By: Alexi Guindon-Riopel

Residential housing prices in Canada have been increasing sharply over the last 10 years. To solve this problem, the Trudeau government created the First-Time Home Buyer Incentive (FTHBI) which aims to do two things; ease the burden of the high initial cost to break into the housing market and reduce monthly mortgage payments by increasing the homeowner’s down payment. More specifically, the federal government provides a 5 or 10% loan if the applicant meets certain criteria such as a household income of less than $120 000, and of course, the transaction must be their first home purchase. By the Trudeau government’s own admission, the FTHBI was designed to act “as a second mortgage”. Nevertheless, the FTHBI has failed to solve or even mitigate the effects of an unaffordable housing market and is a poor solution to help first-time homebuyers purchase their first home.

Although this loan is advertised as being “interest-free,” successful applicants grant the federal government a share of their home equity until they sell their home, or after 25 years, whichever comes first. When the program was first implemented, the government’s share would grow at the same rate as the home’s value. For example, if the initial loan was valued at $24 000 after a 50% increase in home price, the homeowner would need to pay back $36 000. Although the loan doesn’t accrue interest in the traditional sense of the word, the outcome is identical. The borrower receives a payment from the government and pays back the original value plus an additional payment corresponding with the home’s new appraised value.

What originally seemed like a fiscally positive policy for the government over the past several years as home prices soared has become a liability with recent falling valuations. As a result, the program has been adjusted to an 8% annual cap, non-compounding. This cap is applied to potential gains and losses, with the government losing a maximum of 8% per year on their loan even if the value of the residence decreases more significantly. In the event of a large market downturn, the government’s equity share grows disproportionately to the total value of the home which protects the government from the more significant losses felt by the homeowner. In other words, while the government is protected by the 8% stop-loss in the event of a downturn, the homeowner doesn’t benefit from that same protection. This is a problem because the homeowner now effectively owns a smaller portion of their home. In other words, although the pie shrinks, the government’s slice doesn’t shrink as much as the homeowners’.

It is also important to note that the FTHBI hasn’t been widely adopted. At the halfway point of the three-year program, only 14% of the funds had been distributed. It is difficult to identify why participation is low, but some sources mention that many aspiring homeowners who would otherwise be eligible for the program aren’t fond of the idea that the government would own a portion of their home equity. Furthermore, many potential applicants are hesitant to take on the extra cost of this loan, especially since it can be difficult to predict how much will need to be paid back. Notably, the uncertainty in the housing market today makes this program even more unattractive.  

On one hand, if the program continues to be ineffective, we are stuck with the status quo, and the program provides no significant relief to Canadians struggling to purchase a home. Meanwhile, if the program becomes widely adopted, a sudden change in the housing market as we have seen in the last 5 years could cause serious financial hardships to successful applicants or make the government liable for doling out more money than they initially provide under the current framework.

The 8% per annum limit prevents some pitfalls of this program, however, it can still pose a risk to both first-time home buyers and potentially wasting taxpayer dollars. Harsher economic climates, such as rising interest rates could trigger a premature home sale. While the beneficiary of the program is already struggling financially, they would not be able to benefit from the full value of the home sale and would be required to pay back the initial payment provided by the government, plus the increase in home value. The average person benefitting from this program may also have taken out a loan against the equity they’ve built into the home, which adds to their debt burden. As such, this program adds to the debt that first-time homebuyers are frequently saddled with. 

While the FTHBI makes it easier to enter the housing market in the present, buyers in the future will face more competition and higher prices especially if future (or current) governments decide to end the program. Thus, this program is not sustainable and is merely a temporary solution, better known as kicking the can down the road. Residential housing stock already accounts for 22% of national wealth, and this program simply injects more capital into an already oversaturated economic sector. Overall, the FTHBI does not address the underlying issues of the housing crisis such as affordability and lack of housing stock. Meanwhile, other solutions such as a density bonus on the supply side could be more appropriate.

Although the FTHBI has its fair share of shortcomings, Budget 2022 specifies some changes to the program, such as more flexibility and better adaptation to the needs of first-time home buyers. Recent changes such as increasing the maximum household income threshold to $150 000 in more competitive markets could make the FTHBI more accessible, but it’s difficult to ascertain if these changes will improve the program or increase adoption.