The Liberals' first-time homebuyers incentive is a bad deal

The First Time Home Buyers Incentive (FTHBI) is a bad deal.

I support the Liberal's National Housing Strategy. I have also publicly advocated for changes to the housing finance ecosystem and cheered some of the recent interventions in the mortgage market. The extension of the stress tests to low-ratio mortgages was a good idea and it helped curb some of the excesses in the housing industry. But I also know a bad deal when I see one, and the FTHBI is a bad deal.

Under the program, which was touted as a way for young Canadians get into the housing market, first-time home buyers can receive between five to 10 per cent toward the value of their home in the form of a "shared equity mortgage." 

There are no interest payments required on the incentive amount but when the home is sold, the government will take back the same percentage of the value of the sale as it contributed to the purchase. In order to qualify, in addition to meeting all the standard requirements for insured mortgages, applicants' income must not exceed $120,000 and total borrowing must not be more than four times income.

Let's say you have income of $100,000 and have saved $25,000 for a down payment. Under the program, you can purchase a home valued at $425,000. The government will contribute up to $42,500 toward your down payment, and at market rates, that would save you approximately $230 on your monthly mortgage payments.

Limited value

Much of the criticism of the program to date has focused on the fact that was limited to homes below $560,000 in value and therefore wouldn't do much for prospective homebuyers in expensive cities such as Vancouver, Victoria or Toronto. Liberal leader Justin Trudeau attempted to address that issue Thursday by announcing a future expansion of the program to include homes up to $789,000 in value. 

But the program is flawed in a more fundamental way: it asks too much in exchange for that savings of a couple of hundred dollars a month. In fact, it asks for up to ten per cent of the value of your home. In economic lingo, the government's stake in your home has the upside of equity, but the downside protection associated with debt.

When it is time to sell, you owe the government the same percentage on the new (hopefully higher) value of your home that the government contributed at the outset. In the interim, you carried the mortgage and paid for the renovations and upgrades. The government, on the other hand, did nothing.

If, like most people, you bought the home with a view that it will go up in value, by taking the incentive, you give up a sizeable portion of the tax-free upside associated with the appreciation in the value of your home.

You might say: well, at least I do not have to pay interest on the incentive amount. 

Actually, by the government's own calculation, the interest equivalent to sharing the upside, even assuming relatively modest increases in the value of the home, will likely be well above the rate on your mortgage. In one example shown, where the value of the home goes up by 20 per cent over five years, the equivalent interest rate would be 3.71 per cent. In another example, where the value of the house goes up by 30 percent over two years, the equivalent rate would be 14 per cent! 

It gets worse. What if the value of the home goes down when you sell? In that case, you still owe the government the same percentage on the revised value of the home. I use the word "owe" purposely, because while you participate equally with the government on the upside, on the way down, the government's money comes before yours. 

That means your down payment can easily be wiped out if there is a decline in the value of your home when you sell, but you would still owe the government their percentage of the home's value. This is not just a theoretical possibility — in the earlier example of the $425,000 home, just a six per cent drop in the value of your home would wipe out your equity. 

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How does the program address this downside scenario where your equity is zero but you still owe money to the government? Very meekly and only in the fine print: "The Program Administrator will work with borrowers who are experiencing financial hardship, which may include an extension or modification of the repayment requirements." 

At this point, you may think I am out of touch with the lives of many young Canadians for whom $230 a month is a meaningful amount. Wouldn't the dream of home ownership justify giving up some of the upside for those people? Actually, the qualification criteria for the FTHBI is such that most homebuyers who are eligible for the program would have qualified for a larger mortgage by opting not to use it. 

That person with the $25,000 down payment and $100,000 income? She could have purchased a $500,000 by not using the program instead of being limited to a $425,000 home. So, while the incentive might mean saving a couple of hundred dollars a month on your mortgage payments, if you qualified for the incentive in the first place, you are likely the type of person who could have afforded the extra monthly payments anyhow.

Housing policy is an important issue that goes well beyond simple economics, and the National Housing Strategy's goal of "giving more Canadians a place to call home" is a worthwhile pursuit. Unfortunately, at best, the FTHBI does nothing to advance that goal, and at worst, it will harm the very people it claims to help. 

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