The federal Liberals pitched the new First Home Savings Account (FHSA) as a way to help Canadians “afford a downpayment faster.”
FHSAs let first-time home buyers save up to $40,000 toward their first home, get a tax deduction on the contribution and withdraw the money tax-free for a home purchase – with no need to repay it. Dandy.
Unfortunately, this program is another Band-Aid housing initiative. Remember the convoluted, ineffective and underutilized First-Time Home Buyer Incentive?
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For reasons I’m about to explain, the FHSA is another scheme that will barely move the needle for young buyers. But you know what? If you’ve never owned a home this year or in the prior four calendar years, per FHSA rules, you should jump on it anyway.
Just realize it may not help you afford a home
Few problems are graver in this country than its housing crisis, and vote-hungry parliamentarians love to proclaim they’re doing something about it. But the math doesn’t lie.
Canada’s latest reported average home price is $662,437. FHSA shelters $8,000 a year of savings from taxes, up to $40,000 total. That’s a 6-per-cent down payment on the average home.
That doesn’t even meet the government’s minimum $41,244 down payment requirement in today’s dollars. Sure, you’ll have small investment gains and tax savings, but you’ll also face rising home values.
Speaking of which, the average 12-month price change for a Canadian home since 1980 (as far back as data exists) is 5.87 per cent.
So if history repeats, by the time a young buyer has saved the maximum-allowed $8,000 in one year – assuming they can save that much – that average home price would jump more than $38,000 to around $701,000.
Wait five years to save your $40,000, and based on historical appreciation, today’s average Canadian home could cost over $881,000. So you’d pay about $219,000 more to save a $40,000 down payment. What kind of math is that?
Diversionary tactics
When your job’s on the line, when people demand solutions and when you can’t provide them fast enough, you divert attention.
That’s precisely what the FHSA is – a diversion.
The government is ushering people into this country and we cannot possibly house them economically. Heck, it could very well cost the Liberals the next election. Our monthly population growth is smashing records, up 0.25 per cent in March alone, with more than 1.4 million new immigrants expected by the end of 2025, according to a Desjardins Economics report Thursday.
For a housing market already showing signs of reheating, one that’s only pacing at 244,000 housing starts a year, that’s a severe problem. Canada’s “come-on-in-and-good-luck-with-your-housing” policy isn’t working. And demand-stoking tax schemes for home buyers won’t help.
If the government wants to usher people into home ownership before prices inflate further, it would have been more economical just to bring back 100 per cent financing – except, unlike the last version in 2008, make it solely for first-time buyers to limit the price impact.
Compared to the FHSA, at least no-down-payment loans would give today’s young people a chance to get in while prices are temporarily low. And at least it wouldn’t cost taxpayers more than $3.1-billion over the next four years.
Now, do I seriously think repealing the 5-per-cent down payment rule is the answer? Absolutely not. It’s only less bad. Allowing 100 per cent financing would juice home values even more, and that brings us full circle. There is no fix until we solve the immigrant/housing imbalance.
The FHSA Takeaway
Unless home prices sink while you’re saving in an FHSA, which would be statistically improbable over any five-year span, this thing may cost most Canadians more than it saves. That’s despite the few thousand dollars it might knock off someone’s taxes for five years.
That last point, and tax-free investment growth, is exactly why everyone who hasn’t owned a home since 2018 should open an FHSA account. Governments siphon 45 per cent of the average Canadian’s pay in taxes and now Ottawa wants to give some back. So if you qualify, take their money.
Even if you never plan to buy a home, you can fold your FHSA into an RRSP with no loss of RRSP contribution room. This is “free” money folks, and handouts from Ottawa don’t come along very often for the citizens who shoulder most of Canada’s tax burden.
Unfortunately, this latest giveaway is little more than income redistribution from the majority of Canadians to first-time home buyers. But that’s a topic for another day.
Rates are as of April 6, 2023, from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20-per-cent down payment, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million, and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.
Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
