Last week, I wrote about the looming Condo Crisis and the increased risks the Big 5 banks have taken on. Today, Canada is rolling out 30-year mortgages to “help” first-time buyers get into the market. But what's the real story here?
Hint: It’s not about making homes affordable.
But why offer this only to first-time home buyers and why only for new construction? Let's take a closer look:
Investor Dynamics
Over 70% of pre-construction condos in the GTA are purchased by investors, not first-time buyers. Many of these investors bought with the intention to flip, but with sales slowing down, they are now stuck holding these properties with big mortgages.
Financial Strain
Over 80% of leveraged investors (investors with mortgages) are experiencing negative cash flow, with 72% facing the same issue in 2023. This puts additional pressure on the market, and many of these investors will be forced to sell, putting more downward pressure on condo prices.
Banking Strategy
The Big 5 banks are heavily involved, having financed 75% of all GTA condo investor mortgages in 2023. By extending mortgage amortizations, they aim to transfer properties from struggling investors to first-time buyers without causing a significant drop in condo prices.
Housing Affordability Myth
Instead of letting condo prices drop (which would hurt investors, potentially the builders, and of course the Big 5 banks), the government is allowing first-time home buyers to purchase these overpriced condos. The idea is that young buyers have time to ride out any potential drop in price.
So, what's the bottom line? The new 30-year mortgage isn't so much about helping first-time buyers as it is a strategic move to stabilize the market, support investors, and protect the banks.
Conclusion
The introduction of 30-year mortgages for first-time buyers may appear to be a move to make home ownership more accessible. However, a deeper look reveals that it's a calculated strategy to safeguard financial institutions and investors. Understanding these underlying motives can help prospective buyers make more informed decisions about entering the housing market under these new terms.