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Here are my thoughts on the new Tax Free First Home Savings Account, barriers to entry for first time buyers, and a cursory look at the issues facing and the short-term future of the Canadian real estate market:

Last week the federal government released the 2022 budget with a heavy but somewhat ineffectual focus on the housing crisis. Among them is the new tax-free savings account initiative for the purpose of down payment - which may be better for first timers than the current RRSP Home Buyer's Plan as it doesn't require repayment - but the details seem to lack some forethought. The small print outlines the limitation of a $8,000 per year allowance over 5 years (beginning in 2023) for a maximum of $40,000 to be contributed towards a down payment. Although the tax-free and non-repayment clauses are helpful, the yearly limit does take away from its efficacy in no small part as it would take a first time buyer 5 years to be able to maximize the benefits of this program. That timeline will by no means have an immediate or noticeable affect on affordability in this market.

Furthermore, I don't think that the main barrier to entry for first time buyers is lack of down payment. In my experience, the majority of my first time buyers do have a significant amount saved, or will be receiving help from family in the form of a gift. The issue most of the time isn't even income, although it plays a bigger part in determining what the borrower will qualify for. The fact that there is so little supply compared to the level of demand means that the competition is incredibly fierce, and the concept of "value" goes right out the window. The market value ends up being determined by what a motivated (or exhausted and frustrated) buyer will pay for it on any given day. At that point down payment amount is irrelevant and it comes down to whether the first time buyer is willing to spend $800,000 on a 650 sq ft condo just to have a chance at getting into the market. It becomes about the value of homeownership as opposed to the value of the property, and qualifying from an income or down payment perspective is a secondary issue.

The supply issue was addressed in the budget as the federal government put a sum aside for removing red tape and encouraging municipalities to expedite approval times for new projects. The $4B allotment may seem substantial, but more is needed to subsidize the gargantuan increase in supply that is needed to satiate what we can confidently call a housing crisis. If the government really wants to help first time buyers get into their first home they will focus on adding more supply to the market and creating some legislation around first right of refusal for first timers, so that they are only competing with their own kind. Entry level housing should be reserved for entry level buyers, and more of it needs to be created so we can maintain a middle-class demographic that is quickly becoming disillusioned with the idea of building generational wealth through real estate, and complacently accepting that they may be lifetime renters. 

Another issue I am seeing is with the new supply being built. Builders are trying to maximize profits by minimizing unit sizes, so we are now seeing the completion of "micro condos" that are under 450 sq ft. Unfortunately, lenders have not caught up to this trend because there is no evidence of stability in the resale value of these types of condos, so most are shying away from financing them. And again we run into the issue of investors scooping them up with the goal of renting them to students and singles, pushing out the prospective first time buyer.

Now that immigration is opening up again and we will be welcoming hundreds of thousands of new Canadians each year for the next few years, first time buyer competition will be even tougher. My clients that qualify under New to Canada programs or as newly established permanent residents all have well paying jobs and a significant nest egg already accumulated for a down payment. We are seeing immense growth in our country, but some young Canadians are being left behind, and the federal government's immigration goals are only going to put more pressure on the market.

In summary, the 2022 federal budget was an attempt to address the issues facing the first time buyer and the Canadian housing market as a whole, but characteristically  superficial and media-friendly initiatives were the story last week. Supply continues to be the major issue, and pressures continue to build in our housing market. The only saving grace for first time buyers may be (ironically) increasing lending rates, which may push some competition out of the market. As we see fixed rates approaching 4%, the stress-test guidelines now force qualification above the benchmark rate (at 2% above contract rate), meaning that buyers choosing a fixed rate mortgage are qualifying at close to 6% which will put a dent in their approval amounts. As we wait for the announcement by the Bank of Canada this week, only time will tell how the forecasted rate increases will help to bring some respite to an exhausted market by cooling the demand. The rest of this year will be very telling as we hopefully continue to recover from a spike in energy costs, stunted supply chains, and of course the implications of the stubborn pandemic situation.