Alex Leduc, CEO of Perch, shares his take on the federal budget. Spoiler alert: Little relief is in sight for homeowners-to-be.
In light of the housing affordability crisis and buyers pinning their hopes on Thursday’s federal budget announcement, little relief is in sight for many homeowners-to-be. Out of a 304-page document, only 2 pages speak to making homes more affordable for first-time homebuyers. It’s the government equivalent of (barely) throwing Canadians a bone.
Tax-Free First Home Savings Account: This account isn’t radically different than the existing $35,000 Home Buyer’s Plan, where Canadians can lean on their RRSP for their down payment. Most first-time buyers aren’t using it and almost none are using the full $35,000. If you’re living pay cheque to pay cheque, your main constraint isn’t a lack of options on where to place all of your savings - it’s being able to even save in the first place
Even in the (optimistic) example cited by the federal government, a couple earning a combined $150k a year can't purchase a home until 2027, five years from now, with less than 20% down. Further in this article, we outline why the Tax-Free First Home Savings Account wouldn’t help in hotter markets and how the couple in this scenario would likely need to save at least $200k, which pushes out their purchasing timeline even further. Remember, this is for a couple bringing in $150k annually, which is at least double the average Canadian household income.
First-Time Home Buyers Tax Credit: Doubling the tax credit translates to a grand total of $750 back to the buyer, months after closing. This is hardly a meaningful amount, and would be paid out anywhere from a few months to almost a full year after closing, which is not when people need it the most.
Housing Accelerator Fund: Extending the First-Time Home Buyer Incentive (FTHBI) program to 2025 makes no difference, given the program is grossly underutilized. Initially launched in September 2019, the program had lackluster participation right from the start. The program was intended to help 100k first-time buyers and received less than 10k application approvals in its first year. The program was later revamped in May 2021 in a bid to help buyers in hot markets such as Vancouver, Victoria and Toronto and had little impact.
Scaling up rent-to-own programs sound nice in theory; however, many lenders don’t recognize those rental payments as a down payment. Without regulatory changes for lenders in parallel, people buying through rent-to-own will be limited to more expensive financing. This cuts into the economic advantages of homeownership, to the point where they may have actually been better off renting.
Anti-flipping and foreign investment ban: It’s no surprise the media headlines have focused on this so-called ‘ban.’ Investors are an easy scapegoat. However, most industry experts estimate that around 1-2% of purchases in Canada are attributed to foreign buyers. The ban has exceptions as to which foreign buyers are subject to the ban, which then reduces the scope of buyers even further, so it’s unlikely this two-year foreign investment ban will have any real effect.
As for flippers, they provide a valuable service to the market. The reality is, not everyone has the knowledge nor the time to invest in modernizing a home and making it into a livable space. When it comes to resale properties, these flippers are already paying taxes on business income. Making a reasonable profit on a home you’ve owned for less than one year is incredibly difficult, after factoring in all the transaction costs.
Lastly, taxing assignment sales unfairly penalizes the buyer. In preconstruction, builders can be delayed, and this was compounded during the pandemic. Buyers who can’t wait another 1-2 years to move in and make the decision to move on to a new property, shouldn’t be penalized for selling for circumstances that were largely out of their control.
The ‘Home Buyers’ Bill of Rights’ which considers potentially banning blind bidding, is currently undergoing a 1-year consultation, with no firm decisions announced yet. While this will change the process of buying a home to be more transparent (as many buyers express frustration in the home buying process), it is unclear if it would make homes more affordable. Other countries that have bans on blind bidding, such as Australia, still experience housing affordability issues and a hot real estate market.
Investigating corporate ownership of properties is also undergoing a 1-year review period, with no commitments outlined yet.
The announced Anti-Money Laundering requirements for private lending are not tangible, but it’s worth noting that brokers and lenders are already subject to many operational procedures that are meant to prevent money laundering or terrorist financing.
Tax-Free First Home Savings Account: Effective January 2023
First-Time Home Buyers’ Tax Credit: Any home bought after January 1, 2022 is eligible. Buyers will receive the credit in 2023, after filing 2022 taxes.
Housing Accelerator Fund: No timeline yet
Anti-flipping and foreign investment ban:
First-time buyers that are residents or permanent residents are eligible for the Tax-Free Home Savings Account and First-Time Home Buyers’ Tax Credit.
The ban on foreign ownership applies to anyone who isn’t a resident or permanent resident of Canada, and excludes anyone purchasing on a work visa, is a refugee or an international student on a path to permanent residency.
The taxes on flipping or assignments apply to any homeowner based on the timelines outlined above.
Yes, you can if you meet the definition of a first-time home buyer.
Realistically, this will have minimal impact across Canada and even less so in cities like Toronto and Vancouver. The down payment continues to be a major blocker for people and the minimum down payment required to buy a home above $1M is 20%.
To illustrate this concept, let’s say a couple wants to buy an $800k townhouse today. Referring back to the federal government’s example, a couple earning $150k should be able to save a $90k down payment after five years. However, if we assume a 5% annual appreciation, that $800k townhouse is now worth $1.02M five years from now. Now they’ll need $200k in down payment or they would be forced to downgrade their expectations and only buy below $1M. Instead of a townhouse, perhaps they look to a condo. In less expensive cities, the average home price is much lower than $1M, so it's less of an issue. But in places like Toronto and Vancouver, the types of home people aspire to have will be completely unattainable by people who don’t already own real estate and have generated the 20% equity they needed from their previous home.
Your options to buy haven’t changed, nor have you really benefitted in a meaningful way from the federal budget.
For the most part, demand for housing should remain strong over the long term. If you were planning on selling your home within a year of owning it, you may want to speak with your accountant to assess any new tax implications. If you were considering selling a pre-construction property on assignment, you have until May 7, 2022 to sell before all assignment sales become taxable. Connect with your realtor to determine what your best course of action is.
If you have clients with pre-construction properties they want to sell, assignment taxes are coming into effect on May 7, 2022. If you have a client wanting to list their home within a year of purchase, consulting an accountant or lawyer may be prudent to determine if it changes the economics and if the closing date on that sale could save your client tens of thousands of dollars.
If you work with foreign investors, determining if they are exempt from the ban will also be crucial to ensuring your deal can close.
About the author:
Alex Leduc is Founder and CEO at Perch. He has worked in the real estate industry for 9 years as a lender, mortgage broker and an entrepreneur. He is currently a Technical Advisory Committee Member of the Financial Services Regulatory Authority of Ontario (FSRA) and Co-Chair of the Canadian Lenders Association Mortgage Roundtable. Alex is a graduate of Ivey Business School from Western University and a CFA Charterholder.