Premier Christy Clark’s plan to help first-time homebuyers offers a ray of hope for people who would otherwise face a lifetime of renting, but it’s a risky proposition for both the province and the homebuyers.
“What we know is for many first-time homebuyers, qualifying for a mortgage is hard, but getting past that down payment and scraping together the 25 grand or 50 grand that you might need to be able to get into your first home is just impossible,” Clark said Thursday as she announced the program.
So the province will match the amount a prospective homebuyer has saved for a down payment, up to $37,500 or five per cent of the purchase price. The loans will be spread over 25 years, and no interest or principal payments will be required for the first five years.
That will undoubtedly be an attractive offer for people whose home-ownership dreams have been thwarted by high housing prices, especially those who have been scrimping and saving but can’t get quite enough cash together for a down payment.
And the program has elicited praise from the real-estate and finance industries, who stand to benefit if more people can buy houses.
But it has also set off alarm bells among critics who believe it will only heat up the housing market and put people deeper into debt.
The idea of helping people get into the housing market for the first time is commendable, and it would be a reasonably sound idea if interest rates stayed low and housing prices didn’t plunge.
But the U.S. Federal Reserve raised its key interest rate Wednesday by 0.25 per cent, with plans for three more increases in 2017. That’s a signal that interest rates, low and stable for nearly a decade, are going to rise.
For years, the rule of thumb was that you shouldn’t buy a house that cost more than three times your annual income. For middle-class families these days, that’s a joke, and a cruel one at that. People are buying houses worth eight or 10 times their annual income, and they can do that only because they are mortgaged to the hilt and interest rates are low. Even a modest increase in interest rates could push many over the financial brink.
While demand is likely to keep house prices high in Greater Victoria and the Lower Mainland, economic shifts could still bring prices down, good news for those still seeking to buy, but bad news for those who find themselves with houses worth less than the money owed on them.
B.C.’s move is also at odds with federal government policy. In October, Ottawa toughened mortgage rules in an effort to curb household indebtedness and rising housing prices.
High levels of household debt have left the country vulnerable to economic shocks, the Bank of Canada said this week, yet the provincial mortgage-assistance plan would enable households to accumulate more debt.
And if any recipients of Clark’s pre-election largesse default on their mortgages, the taxpayer will be on the hook for the loans. The province would be, in essence, the holder of a second mortgage; the second lender in line seldom fares well in such cases.
It’s understandable, especially as an election approaches, that the B.C. Liberals would want to help people realize the dream of home ownership. But the problem is that demand greatly exceeds supply, and Clark’s plan will do nothing to ease that situation and, in fact, will likely boost housing prices.
It would be far better to seek ways to create more housing, rather than create more buyers. Election strategy is not a good substitute for sound public policy.
