Last year, we put out a piece that examined the impact of a somewhat obscure policy limiting insured mortgages to homes at values below one million dollars, to housing affordability.
We won’t repeat that analysis here as it’s quite lengthy1, but it seems someone in Ottawa may have been reading this blog with their official announcement to increase the cap on insured mortgages as of this morning.
For the record, no one from Ottawa has reached out to us about this topic, and we’ll probably never know whether our “Million Dollar Wall” piece played any role in influencing this policy decision.
But we’ll take the coincidence as a win.
Knee jerks
Right out of the gates, as one would expect, Canada’s housing punditry are already taking aim at this announcement claiming it will do nothing for affordability and will stoke demand.
From our perspective, these concerns are overstated and largely unfounded.
Primarily, this policy will widen the price spectrum of homes available to buyers who have less than a twenty per cent down payment.
Many of these buyers can currently easily afford the payments on a home valued between $1m and $1.5m dollars, but do not have a sufficiently large down payment to purchase them (under the current policy regime).
As we argued in the Million Dollar Wall, by allowing these purchasers to move up into this price range, it reduces the demand pressure for homes below the $1m dollar mark from this subset of purchasers.
Assuming no change to the total number of buyers in a given area, (some) demand should shift away from the lower priced homes in the market towards homes above $1m and $1.5m, where currently, only those with a twenty per cent down payment can compete.
We view this as reasonable trade off.
Punching your own weight
In case this is still confusing to anyone, here’s an analogy.
Think of a sport like boxing, where weight class is an extremely important variable to consider when pairing athletes for a “fair fight”.
Under the current policy regime, home buyers with high incomes and less than a twenty per cent down payment are actually forced to compete with other home buyers with much lower incomes who also do not have a twenty per cent down payment, for the same pool of homes.
It’s akin to putting a heavyweight boxer in the ring with one from a featherweight class - it effectively ensures an unfair fight.
By moving these “heavyweight” home buyers into a “weight class” that is more reflective of their incomes and higher (but still sub-twenty per cent) down payments, this helps to level the playing field (to a degree).
Exchanging blows
Whether this policy shift deals a blow that materially improves housing affordability in practice remains to be seen, however.
We’ve argued ourselves that there is often a big difference between how things work in theory versus in practice, and our expectations for this policy shift are fairly low at present.
But from the perspective of impacts to the business of our membership, we view this policy shift as a net positive.
It will allow many of our members’ new and existing clients to expand their home search criteria quite dramatically (both in terms of price, but also areas), which we hope results in their clients finding a home that better suits their needs.
And at the end of the day, that’s what we all want: a home that we love, and that we can afford.
Footnotes
But we recommend you go and read/watch it!↩︎