March 20, 2019 | Huh?

When the concept of shared equity mortgages burst upon the nation in the budget late Tuesday, some people flipped. “How on earth would this not have the effect of increasing the cost of housing?,” Joe asked me. “Eventually (or quickly) wouldn’t this just get factored into selling prices? If yes, there would be a net benefit of $0 to buyers, a substantial benefit to sellers, and the tax payer would be on the hook to guarantee an interest free loan via CMHC, correct?

“Frankly, this seems like madness rather than a “clever idea”. Am I missing something?”

Yes and no. On one hand, this is a fat nothingburger. On the other, it’s wicked scary.

First the facts. Here’s what we know about SEM.

It starts in September. The feds, through CHMC, will foot the bill for 5% of the mortgage on a resale purchase and 10% of the financing on a new home in a program costing  taxpayers about $1.25 billion over three years. Ottawa says this will turn 100,000 renters into mortgaged buyers which, for some reason, is considered a good thing.

But it’s seriously narrow in scope. Buyers must be first-timers, possess a 5% down payment, and have total  household income under $120,000. The kids still have to pass the 5.34% stress test, which means we’re talking about purchases in the $400,000 range.  The mortgage amount plus the shared-equity hunk cannot exceed four times the household income. Go see what that buys you in Toronto or Vancouver.

The portion of the mortgage footed by taxpayers is interest-free. No payments required. But when the property’s sold, the funds must be returned. If the house has risen in value the profit on that equity-shared mortgage is payable to the government. So the feds now have a stake in rising property values, which this program encourages. Can you say, ‘moral hazard’? If there’s a loss, taxpayers eat it. Mortgage guru Robert McLister calcs if the housing market tanked 20% and 120,000 people had used the program to buy $400,000 houses, the hit to us all might conceivably be $3 billion.

The savings for buyers are weensy – about a hundred bucks a month on a sub-$500,000 house. But the big thing is that by throwing free money on the table the feds make it possible for the moisters to qualify for bigger loans. That, says McLister, will allow buyers to go after a 4.8% more expensive resale house or a new condo costing an additional 10.2%.

Cue the scary part.

First, shared equity buyers qualify for bigger loans, allowing them to bid more and potentially jack up house prices, hurting everybody else and making real estate less affordable. Well done, Bill Morneau.

Second, the psych value here is huge. Moisters are into the sharing economy as no previous generation, and this plays perfectly to that meme. If the Libs are elected again this autumn, you can bet on an expansion of this program of public participation in private mortgages, leading to more demand.

(It was interesting that RBC economist Craig Wright called it “a solution looking for a problem.” When 70% of people own houses, why are we pushing more into them? This is political, he says, not policy-related “Demand will show up now, while supply will show up later, and in the near term prices could move higher so … you may make it less affordable to own a home.”)

Third, the share-equity thing comes hand-in-hand with new rules allowing a bigger raid on RRSPs for house-buying. Effective today a couple can take $70,000 from their retirement savings for a downpayment, and not pay it all back until 2037. Of course this is a further corruption of the RRSP concept, letting people remove funds from tax-free growth during the height of their working lives to dump into a single asset. Besides, it’ll cost taxpayers another $145 million.

To be fair, the shared-equity mortgage – in its current watery form – is probably less damaging to real estate than bringing back 30-year amortizations (which was widely anticipated). That would have been grabbed immediately by most borrowers who’d happily trade lower monthlies for more interest later. Myopia is us.

Well, there you have it.

We’ve crossed the Rubicon.

The government is buying houses for people with tax dollars.

Lavalin? What Lavalin?

Garth Turner March 20th, 2019

Posted In: The Greater Fool

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