Fixing the Home Buyers' Plan

Home ownership. It’s something most Canadians aspire to achieve. It may not have the proverbial white picket fence but owning your home is a meaningful and productive endeavour.

The federal government has tried to facilitate home ownership through programs like the Home Buyers’ Plan (HBP), which allows first time homebuyers to withdraw up to $20,000 from Registered Retirement Savings Plans (RRSP) for the purposes of a down payment. The withdrawal is made without penalty but must be re-paid within 15 years.

Unfortunately, a bureaucratic oversight in Ottawa means that the HBP favours smaller cities with lower land costs relative to larger metropolitan areas with higher land values. As one would expect, there is a great deal of variance in the average purchase prices across Canada’ Census Metropolitan Areas (CMAs). Vancouver records the highest average price of $369,343 while Trois-Rivieres records the lowest price of $75,700. The average sale price for all CMAs in 2001 was $120,291.

The problem with the HBP is that it is capped at a nominal value ($20,000) rather than as a percentage of the purchase price. Thus, the real value of the HBP, as measured by the percent of the purchase price paid by the HBP, will increase or decrease depending on the purchase price of the home. For instance, a maximum HBP withdrawal for a couple ($40,000) represents 52.8 percent of the average purchase price of a home in Trois-Rivieres but only 10.8 percent of the average purchase price in Vancouver.

Let us assume that five families earning the median income in each of five cities (Vancouver, Windsor, Toronto, Trois-Rivieres, and Halifax) decides to purchase an average home in their city using only the HBP as a down payment.

Obviously a lower priced home coupled with a relatively large down payment will result in relatively low mortgage payments. The hypothetical couple in Trois-Rivieres, for instance, faces annual mortgage payments of $2,736 a year, representing 5.3 percent of their annual income. Alternatively, the Vancouver couple faces mortgage payments of $25,920, representing an alarming 47.0 percent of their annual income.

Another affect of the size of the down payment is less well known and relates to mortgage insurance, which must be purchased if your down payment is less than 25 percent. Without mortgage insurance the exposure to default risk on highly leveraged mortgages would be undesirable to most lenders who would, in turn, demand substantially larger down payments than the minimum 5 percent now required. The CMHC charges a fee for mortgage insurance that increasing incrementally according to the portion of the purchase price not covered by the down payment. In other words, the larger the relative down payment, the smaller the CMHC fee.

Two of the five hypothetical couples, namely the Vancouver and Toronto couples pay CHMC fees of $8,234 and $4,230, respectively, since their down payments do not reach the exemption threshold of 25 percent for CHMC fees. The down payments of the other three couples all exceed the threshold and thus avoid paying CMHC fees.

Now a routine response to high housing prices in metropolitan areas is that individuals in these areas have higher incomes, which allow them to afford more expensive homes. However, data regarding median incomes in the CMAs indicates this is not the case. For instance, Vancouver, which maintains the highest average housing prices, records only the 22nd highest median family income. Alternatively, Regina records the 20th highest average housing price and the 7th highest median family income. The data does not tend to support the assertion that those living in larger CMAs enjoy higher incomes than those living in smaller CMAs.

The federal government could easily rectify the HBP bias towards smaller cities with lower housing values by adjusting the cap. Specifically, the cap should be altered so that it is the greater of $20,000 or 25 percent of the purchase price of the home. This would enable all Canadians, regardless oof the housing market within which they live, to use their own resources (RRSPs) for the purchase of a home and avoid costly CMHC fees. Such a change in policy would have no affect on Ottawa’s ability to collect taxes since it does not change RRSP contribution limits. The proposed change would only affect asset compositions within RRSPs and only for a 15-year period. It would, however, greatly benefit those Canadians who reside in cities like Toronto and Vancouver where the cost of owning one’s home is significantly more than in the rest of the country.