'Not a game-changer': Why the Liberal plan for first-time homebuyers isn't a cure-all

First-time buyers can get help with their mortgage through CMHC (Getty)

Should they win the upcoming federal election, the Liberals promise to make it easier to get into the housing market with a pumped-up first-time homebuyers incentive.

The current version is widely criticized for its $480,000 cap as it isn’t enough to cover a home in Toronto, Vancouver, or Victoria. The new version helps buyers get a foot in the door in those markets by including properties worth up to $750,000.

The maximum combined income has also been increased to $150,000, up from $120,000.

Paul Kershaw, UBC professor and founder of Generation Squeeze, says it won’t solve the unaffordability problem because there’s no silver bullet.

“But it is an innovative tool that can be used in partnership with a broader range of tools,” Kershaw told Yahoo Finance Canada.

“Other tools we still need to hear about from the federal Liberals include using federal transfers to incentivize municipalities to meet density targets in residential lands currently zoned for single detached homes and other really low forms of density housing.”

Kershaw does praise the Liberals for choosing this plan over caving to calls to change the mortgage stress test. Doing so, he says, would have simply encouraged Canadians to pile on more debt while driving home prices even higher.

“CMHC research suggests that this approach to supporting first-time buyers will contribute to price escalation at 1/5 to 1/6 the rate of plans that change the mortgage stress tests or amortization period,” Kershaw said.

UBC Sauder School of Business professor Tom Davidoff says he likes the idea in principle, as long as interest rates stay low and rent stays high. But he doesn’t think it will be a huge program.

“In the U.K., they found something similar increased home prices – without more supply, adding to buying power doesn't help that much,” Davidoff told Yahoo Finance Canada.

“This program is clearly a subsidy as opposed to the government breaking even and just overcoming a financing constraint. Because the government doesn't get to live in the house, it should get more than 5 per cent of resale value if it puts down 5 per cent. This could be done by giving government a larger and larger share of resale the more the selling price gain per year.”

Benjamin Tal, deputy chief economist at CIBC World Markets, says it makes sense to raise the maximum price, but given the program’s small scale, the impact will be marginal at best.

“It's a step in the right direction, but a very little step — not a game-changer,” Tal told Yahoo Finance Canada.

Taxing foreign speculators

The Liberal plan also includes a national one per cent vacancy tax targeting foreign owners, on top of the provincial levy that's already in effect in British Columbia.

The announcement “is particularly strong in terms of reducing harmful demand: A new national tax on non-resident, non-Canadians is important to discourage foreign speculation in the Canadian housing market,” said Kershaw.

“While ongoing work is required to reduce speculation among locals, this is an important development.”

The plan also includes improved data collection about foreign ownership and speculation as well as commitment to crack down on money laundering through real estate, a move Kershaw and others called on the Liberals to make.

Davidoff says the tax could be helpful, but unlikely to have make much of a difference as only a small minority of homes are on the hook for it.

“I suspect it will chase away many of the small number of owners who have not yet sought to avoid paying the tax by selling or renting out their homes – the combined federal + provincial (+ Vancouver Empty Homes Tax) rate is quite high. Also, the Feds may be able to enforce against faking better than Vancouver or B.C. due to their superior access to income tax return data,” said Davidoff.

But is a tax on foreign buyers going to make a big dent in home prices?

“The vacant house tax will not be a significant factor impacting prices since the stock of vacant houses is not large enough to make a big difference outside some neighbourhoods in Vancouver and maybe Toronto.”

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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