The real estate industry knows buying a home in major cities is becoming prohibitively expensive for many Canadians. So it’s proposing to help. The Canadian Real Estate Association is lobbying the federal government to allow parents to dip into their registered retirement savings accounts to fund their children’s home-ownership dreams.
CREA, which represents more than 100,000 agents, brokers and salespeople, has made a 2018 pre-budget submission proposing changes to the Home Buyers’ Plan (HBP). That program allows a first-time buyer to withdraw up to $25,000 from an RRSP account to purchase or build a home. The realtors’ association suggests expanding the program so that parents can withdraw from their own RRSPs for their children to purchase of a home. Both parents would be eligible to take funds from their accounts, subject to a maximum amount. “Extending the HBP is a compassionate and fiscally responsible way to help modern Canadian families finance the purchase of a home, and also help close the gap for young Canadians,” according to CREA’s submission.
Family already plays a big role in financing first-time buyers. A survey conducted this year by Genworth Canada, a mortgage insurer, found that 22 per cent of first-time buyers received a gift from a family member and 12 per cent received a loan, up from nine per cent in 2015. “As many parents are already ‘loaning’ their savings to their children, a formalized mechanism which allows for the transfer of RRSP savings would help not only increase the available down payment and reduce the amount borrowed, but also limit risk to the lender,” CREA contends.
Some observers are not convinced. “This is a remarkably stupid idea,” says Josh Gordon, an assistant professor at Simon Fraser University’s School of Public Policy. “One of the dumbest ideas I’ve heard in the housing debate.” The policy change would only fuel demand for real estate, he says. With more access to funds, buyers are able to pay more for homes, driving up prices and exacerbating the very problem CREA purports to address. “You’re just allowing people to take on more debt, meaning they can bid more for the same house,” Gordon says.
John Pasalis, president of Realosophy Realty, agrees. “It’s a terrible policy,” he says, adding that it’s typical for real estate groups to propose ideas that stimulate demand in response to affordability issues. “They’re going to recommend things that drive real estate sales, independent of whether it’s good policy,” he says.
Home ownership can be beneficial, says David Madani, an economist at Capital Economics in Toronto. Homes operate like a forced savings mechanism as owners pay down the mortgage and build equity. But now is the wrong time to implement CREA’s policy suggestion, he says, given Canada is grappling with record high household debt and overvaluation in large markets such as Toronto. “It’s unwise to encourage potentially thousands of younger people to rush buying a house at this particular correction point in the housing cycle,” according to Madani.
Tim Syrianos, president of the Toronto Real Estate Board, which is supporting CREA’s proposals, rejects the criticism. “Why would it drive up home prices?” he asks. “The intent of CREA’s proposals is not to drive up more demand. It’s to provide the opportunity for people to own a home.” The government requires that RRSP withdrawals are paid back within 15 years, but Syrianos contends “intergenerational RRSP loans,” to use CREA’s term, do not amount to more debt for first-time buyers. “It could be paid back by the parent,” he says. (A CREA representative was not available for comment.)
In addition to RRSP loans, the real estate association is recommending an expansion of the home buyer’s program to include those who have undergone major life events, such as a divorce or relocating for work. CREA also proposes raising the maximum withdrawal limit from $25,000 to $35,000, since the cap hasn’t increased with inflation since 2009. “Anyone knows $25,000 for a down payment doesn’t get you very far right now, so it makes sense to perhaps increase that a little bit,” Pasalis says.
Government officials, the Canada Mortgage and Housing Corporation and the Office of the Superintendent of Financial Institutions (OSFI) have all been working to temper demand for real estate, however. OSFI, the country’s banking regulator, tightened mortgage qualification criteria twice since 2016. The latest measures, which take effect in January, could affect up to 10 per cent of prospective homebuyers, according to the Bank of Canada, prompting them to purchase cheaper properties or simply delay.
CREA’s proposals, especially intergenerational RRSPs loans, appear to run counter to the aims of housing and finance authorities. But politics have trumped sound real estate policymaking in the past. The former Liberal government in B.C. introduced a down payment loan program for first-time buyers in response to eroding affordability last year, a few months ahead of an election. CMHC head Evan Siddall was a strident critic. “Programs that support demand in supply-constrained markets, like Vancouver, serve primarily to increase prices and make the affordability problem worse,” he emailed to provincial officials.
Siddall has also used recent speeches to point out governments at all levels offer ample assistance to homebuyers. When talking about affordability in a speech this month, Siddall said it makes more sense to “restrict unhealthy demand” by keeping lending rules tight and stimulating housing supply, rather than providing more financial support to prospective homeowners.
Affordability is a real—and growing—concern in major cities, of course, but Gordon says policymakers need to target the underlying causes of soaring home prices, namely speculation and foreign investment. Although both Ontario and B.C. implemented taxes on non-resident buyers, the programs might not be adequately capturing foreign dollars. Gordon’s colleague at SFU, Rhys Kesselman, has proposed a one per cent annual tax on homes worth at least $1 million that increases with the value of the property. Importantly, the levy is deductible against income tax paid in the previous year—effectively exempting those who pay income tax in Canada while targeting those who don’t. Such a tax would be more difficult to evade, according to Gordon, even for foreign buyers who use business entities to purchase homes.
Measures like that come with an another benefit: parents can hold on to their retirement savings, guilt-free.