Wednesday, 20 October 2021

Langford's new program to help first time buyers, nothing but an empty box.



    Earlier this week it was announced that the City of Langford will be launching a new program to assist first-time homebuyers to enter the market. I first came across the article from Chek news here and full information about the program can be found on the city's website here.

    At a first glance, this appears to be a very progressive program. While still in its early stages, with all the details not 100% clear, it seems that the city will allow a Langford resident who currently does not own to purchase a 2 bedroom condo for a guaranteed price of $450,000. 

    A quick look at Langford MLS listings shows only 4 properties at this price point or less. So this leads me to assume that Langford will build these condos and then provide them for sale for $450,000. If so, great this program helps buyers get in, while also manufacturing the extra supply to meet this extra demand. Although, somehow, I am hesitant to believe this is the case, and rather just another government policy aimed to spur demand which will only put further pressures on the market, pushing prices higher. 

    The interesting part of this proposal is seen once you get into the details (those provided at least). 

  • The city of Langford will 'top-up' your downpayment (assuming to minimum 5%) to assist with entering the market, this will be based on income.
    • Households with incomes up to $100,000, will be granted 75% of their downpayment
    • Households with incomes from $100,000 up to $115,000 will be granted 50% of their downpayment
    • Households with incomes from $115,000 up to $125,000 will be granted 25% of their downpayment 
    Seems fair and progressive - but all this is based on the households being able to obtain financing. so let's look at what minimum level of income a household would need to just qualify to buy one of these condos. 

Note: it has been a while since I was in the mortgage world, so some policies may have changed from how I recall - any feedback appreciated

    let's begin by assuming a purchase price of $450,000 as stated, for simplicity we will assume that GST is included in this price. Assuming a minimum 5% downpayment ($22,500), leaving the requirement of CMHC insurance at 4% or $17,100. This leaves a final amount to finance of $444,600

    Further, let's assume that the purchaser goes for a max (25 year) amortization, and needs to qualify due to the stress test at the 5-year rate of 5.25%. That is, the purchaser would need to be able to service a mortgage payment of $2664.26 a month. but that's not all. With CMHC to ensure that the borrower can afford their costs, we will also need to include property taxes, heat, and strata costs, let's assume that property taxes average to $180 a month, heat at $150 a month and strata at $200 a month. This puts the shelter cost at $3194.26 a month

    Now, what minimum household income would be needed to be able to qualify for this monthly payment? 

    Assuming that lenders still use a 35% Gross Debt Service Ratio (GDS), which allows shelter costs to run up to a maximum of 35% of their gross (before tax) income, we can work backwards to determine the income such that the borrower would be exactly at a 35% GDS ratio. 

    Doing the math, we work out that the borrower would need to have a gross monthly income of at least $9126.44 a month or $109,517.33 a year in order to qualify for financing. 

    Looking back at the grant payout table - 75% to households with income up to $100,000. Great, but these households will never qualify for financing! 

    In fact, as the program caps out at an income of $125,000, that is, there is only about a $15,000 window of annual income in which participants will qualify. 

    As this is a trial "pilot" program, it may be purposely set up this way to provide lip service to the problem, while at the end being able to say "No one utilized the program, so clearly, there is no problem" 

    To me, it seems the program has been specifically set up in such a way so that very few if any, applicants will be able to be approved.

UPDATE (21 Oct 2021)
     Since so many of the details of this program are not yet disclosed, much of the above analysis is based on assumptions. So, I have been asked, what if these assumptions change? Primarily, what if Langford is not granting up to a 5% downpayment, but rather up to a 20% downpayment. How do things change?

    First, a 20% downpayment on a $450,000 property would be $90,000. There is also another known limiting criteria for applicants, being that they cannot have more than $50,000 in assets. 

    In this case, if applicants are able to obtain the full 20% downpayment, then all income brackets now qualify for financing, as you would need a household income greater than $92,135.72 to qualify. 

    This looks positive! Maybe I was wrong, maybe this is actually a well-thought-out program that will be far more generous than I initially imagined. Let's take a look at the grant payments:

    The above table shows the grant amount as a % of the downpayment based on the income bracket of the applicant. This information is then translated to show the dollar amount which will be granted versus the money which the applicant will need to bring to the table. 

    What we see in this case is a reversal of the first analysis. In this case, the lowest income bracket does qualify for financing (because of the larger downpayment) but still needs to front at least $22,500 (plus other closing costs!). 
    The middle-income bracket also qualifies but will need to front $45,000 (plus other closing costs).

    Finally, the highest income bracket, comically, no longer qualifies for support. This is because the amount they need to front for the downpayment ($67,500 + other closing costs) is greater than the cap on assets placed on the program. 

    So if the program does turn out to be extremely more generous than initially assumed, it still runs into problems and still sets the bar quite high in terms of the level of personal savings needed in order to enter. 

    What are your thoughts? feel free to comment below. 

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