Unintended Consequences And A New Hope?

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Toronto’s March real estate market was the third strongest ever.  Sales volumes dropped compared to record setting March 2021.  Prices increased by double-digits as Toronto’s sellers still held the balance of power due to limited supply.

Last week, the federal government presented the 2022 federal budget where housing affordability was a major consideration. With strong immigration targets and Canadians already enamoured with investing in real estate, making housing affordable is a high wire act.

We can see the dilemma when adding incentives for new buyers only puts further upward pressure when there is already strong demand from existing home owners and investors.  In recent years, the government extended amortization periods to 40 years and practically eliminated downpayment requirements.  This lead to significantly higher prices due to these lower barriers which resulted in a reversal of these policies.

Unintended consequences are inherent in any government policy.  Of all the measures announced last week, I thought the most creative was introducing the First Home Savings Account (FHSA).  The FHSA that would give prospective first-time home buyers the ability to save up to $40,000 in the next 5 years. Like an RRSP, contributions would be tax-deductible, and withdrawals to purchase a first home – including investment income – would be non-taxable, like a TFSA.

The FHSA is an improvement over the existing homebuyer RRSP loan program since FHSA withdrawals don’t have to be repaid. However, the $8,000 per year cap means that it will take until 2028 to contribute the full $40,000.  Given current price levels and significant delay in hitting the cap, it will unlikely provide meaningful impact on housing affordability.

In order to have a more significant impact, I’m hoping the government will increase the annual amount and total cap to the FHSA.  Furthermore, they could allow first-time buyers to transfer money from their existing RRSP which many had focused their downpayment saving efforts.

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