By Nick Falvo, Research Associate at the Carleton University Centre for Community Innovation, and CCPA Research Associate. This blog was originally posted on behindthenumbers.ca
On March 19, Canada’s federal finance minister tabled the Trudeau government’s 2019 budget titled Investing in the Middle Class. Key social policy announcements include a new Canada Training Credit, increased funding for municipalities, some increased funding for women’s organizations and increased earnings’ exemptions for low-income seniors.
Budget 2019 also has implications for housing—and on that front, here are 10 things to know:
- Budget 2019 introduces a new First-Time Home Buyer Incentive, creating so-called ‘shared-equity mortgages.’ This program fronts a portion of the required down payment for a ‘middle income’ household trying to buy a home for the first time. The federal government contribution is set at 5% of the value of an existing home, or 10% of the value of a newly-built home. The household does not pay interest on the federal loan portion; however, Canada Mortgage and Housing Corporation (CMHC) ends up owning 5% or 10% of the home’s value—and on the home’s sale, CMHC gets back 5% or 10% of the appreciated (or depreciated) value. Participants must be first-time home buyers with annual household incomes of under $120,000. The maximum value of the mortgage plus CMHC support will be four times household income (i.e., $480,000). This program is expected to be operational by September 2019. Federal officials say they expect approximately 100,000 first-time home buyers to take advantage of this program over the next three years.
- The Home Buyers’ Plan withdrawal limit has been raised from $25,000 to $35,000. This is the program that allows first-time homeowners in Canada to borrow from their Registered Retirement Savings Plan for a down payment. This increased limit is available for withdrawals made after March 19, 2019. Budget 2019 also proposes that individuals who go through a separation or divorce be permitted to participate in the Plan, even if they’re not buying for the first time.
- The good news on the housing affordability front is that the home ownership measures contained in Budget 2019 will likely increase the average rental vacancy rate and exert downward pressure on average rent levels. That’s because some households currently renting will now become home owners, creating a bit of slack in the rental market. This is good news for prospective renters and existing renters. Some landlords won’t be happy though—with reduced demand for rental housing, they may not be able to charge as much rent or be as selective in terms of which tenants they rent to.
- The bad news on the housing affordability front is that these same measures will likely exert upward pressure on the average price of a new home. That’s because when you increase demand for a product, its price typically goes up as well. This is good news for current home owners, especially when they decide to sell, but it’s bad news for prospective home owners who aren’t eligible for the initiatives.
- Incentivizing households of modest means to become home owners isn’t necessarily good public policy. In a 2006 report, Michael Mendelson argued that Canadian housing prices are subject to large price swings. Indeed, housing prices do not only go up—for example, from January 2018 until January 2019, the price of detached homes in Vancouver fell by approximately 9%. Mendelson argues that such price decreases are bad news for owners of modest means who need to sell during such a downturn, especially if they haven’t been owners for very long. He cautioned that, in such situations, those households can lose their life savings.
- Incentivizing households of modest means to become home owners also runs counter to at least one action recently introduced at the federal level in Canada. I refer here to the introduction of the mortgage stress test, largely in response to unprecedented consumer debt levels (and against which Canada’s home builders have recently expressed strong opposition). This measure was introduced by the Office of the Superintendent of Financial Institutions, an arm’s length regulator (and endorsed by the federal minister of finance).
- Canada’s Rental Construction Financing Initiative, originally scheduled to be in place for four years, will now be extended to nine years and provided with an additional $10 billion in loans. Originally announced in the 2016 federal budget, this program provides low-cost loans for the construction of new rental housing for ‘middle income’ households. These loans are for developers (either non-profit or for-profit) and unit rents must be set 10% below full market potential. Funded projects must also meet two other important criteria: 1) achieve a standard 15% better than required by national codes for energy efficiency and reduction of greenhouse gas emissions; and 2) have 10% of units accessible. With changes announced in the 2019 federal budget, the program is now expected to assist 42,500 new units across Canada, targeting areas of low rental supply. This represents federal loans totalling $829.5 million over nine years, starting in 2019–20. It’s expected that CMHC will make money on these loans.
- This budget announced a new $300 million program to improve energy efficiency in new and existing housing. It is being allocated to, and will be administered by, the Federation of Canadian Municipalities (FCM). In fact, three energy-efficiency initiatives for residential, commercial and multi-unit buildings worth a total of just over $1 billion annually were announced in this year’s federal budget, all of which will be administered by the FCM. This includes one $300 million initiative specifically for energy efficiency in social/affordable housing (new and existing).
- This budget announced that the Canada Revenue Agency will receive $50 million over five years to create audit teams in high-risk regions of the country. One can infer from this that the federal government believes that home prices, especially in Toronto and Vancouver, have been driven up by investors flipping houses and not paying their fair share of taxes in the process (a practice that makes houses more expensive while denying revenue to the federal government).
- A budget supported by a more robust social spending framework could do a lot for both affordable housing and homelessness. A major reason people have housing affordability challenges is that they have low incomes. Addressing low incomes requires a well-funded social spending framework that would reduce income inequality. This year’s Alternative Federal Budget (AFB) provided such a framework. The AFB is a fully costed-out advocacy document that includes funding increases for post-secondary education, seniors’ benefits, child care, First Nations’ infrastructure, social assistance, and affordable housing (including supportive housing for vulnerable populations). It also proposes universal pharmacare. (Full disclosure: I was primary author of the AFB’s housing chapter.)
In sum. The Trudeau government’s 2019 federal budget contains very few initiatives explicitly geared toward affordable rental housing, and no new funding at all for absolute homelessness. The home-buying incentive measures will make it easier for some households to become homeowners; however, they may have unintended consequences as well. The extension of the Rental Construction Financing Initiative is good news for housing affordability, while new funding for auditing may have the effect of exerting downward pressure on the price of homes—especially new condos in Toronto and Vancouver. Far-reaching changes to housing affordability would require bold changes to fiscal policy, such as those proposed in the 2018 Alternative Federal Budget.
I wish to thank Helen Harris, Ron Kneebone, Marc Lee, Scott Leon, Michael Mendelson, Claire Noble, Brian Pincott, Shayne Ramsay, Tim Richter, Steve Saretsky, Marion Steele, Ray Sullivan, Greg Suttor, and three anonymous reviewers for invaluable assistance with this blog post. Any errors are mine.
Nick Falvo is a Calgary-based research consultant, a research associate at the Carleton University Centre for Community Innovation, and a CCPA research associate.