First time home buyers loan program

The following entry is a record in the “Catalogue of Catastrophe” – a list of failed or troubled projects from around the world.

BC Provincial Government – Canada
Project name : British Columbia Home Owner Mortgage and Equity Partnership program
Project type : Government backed loan program to help first time buyers enter the real estate market
Date : Cancelled Dec 2018
Cost : Unknown

Synopsis :

Between 2002 and 2017 residential property prices in the city of Vancouver, Canada were hot. Nowhere was this more true than in the city’s Westside neighbourhood where properties rose by up to 500% in just 15 years. Driven by both local demand and foreign money flowing into Vancouver, the dream of owning a single family home in the city became just a pipe dream for anyone other than the very rich. Even the city’s townhouses and condos pushed a typically family beyond their financial limits and affordable housing grew to become a major political issue. With locals priced out of the market the British Columbian (BC) Provincial government started to fret over what impact the issue might have on the next election.

To help address the crisis, the BC Government implemented a loan program aimed at helping first time buyers get into the market. Offering an interest free loan of up to $37,500 of the program was intended to give younger people a leg-up so that could get onto the lower rungs of the property ladder. When launched, the government projected that more than 42,000 people would take advantage of the program over the first 3 years.  In reality, the take up rate was much lower and after a year the actual number was a mere 2,000.

While those 2,000 people may appear to have benefited from the program, the truth is more complex and the law of unintended consequences led to an outcome very different than had been anticipated.

While the program had no effect on the city itself, when the program came into effect in 2016, prices at the lower end of Vancouver’s outlying suburbs started to take off. Some theorized that new buyers armed with government loan money would now be entering the market in large numbers. Although that wasn’t true (take up rates were very slow), the belief started to drive prices up. Seeing prices rise some feared that the suburbs would suffer the same fate as the city and the so called ‘FOMO’ effect (fear-of-missing-out) started to set in. Condo’s in the more affordable suburbs started to rise quickly. Some areas jumped as much as 40% in a single year. News of dramatic price rises triggered a hysteria that further drove the market up. In some cases, parents took out Home Equity Line of Credit loans (HELOCs) on their own homes, so they could give their children the money needed to get a down payment together and buy in. Stories in the press even reported parents buying condos for their young children in the belief that buy the time their children were old enough to buy, the market would be even higher.

A bubble had started to inflate and condos and townhouses rose in value significantly more than the $37,500 offered by the loan program. Negating the value of the leg-up loans, the price mania affected all buyers, not just those using the first time buyer program. Although markets are too complex to definitively establish cause and effect, it is likely in part that the threat of government money assisting first time buyers contributed to the bubble’s growth. The program was eventually cancelled in March of 2018 at which point the suburban market was considerably higher than it was when the program was first launched. In retrospect there is a growing realization that a simplistic view of economics and how humans behave in a real estate bubble meant the loan program had the complete opposite effect of what had been intended.

Now we are in 2019 it’s clear that the Vancouver property bubble is deflating, if not bursting. Single family homes in the most desirable districts have dropped as a much as 35% from their peak and lower priced condos and townhouses have pivoted into negative territory as well. Inventory is building and there are clear signs of trouble ahead.  For those who did buy using the program, and for those attracted in because of FOMO, they are now faces potentially significant loses because a deflating bubble.

Contributing factors as reported in the press:
Poorly designed program that triggered unanticipated consequences. Politicians reacting late to a problem with a knee-jerk response rather than considered & effectively planned policy.

Reference links:

  1. B.C. offers interest-free loans up to $37,500 to 1st-time homebuyers
  2. HOME wreckers: B.C. cancels loan program for first-time homebuyers