A home is more than a place where you sleep. It’s a safe haven where you raise a family and create some of your most cherished memories.
It’s also seen as a rite of passage for many. When you own a home, you’ve arrived at adulthood and can consider yourself a productive member of society. In the past, many nations required you to own landed property – a house – before you could vote.
This is the modern era and a home is many different things to many different people. No matter how you perceive a home, it’s getting more and more difficult to buy one.
In many countries such as Canada, UK, Australia, New Zealand, US etc., the price of homes is going up much faster than income. Homes that were valued at $100,000 20 years ago are now many times that amount.
This begs the question, should governments interfere in private markets and help 1st time buyers out?
The problem 1st time buyers have
The rising cost of housing presents a challenge to many 1st time home buyers. For the most part, they’re early in their careers and don’t have the savings required to place a 10% - 20% down payment on a new home. In addition to that, their income just isn’t large enough to spend thousands of dollars on a monthly mortgage bill.
That’s creates another problem which feeds into the first one. Since 1st time buyers aren’t able to afford the more expensive homes, they go looking for affordable ones. Those homes are much smaller than they would have liked, may not be close to amenities, and outside of their ideal area.
There’s so much demand for these “affordable” homes that the seller can raise the price on a whim. In other cases, bidding wars ensue and the lower income prospects are priced out of the market. Many potential home buyers are opting for smaller properties like condos to build equity and wait for more favorable conditions.
Finally, the last problem plaguing first time home buyers is the lack of a strong credit history. Banks borrow money from their central banks at a fixed rate. They lend to their customer at a premium to hedge against defaults and unforeseen circumstances. Because they’re at risk, they want to make sure the person who’s borrowing from them has the ability to pay back.
They do this by looking at the credit history of applicants. Many 1st time buyers are still young and have only been at their first real job for a short amount of time. They don’t have a reasonable credit history built up so they’re often denied preapproved loans that will allow them to purchase larger homes.
As you can see, there are many challenges which compound to make it difficult to become a property owner. It’s no wonder the government decided to step in and assist.
What the government is doing to help
Some governments around the world are stepping in to ease the burden. An example of this is the Canada home buyer incentive program which took effect in September 2019 and is designed to help potential first time home owners offset some of the costs associated with buying a home. There are three different ways a buyer in Canada can benefit. Each has its own qualification criteria.
Land transfer tax rebates which refund some or all of the land transfer tax included in closing costs
First time buyer incentive which allows 5%-10% of your home to be purchased by the government upfront. You pay them back, interest free, over the course of 25 years or if the home is sold.
The Home Buyers Plan which allows you to withdraw up to 35,000 dollars from your registered retirement savings plan
The truth of the matter is that whether we feel it’s right or not, it’s already happening. The goal now is to see whether it has the effect it was intended for or if it’ll have a minimal impact on the home buying process.
Only time will tell if it was the right choice.