome for a new buyer.  The program essentially reverses the constraints implemented in recent years on the mortgage insurance program which had required more direct investment by new home buyers, up to at least 10%.  Perhaps backtracking on the mortgage insurance front was viewed as politically unwise, so they've cloaked it. 

CMHC is still working out how this program will work.  However, it appears to be a pre-election gimmick more than a realistic housing program. It is unlikely to have significant beneficial impact in the cities with serious affordability problems. 

 

 

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