Thoughts regarding upcoming proposed changes in the 2019 Federal Budget to help Canadian Home Buyers:

Per the upcoming 2019 Federal Budget announcement tomorrow, while I personally identify myself as apolitical, and welcome any proposed changes that make home ownership more affordable for millennials, and all Canadians for that matter, I would recommend exercising caution and not get over-exuberant regarding any forthcoming changes.  Here’s why:

  1. Securities markets around the globe have been on a historically long Bull run and the Bears are getting hungry. Global markets, in my opinion, are overdue for a correction, which would have an adverse affect on housing markets.
  2. The Bank of Canada (BOC) is rightly concerned about the high level of personal debt Canadians hold. This impacts Gross Debt Service (GDS) and Total Debt Service (TDS) ratios used to determine if an applicant(s) will qualify for a mortgage.  A correction in financial markets could have significant consequences for millennials buying their first home should efforts to make housing more affordable fail to carefully consider this point and point one.  https://www.cmhc-schl.gc.ca/en/finance-and-investing/mortgage-loan-insurance/homebuying-calculators/debt-service-calculator
  3. I’m an outlier among most of my colleagues in Real Estate with respect to the mortgage stress test. I think it’s appropriate.  Here’s why:  The majority of homeowner’s, many with high GDS & TDSR ratios lock into 5-Year fixed rate mortgages.  The BOC’s economists anticipate their overnight rates will increase by upwards of 2%+ over the next several years.  If a millennial is incentivised to purchase a new home at today’s rates, without taking this into consideration, they may not be able to renew their mortgage when their 5-Year term is up.  This could potentially result in an increase in mortgage defaults down-the-road, and have a spillover effect on the Canadian economy in general.
  4. Millennials are widely referred to as the “Instant Gratification” generation (Management Dynamics in the Knowledge Economy, 2016, Vol.4(2), pp.173-192). Incentivising a “Buy now, pay later” cohort may not result in the desired effect, and could actually make things worse.

While almost anyone who works in Real Estate, especially in Newfoundland and Labrador, would most certainly welcome any stimulus to improve the local Real Estate market and housing affordability, I’ll reference a quote from my best friend, who is a Police Sergeant:  “You never aim at the suspect as a target, you look behind the suspect to verify you won’t inflict collateral damage on innocent civilians in the event you miss the intended suspect target.”  I sincerely hope the Federal Government’s upcoming budget heeds my best friends’ advice.

In my opinion, there are additional/alternative solutions to improve housing affordability, which could include the following:

  • Reign in on speculators who purchase properties as investments in hot markets, yet never live in them or lease/rent them out.
  • Adopt similar laws, as countries like Australia have, that require special approvals for foreign investment in domestic real estate and limit these investments to new housing construction, thereby helping create additional employment opportunities for its citizens and legal residents (http://firb.gov.au/real-estate/).
  • Stop using a macroeconomic approach to Federal Budgets with regard to housing affordability.  In Real Estate, what works to cure an issue in Toronto or Vancouver ends up hurting people living in places like Newfoundland and Labrador.  Never forget the three “L’s.”  Location, Location, Location!  A microeconomic approach, with specifically tailored solutions for each region or metropolitan area of the country should be explored, and where feasible, implemented as soon as possible.  While I understand the Bank of Canada has a federal mandate, a “one-policy fits all” doesn’t, and will never, work for all Canadians.  We’re to large and too diverse a country.  I recognize the BOC can only control monetary policy on a national level, however, if Toronto or Vancouver are “on fire”, why not consider, in conjunction with macroeconomic policy decisions to put out the flames in overheated markets, adopt microeconomic, federally funded programs such as down-payment assistance, grants, or other programs to help provinces whose housing markets are not “on fire” support their local housing market?  Every new home that gets built or an existing home that gets renovated helps employ countless people:  Employees at Home Depot, Kent or Home Hardware, plumbers, electricians, framers, drywallers, painters, kitchen cabinet manufacturers, flooring installers, concrete manufacturers, timber mills, transport truck drivers, permit inspectors, Realtors®, Lawyers, Home Inspectors, Surveyors, Water testers, furniture store employees and many more…you get my point.

In a recent exchange with the Canadian Mortgage and Housing Corporation’s Senior Analyst for Atlantic Canada, I asked the following:  “Are you aware of any programs being contemplated, either federally or provincially, that are designed to help offset the impact of the BOC’s recent rate hikes as well as the new mortgage stress test, to help offset the collateral damage that is negatively impacting housing markets like Newfoundland and Labrador?”  The response:  “No”

I’d also like to draw attention to the following point some economists have made recently:  We have two off-shore oil rigs that are due to start producing “first-oil” in 2019 and the economic forecasts for Newfoundland and Labrador are looking positive for 2019.  The disclaimer on these types of comments should read:  “The previous statements are forward looking and do not take into consideration geopolitical or other economic risks, be they known knows, known unknow’s or unknown unknow’s.  Additionally, it could possibly take from six to eighteen months for improvements in local economic conditions to have a measurable impact on local consumer confidence and the overall local economy.”

While this blog post may come across as being written by someone who has a negative view of the economy or the future, in truth, I’m very much a realist.  I believe that anyone contemplating purchasing a home, at any time in their lives, should consider all the possible scenarios that may affect their financial future, including carefully understanding the impacts local, provincial and federal legislation could have on your investment, as well as external risks that can have an important impact on outcomes on many levels.  Housing prices in Newfoundland and Labrador, and especially the Avalon, are, based on the data I’ve read,very affordable as compared to the 2011-2015 housing boom.  For many, this represents a great opportunity for new home ownership.  My recommendation:  Be careful to not borrow against your future or risk being overstretched financially to jump in if any forthcoming changes in the budget look too good to be true.  Think about where you’ll be five or ten years from now, plan for rainy days and don’t get overstretched.  Perhaps buy a smaller home that you can afford even if your partner goes on maternity leave, loses a job or has an illness.  Build your equity in that home and five years down the road or so use that equity to move up to a larger home and hopefully be in a position to avoid having to pay high-ratio mortgage default insurance premiums in the process.

 

*The commentary and/or opinions expressed in this Blog post are those of the author and have been researched.  However, readers are advised to independently verify any of this posts commentary or opinions prior to acting on said commentary or opinions.*