My door swung open About a dozen of them entered.
Twenty-two years ago the realtors were in a funk. A boom housing market had turned to bust. The economy was slumped toward recession. Many people who’d bought in a frenzy three or four years earlier, when everyone thought houses were going up forever, now owed more than the properties were worth. Toronto and Vancouver values were down by 30%. Nobody had seen it coming.
Walking into my Parliament Hill office were the presidents of the national real estate association and the homebuilders organization, plus their in-house economists and hangers-on. The lobbying effort was intense for a shiny new idea to rescue the plunging market. ‘We want first-time buyers to be able to use RRSP money for a down payment,” they told me. “This is an emergency situation and we must stabilize things before millions of families lose everything.”
But, I said, retirement savings are for retirement. Why would we corrupt the system by letting people divert this money into a house? If they don’t have enough for a down payment, why should they be able to buy real estate? Won’t we regret this later?
Because, they said, plunging equity could make a recession worse – combined with the negative numbers of the day. We need to encourage new buyers. (At the time both inflation and mortgage rates were in double digits.)
So, I bought it. The rest of the government did, too. We brought in the Home Buyers Plan, but only on a temporary and urgent basis. Once middle class equity was stabilized, the program would end.
The deal: virgins could withdraw money from RRSPs for a down payment and pay no tax, on the condition they repaid it starting in two years and finishing 15 years later. Any missed payments would be added to their income in that year, and taxed at their marginal rate. The immediate goal was to rescue a free-falling housing market. The ultimate goal was to encourage people to save and invest for retirement.
In a few years it all changed. Housing prices plateaued and started to climb. Rates came down. But politicians who came after me made the HBP permanent, then dramatically increased the amount a couple could withdraw – to $50,000.
Well, now the Home Buyers Plan has been used about 2,500,000 times and roughly $30 billion has been removed from financial assets inside RRSPs and dumped into the real estate market. Combined with cheap mortgage rates and lenient bankers, this helped push average detached home prices over $1 million in two major markets and made houses so expensive it takes over 70% of gross income to own one in Vancouver.
While real estate values have moderated, declined or tanked in most western countries since the financial crisis, here they’ve bloated into gasbag territory, while home ownership has become a cult. The HBP has done its bit in swelling house lust and persuading an entire nation you won’t need to save money when you can sink it all into a house instead.
But, now we have troubles, as the raid-your-RRSP scheme is telling us.
A University of Guelph thesis points out at least a third of all the first-timers who snatched down payment money this way between 1995 and 2007 didn’t actually pay it back, even when the annual repayment was less than 7% of the amount taken. Since then, things appear to be getting worse.
By 2011, says the Canada Revenue Agency, almost half (47%) of all the people who sucked their RRSPs dry to buy a home had not started returning the money. As a result, all of those missed payments were added to taxable incomes, and borrowers were forced to pay more as a result. Why would they let this happen, increasing their income tax burden rather than putting the small annual sum back inside their RRSPs?
Probably because they didn’t have the money. The HBP plan plus historically low rates, in addition to society’s overwhelming house horniness, just encouraged the virgins to buy as much real estate as possible with maximum debt. After all, who wants a starter home anymore? Everybody thinks their first house has to be better than their parent’s final one.
And last week, as I reported, Morningstar equity analyst Dan Werner has this stunning news for us: while all these new homeowners have been unable to repay their RRSP withdrawals, our mortgage debt profile has come to mirror that of the US just before its devastating real estate plop. Today 23% of Canadians have financing of 80% or more on their houses. At the height of the American housing bubble, it was only 22%.
Now that we have low inflation, low mortgage rates and free RRSP money for houses, what will the realtors propose next when real estate topples under its own excess? And how long will it take to recover? A generation?
A lot of folks may wish they’d never touched those savings.
In case I depressed you, watch this: