In their Fall election platform, the Liberals promised two broad initiatives to help people get into the housing market: 1) Provide money to address the supply problem and suppress price escalation; and 2) A rent-to-own program to help people get onto the path to homeownership.
In their spring budget, they addressed the first of these with a variety of policies that they hope, collectively, will have the desired effect. There is plenty of skepticism over that. (See my last week’s post.)
Regarding their second initiative, I was privileged to be part of a submission to the federal government, via CMHC, back in January. It was a joint submission of the Canadian Federation of Apartment Associations (CFAA) and the Canadian Association of Rent to Own Professionals (CAROP), of which I was the founding president and still sit on the board. The submission was prepared by board members, lawyers and with the assistance of a government lobbyist and a CMHC insider.
While we were aware that the government would prioritize the supply initiative, it is disappointing that they did not begin to address their rent-to-own commitment. Our submission offered a variety of measures they could take to radically increase the opportunity for the average consumer to get into the market, some of which wouldn’t have cost the government a dime.
Let me identify just a few the 18 recommendations in that submission that would make the rent-to-own path to home ownership much easier for families.
Recommendation 2, a big one that would not cost Canadian taxpayers anything, would simply be to change CMHC policy to allow investors who purchase homes for R20 clients the same 10% down payment standard that the clients will have at the end of the deal. Currently, any property purchased as an investment (i.e., where it is not occupied by the owner) requires a minimum of a 20% down payment. Since the R2O client, not the investor, will be living in the property during the term, that 20% standard applies.
How would this change help? Well, a primary appeal for investors to invest into R2O arrangements is a good return on the 20% down payment they contribute. For R2O facilitators (like me), the return on that investment (ROI) is a significant cost that must be covered in the basic rent charged to the client. Therefore, basic rents tend to be high, even before any credit portion, rendering R2O programs too expensive for many clients.
If the down payment required by the investor is cut in half, it then also cuts in half that portion of the rent that must be charged to cover the ROI. A quick calculation tells me that, on a $500,000 property, I could drop my rents by $437 per month. Would that make the rent-2-own option more affordable and get more people onto their own paths to home ownership?
And furthermore, investors could double the number of properties they purchased for rent 2 own clients if they only needed half as much for each down payment.
But the government wants to spend money on this—it will look good on them when next election comes around. So they’ve allocated $1 billion for this program.
How can that best be used?
Recommendation 3 is that the government match up to 2.5% of the client’s initial deposit in a rent-to-own program; i.e., if the client has at least 2.5% for an initial deposit, the government program would match that with a further 2.5%. Typically, R2O programs require about 5% deposit to start, based on needing 10% at the end, and this is a big impediment to many people getting into rent 2 own programs. How many can afford $25,000 for a $500,000 property just to start an R2O program?
This recommendation would cut that requirement in half. $12,500 would get a lot more people started if they knew that the government was adding another $12,500. Even if 20% of the $1 billion allocated for the government program was used for administration costs, it could still put 64,000 more families onto the path to home ownership (based on an average $500,000 home value; at a $350,000 value, it would add 91,500 families).
Recommendation 10 is to allow clients to use RRSPs as a source of funds for their initial R2O deposit or, alternatively, as security for loans for initial deposits. Many would-be rent 2 owners have limited funds readily available for R2O deposits but do have some RRSPs saved up.
Currently, RRSP rules allow for RRSPs to be used for down payments on purchase, but they do not work for the initial R2O deposits because of the requirement to begin paying them back within a year. This small policy shift would allow R2O clients to add the R2O term to the one-year payback timeline, allowing them to use the funds at the beginning rather than only at the end of the R2O term.
Would these three recommendations alone make it easier for families to get onto the path to homeownership? Would this do more with $1 billion than the $8 billion (or whatever the collective number is) that they promised in the budget earlier this month?
I’d be curious what you think about these three.
Will the government do anything in response to these, or any of the other 15 recommendations?
I hope we don’t have to wait until next year’s budget to find out. But I suspect we will.