02/12/2020 13:30 EST | Updated 02/13/2020 10:41 EST

First-Time Homebuyer Incentive A ‘Flop’ That Might Be Driving Up Canadian House Prices

CMHC's program to help first-time buyers has seen little interest.

Ivan_Sabo via Getty Images
A stock photo of suburban homes in Greater Vancouver. The city has seen very little interest in the federal First-Time Homebuyer Incentive.

MONTREAL ― The federal government’s First-Time Homebuyer Incentive is proving largely unpopular ― but despite little public interest, it might still be driving up house prices as speculators return to the market.

Preliminary data released last week showed that Canada Mortgage and Housing Corp. (CMHC) got roughly 3,000 applications for the program in its first three months, and the Crown agency issued some $51 million in funding in 2019, a small fraction of the $1.25 billion it plans to invest over three years.

And the program may be missing the mark in helping affordability. Even though Canada’s largest cities are struggling with some of the worst problems, only a third of applicants were from large cities, according to an analysis of the data at the Better Dwelling blog.

Watch: 3 trends from Canada’s housing market you can expect in 2020. Story continues below.


What’s more, the program has been most popular in Quebec and Alberta, where housing is considerably more affordable than in Ontario and British Columbia. The latter two combined accounted for less than a fifth of the program’s spending. There were just 148 applications in Toronto, and 45 in Vancouver.

The largest numbers of applicants came from Montreal, Edmonton and Calgary, in that order.

For these reasons Sherry Cooper, chief economist at Dominion Lending Centres, declared the program a “flop” ― though she noted that the Liberal government’s promise to increase the maximum house price under the program could make it more useful in the pricey Greater Toronto and Greater Vancouver markets.

“But the biggest drawback for many is they don’t want to equity share with the government,” she wrote in an email to HuffPost Canada. “A similar program was introduced in B.C. a few years ago and it, too, proved to be unpopular and was lapsed.”

The Liberals vowed during last fall’s election to raise the effective maximum house price under the program to $789,000 from $480,000, after criticism that the limit was too low to help in Toronto and Vancouver.

The program is designed to make buying a first home more affordable. The CMHC purchases 5 or 10 per cent of a homebuyer’s home, reducing monthly mortgage payments, in exchange for an equity stake in the house that the owner has to pay out to the agency when they sell the house or the mortgage ends.


Some experts have argued that, without faster housing construction, the program is destined to raise house prices. Research on a similar program in the U.K. found that homebuyers used it to increase their maximum purchase price, thus driving up house prices.

Return of the speculators?

Stephen Punwasi, founder of the Better Dwelling blog, believes some of the acceleration in house prices may have to do with speculators jumping in on the expectation the program will boost the market. 

“A few agents and reports told investors this would be a huge opportunity to scalp a few dollars from (program) users,” he wrote in an email to HuffPost Canada. “For instance, an email from one report flat out said ‘With high participation, this could increase home sales & prices!’” 

The problem “became worse after the government demonstrated they would continue to raise the limit, when it no longer worked for markets,” he added.

Punwasi noted that a lack of supply is also driving up house prices ― the number of homes on the market has dropped steeply in many markets because “when prices are rising, no one wants to sell.”

And the impact of the mortgage stress test has waned ― the test meant people needed to save up longer for a down payment, and now they have.

The biggest drawback for many is they don’t want to equity share with the government.Sherry Cooper, chief economist, Dominion Lending Centres

With the average sale price in Toronto jumping 12.3 per cent in the past year, and sales in Vancouver accelerating by 42.4 per cent in January, many economists say Canada’s markets are returning to the overheated conditions seen in 2015 and 2016.

The latest Teranet-National Bank House Price Index showed affordability eroded in the final three months of 2019 across most major markets, after having improved for three straight quarters before that.

That worsening of affordability will continue in 2020, TD Bank economist Rishi Sondhi wrote in a forecast issued Tuesday.

“Canadian home prices are likely to expand at their fastest annual pace since 2016 this year,” Sondhi predicted.