Banks, developers urge Ottawa to relax mortgage rules for first-time buyers of new homes

Canada’s largest banks and developers are urging Ottawa to help young first-time homebuyers with their down payments, relax mortgage requirements and provide low-cost financing for homebuilders, as part of a set of recommendations to improve the housing market.

With the country’s real estate downturn dragging on, a group of lenders and developers is suggesting four key areas that need changes: long-term investment, credit risk, immigration policy and housing data.

“We want to increase housing affordability across Canada,” said James Burrow, Bank of Montreal’s head of enterprise sustainable finance solutions.

Although home prices and rental rates have declined over the past four years, many Canadians remain unable to afford housing. The new condo sector is in a slump with presales down significantly, leading to job losses across the real estate industry.

BMO, along with other big lenders and major homebuilders such as Mattamy Homes Ltd. and Wesgroup Properties, released the report called the National Housing and Investment Initiative on Tuesday. It is designed to help inform Ottawa’s housing policies, which include doubling housing starts to nearly 500,000 units per year.

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One of the initiative’s 29 recommendations is to create down payment assistance programs for first-time buyers and further reduce down payment requirements to help them purchase new homes.

It provides several ways to help with a down payment including allowing buyers to deduct the interest paid on their mortgage from their taxable income. It also recommends finding a way to ensure that those homeowners would not be fully exempt from paying capital-gains tax when they sell their homes.

The report said if Canadians cannot access easier financing for new homes, homebuilding “will continue to be constrained.”

The report was endorsed by Royal Bank of Canada, Canadian Imperial Bank of Commerce, BMO, Toronto-Dominion Bank and Bank of Nova Scotia.

It was also backed by 10 large homebuilders including Minto Group, Menkes Developments Ltd., Polygon Homes Ltd., Brookfield Residential Properties Inc., Tricon Residential Inc., The Remington Group, Cantiro Homes and BGO Properties. It was compiled by Building Industry and Land Development Association, a trade group, and The Missing Middle Initiative, a think tank focused on middle class housing.

The report recommends reforms to the mortgage stress test, which requires borrowers to prove they can make their monthly payments at an interest rate that is at least 200 basis points above their mortgage rate.

It said the stress test makes it hard for borrowers to qualify for a loan, which in turn reduces the amount of new housing that gets built. The report said the test should be more flexible and account for differences in mortgage lengths and current market conditions.

The report recommended a sliding stress test based on the mortgage term and type of buyer, including an easier qualifying rate for first-time buyers of new homes.

“The current stress test is a valuable prudential tool but may be too blunt an instrument by excluding otherwise creditworthy borrowers,” the report said.

It also recommended the government provide cheap financing to developers of condos, townhomes and single-family homes. Currently, the federal government only provides low-cost financing to developers that build rental-only buildings.

This could help condo and single-family home development. Developers in places like the Toronto region typically have to sell a minimum of 70 per cent of their project’s units to qualify for construction financing.

Cheap government financing or backing would make a project less risky for lenders and it would likely mean a developer would not have to meet the high sales threshold.

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Wesgroup chief executive Beau Jarvis said access to low-cost financing would help. It could lower pre-sale thresholds, though developers would have to be comfortable completing projects with unsold units.

“It means perhaps you’re returning to more of a speculative development paradigm where you are speculating that purchasers are going to be there to buy the homes that you built when they’re complete,” he said.

BMO’s Mr. Burrow said banks can play an enormous role in catalyzing the capital that’s needed, but some risks are not prudent for the institutions.

“It means the federal government plays a role in what is sometimes the riskiest stage of home development, which is the actual construction phase itself,” he said.