Tuesday, December 20, 2016

New BC program for first time house buyers is a very good policy decision.

I firmly am convinced that the new BC government for first time house buyers is very good for BC economically and the single best thing that can be done for millennials

Last week the BC government announced a program for first time house buyers in BC in which they can get a no interest matching loan to cover up to 5% or $37,500 of price of the house as a down payment.   I personally think the program is an interesting way to make house ownership an option for millennials.   People opposed to the BC Liberals have come up with a number of reasons this program is a bad idea but I am not convinced of any of them.    
News Release

A major problem in buying the first house at the moment is coming up with the 10% down payment.   Saving the money to manage to get to $50,000 down payment for a $500,000 house will take a young couple a long time because there is not a lot of spare money around to save at that point in their lives.   If they can put aside $5,000 a year it will take them 10 years to get a down payment together.  It is long enough to discourage people from ever trying to get in the housing market, ten years at age 28 is longer than the adult life they have lived.  The government no interest loan changes the money you need to save from $50,000 to $25,000 and that time frame drops to five years.   A five year time frame is one that people can think about in their 20s.

Repayment of the loan starts in five years at which point in almost all cases the ability to cover the repayment is much more manageable, that $25,000 becomes a $104 a month payment.   Remember there has been no interest on this loan but the value of the house has probably risen*.

The program limits support for houses priced up to $750,000 but that is much too expensive for almost all first time house buyers to afford.  A much more realistic price is $500,000 which means a monthly mortgage payment of about $2300 with a 10% down payment.   Most people making use of this program will be using a lot less than the maximum they are in theory allowed to access.  

In the Lower Mainland this means almost all the purchases will be of condos and townhomes and this is a part of the Metro Vancouver real estate market that has not risen unsustainably over the last 18 months.

Making it possible for a lot of younger people to buy houses is good for the BC economy.  A crash in the Metro Vancouver real estate market would cause a major recession in the province.  We need the market to cool and come down but if it falls too fast the whole economy goes down.  .Well timing government intervention like this program should be able to soften or even stop a recession caused by the crash of house prices.   The fall of house prices in the US were the primary reason for the Great Recession.

All residential real estate markets need a constant and steady influx of first time 30 year olds buying.  This has not been happening in Metro Vancouver or Greater Victoria.  Saving the down payment takes too long.   This program will in the short term speed up the decision for many to enter the market.   These new buyers replace people downsizing, moving away or dying..   If the people leaving the market are not replaced there will be to many houses on the market and not enough buyers.   It may sound insane to many people at the moment but the market in Vancouver is already showing signs of not enough first time house buyers.

The biggest complaint I have heard is that the influx of new buyers could be inflationary but in this case that is not likely happen because the market is teetering on a rapid decline,  The short term large influx of new buyers will cushion the market for the next year or two and help stave off a recession.

As a program it actually costs the government very little.   The only cost is administration and the interest lost.   This program will not require new government taxation to pay for it.   This is not a grant but a loan and secured against the house, there is almost no capital risk to the government.    It is a clever way to turn a small cost to government into a huge economic benefit.

 The timing of the program is close to prefect for the larger macro economic needs.

For the millennials, this is a chance to do what previous generations have done and have a significant capital asset.   Delaying getting into the housing market from about 30 to close to 40 will create a whole generation of people who do not have access to the financial resources other generations have had.   Borrowing against the value of a home has many important roles in people's lives.

An example, most people that start up a new business at age around 40 use their primary residence as the security to get the financing they need.  If many fewer people have houses they own there are many fewer people that can be entrepreneurs, we can not afford that as a society.

Another example, a house functions as a family social safety net.   It provides a source of financial resources if things go wrong.   For many families it is a effectively an insurance policy against the unknown.

House ownership creates a stronger middle class.   Everyone talks about supporting the middle class, this program will help large numbers of people aged 25 to 40 get into the middle class.   I know people this age that had resigned themselves to never being able to own a house that are now calculating when they could buy with this program.   It works well for my kids because over the next five to fifteen years they will start to own houses and this is not something anyone expected`

This program is one of the only serious government programs that moves wealth from the older generations to the millennials.   Simple generational fairness alone should be a reason to support this program.

From the political side this is a very smart move the government.   The single big target demographic in this coming election are the millennials.  Trudeau won the federal election only because of them and no knows how they will act in the BC election,  I think this policy will move a large number of them over to supporting the government.  What is good for a winning election does not have to be at odds with good policy.

All in all I think this is program is not only a very good idea but it truly bold and innovative   I do not expect it to be perfect but it can be altered as glitches are seen.  I can not think of the last time government has decided to start this large a new program

* I bought a house at age 33 and in the next seven years it lost 55% of its value.  At 51 I am unlikely to ever own a house again
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