Homeownership | The PQ’s difficult plan for young people

The Parti Québécois proposal will undoubtedly appeal to a key electorate, young people. And it targets a real generational problem, namely home ownership.

Unfortunately, the main part of his plan could have the opposite effect of what he wanted, namely to help young people acquire their first property.

In his document Become an ownerthe PQ paints a lucid portrait of the situation and has the merit of putting forward solutions¹. Its leader, Paul St-Pierre Plamondon, clearly states that “the current housing problem stems primarily from unbridled demand and not from repressed supply.”

In short, properties have become unaffordable because there is too much demand, particularly from immigration.

However, the main solution of the PQ plan, that is, for the government to finance a major reduction in the mortgage rate for first-time buyers, will further stimulate the unbridled demand that its leader speaks of. And it will therefore have the effect of further increasing residential market prices and harming homeownership.

Under the PQ, the government would subsidize an interest rate rebate of 3.5 percentage points for three years, so first-time buyers would only pay a mortgage rate of 3.5% rather than 7%, according to its example.

For a home worth about $525,000 with a 10% down payment, the mortgage payment would drop by $950 per month, from $3,309 to $2,359, according to the plan.

The advantage is major. It amounts to $11,400 per year, the PQ calculates, and therefore possibly more than $34,000 over three years. There is no doubt that such a discount would have a significant incentive effect on young people.

To justify it, the PQ compares its solution to the Corvée-Habitation programs, in 1982, and My rate, my roof, in 1991, both launched during painful recessions.

The problem is that these two old programs also had the main objective of reviving the moribund economy through construction, while that of the PQ targets the new and the existing.

At the time, the favorite maxim of economists was “When the building goes, everything goes”, and the idea was to lower the unemployment rate (14% in 1982 and 12.1% in 1991) by activating construction sites. . The government reimbursed itself through tax revenues generated by economic activity.

However, today, the context is completely different. The unemployment rate is very low (4.5%) and there is a lack of labor to meet demand, particularly in construction. Yes, we need more housing, but we must increase the stock through measures to stimulate supply and not demand.

Like every program of the same type, that of the PQ would benefit new buyers, but also many buyers who would have acquired a house anyway.

In short, if the program benefits 50,000 buyers, for example, with a bill of $1.7 billion, it will in fact only have enabled home ownership for a small portion of these buyers.².

The PQ is inspired in particular by the American First-Time Home Buyer Mortgage Rate Discount (FHFA) program. Except that this program essentially targets low-income households, not the middle class, which the PQ includes.

In addition, with the FHFA program, the rate reduction is 1.75 points, or half as much as with that of the PQ³.

Examples in France and the United Kingdom

But more broadly, several economic studies have demonstrated that this type of aid often has the effect of ultimately benefiting not buyers, but sellers or even mortgage lenders, explains HEC Montréal professor Amine Ouazad, who specializes in real estate economy.

For example, the David Cameron government’s Help to Buy program in the United Kingdom caused prices to rise 4.5-6% more than would have been the case without the program between 2013. and 2018, according to a study⁴.

This program, which financed the equity of properties, did not, however, lead to the construction of a greater number of new housing units, according to the study. And in the end, the value of the advantage given to buyers was absorbed almost entirely by sellers in their price increases.

Another study, this time of a program in France between 1972 and 2003, found that government aid to poor tenants resulted in higher rents. Essentially, between 50% and 80% of the assistance was absorbed by the owners⁵.

According to Amine Ouazad, with mortgage loan guarantee programs, like the one offered by the PQ, it is often the financial institutions that benefit, among other things, thanks to an implicit increase in their rate.

In short, government aid is laudable, but results in unsuspected economic effects… and costly ones for public finances.

What to do then? Mr. Ouazad believes that we must continue to act on urban planning plans, by promoting construction. He believes that reducing the GST (and the equivalent of the QST in Ontario) would have better effects than reducing mortgage rates.

The PQ, it should be noted, also proposes this type of measure in its plan.

What do I think of it ? That real estate cycles are long and difficult to reverse, that interest rates will eventually fall significantly within two years – possibly by 1.75 percentage points –, which will promote access to property, and that Here, young people must force themselves to put a lot of money aside to take advantage of the opportunities that arise.

1. Consult the PQ document

2. Moreover, in 1991, experts noted that the My rate, my roof program had encouraged many buyers to bring forward their purchase, which reduced the pool in the following two years, after the end of the program.

3. Another element: the American tax system – with the deductibility of mortgage interest – ensures that the net cost of such a measure is lower. And during the financial crisis of 2008, let’s remember, it was these types of owners helped by the government who, caught by the throat, lost their homes.

4. Consult the study on the British Help to Buy program (in English)

5. Consult the study by the French Institute of Statistics (INSEE)