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Christy Clark's flawed, risky home ownership gamble


In the lead up to the provincial election next May, the Liberal government has begun laying the groundwork for an election platform, announcing new policies in the hopes of wooing voters. 

For British Columbians facing overheated real estate markets, the government has, belatedly, attempted some policy remedies. In early August, Clark brought in a problematic and debatably effective foreign homebuyers tax. While many are skeptical about whether or not this tax was the right policy tool, an influx of foreign investment capital, as seen in the Lower Mainland and other urban centres, does contribute to skyrocketing housing prices.

Last week however, Clark announced another housing policy that not only fails to address any key contributing factors to the affordability crisis, but will likely make housing costs and the overheated market worse: the BC HOME Partnership Program (BCHP).

Widely panned as “bizarre”, “misguided”, and a “horrendous piece of policy”, the BCHPoffers loans to first time home buyers to assist with down payments. To qualify for the program, applicants must be first-time property buyers, citizens or permanent residents of BC, and be able to obtain a high-ratio insured mortgage. Then, buyers can apply for a loan towards the purchase of a home selling for under $750,000. The loan will be interest and payment free for the first five years, and the maximum $37,500 can make up a total of up to 5% of the purchase price.  

Promoted as a way to help first time home buyers with a down-payment in order to “make [their homeownership] dream come true”, the program completely misses the mark.

Home prices are hugely out of sync with incomes in many markets in BC. In Vancouver, one of the world’s most expensive cities to buy property in, the average home price is $818,336 (which would make many homes ineligible for BCHP). That home would require a monthly mortgage payment of $3,570 (assuming a five per cent down payment and a five-year fixed-rate mortgage). The average income in BC is $917.41 per week, meaning the average person would spend 3.89 weeks of labour per month just to pay their average-sized mortgage. 

It should also be noted that for this average Vancouver house, the Canada Mortgage and Housing Corporation (CMHC is the Crown Corporation that insures mortgages) requires a downpayment of five percent on the first $500,000 and 10% on the remaining $318,336. This requirement was instituted in December 2015 to address concerns about growing risk and susceptibility to negative shocks in the housing market. It was a direct signal to Canadians that the government was worried about a housing collapse that would damage the economy in a similar way to the US collapse in 2008; something the Bank of Canada is still worried about today.

The BCHP seems to work in direct opposition to the CMHC’s efforts, as it encourages first time home buyers, who are necessarily applying for high-ratio mortgages, to put even less equity in their homes at the time of purchase, leaving them more vulnerable to interest rate increases.  

To be eligible for BCHP, potential homebuyers must match the amount they have applied for with cash. Because of this condition, this program does not help homebuyers who are unable to afford a down payment. Rather, it  helps future homebuyers put forward a down payment sooner than they would have otherwise. The government gives the example of a buyer who has already saved over $11,000 to make up 2.5% of a home priced at $475,000, or half of the down payment required by CMHC. It follows that this potential buyer either has enough disposable income to save for the down payment, or they have access to cash from another source (their parents, for example) for the downpayment.

In other words, homeownership is something they have already considered and are already working towards.

Currently at record high levels, BCHP funding will increase debt for many home buyers who take advantage of this program, as it will serve as a second mortgage owed to the British Columbia Housing Management Corporation. Instead of waiting and saving the additional $11,875 to purchase that $475,000 home with 5% equity, the example buyer now has only 2.5% equity in their asset, and 2.5% more in a mortgage.

This increased leverage in homes is precisely what both the Bank of Canada and the federal Ministry of Finance have been trying to avoid by tightening mortgage restrictions.

An increase in mortgage debt is only worrisome in housing markets that have lost touch with income trajectories. There are many parts of BC where housing, including single family detached homes, are affordable for someone working full-time, full-year. In the event of an interest rate increase, these homeowners would be able to make their monthly mortgage payments. 

But the question then becomes: should the government be spending an anticipated $703 million over the 3 year program when there is no market failure?

In markets where homeownership has become increasingly unaffordable and unattainable for large proportions of the population, there is a clear market failure to address. Stagnating incomes and soaring housing prices have led to an affordability crisis, and the government could make the argument that this should be addressed with a policy intervention. It is an argument that should be made. What does homeownership look like when the average buyer needs 3.89 weeks of labour income to pay just the mortgage every month, never mind utilities, taxes, or maintenance.

This program will not address that market failure. It will fuel demand and subsidize people who were already able to access the housing market. 

In the government’s press release about BCHP, they highlighted their $855 million commitment to build 4,900 desperately needed units of affordable housing. And ultimately, the opportunity cost of this significant investment in the BCHP is what’s the most disappointing about it. This money would have gone a long way to address housing affordability issues either through targeted investments in new affordable housing stock or perhaps through investments in boosting rental housing construction.

Instead, it will go toward increasing consumer debt. 

Sheila Matthen is a progressive economist interested in public finance, labour and taxation.

Photo: BC Gov Photos. Used under a creative commons BY-NC-2.0 license