By Kim Mackrael
OTTAWA -- Faced with high housing prices that some residents have blamed on an influx of foreign investors, the Canadian province of British Columbia is offering new loans to first-time home buyers who have lived in the province for at least a year.
The 25-year loans are worth up to 37,500 Canadian dollars (about $28,100) or a maximum of 5% of the home's purchase price, the regional government said on Thursday. They will be interest-free during the first five years and do not require payments during that time.
To qualify, home buyers must have been Canadian citizens or permanent residents for at least five years, the government said. Borrowers must also have lived in the province of British Columbia for the past 12 months.
The move comes at a time of heightened concern over frothy market conditions in Vancouver, British Columbia's largest city. The Pacific coast city has become particularly popular among home buyers from mainland China in recent years, prompting some residents to complain that they have been priced out of the real-estate market by buyers who may not live in the city full-time.
Earlier this year, British Columbia introduced a 15% tax on foreign home buyers in metro Vancouver in an effort to curb rapid price increases. There are signs that sales activity in the city was cooling before the tax came into effect, but most economists believe the new tax contributed to a further slowdown.
While the price for a typical Vancouver home is up more than 20% in the past year to C$908,300, earlier year-over-year gains topped 30%. At the same time, Vancouver sales weakened sharply in recent months and have now fallen more than 37% from the previous year.
The regional government said Thursday that the new loan program is aimed at helping first-time buyers gain a foothold in the housing market. The loans should help lower buyers' monthly costs during the first five years and help make home ownership more affordable, it said.
But there is also a risk that it could add more fuel to the Vancouver housing market by increasing demand.
"I'm not sure this is the way to go," said BMO Capital Markets economist Doug Porter. "Obviously they have a huge affordability issue in [British Columbia.] But all this does is, arguably, get more people into a market that maybe is unaffordable to begin with."
Home prices in Canada were driven higher in recent years by rock-bottom interest rates, which encouraged many borrowers to consider more expensive homes than they might otherwise have purchased. Policy makers have expressed concern in recent months over rising household debt, prompting the federal government to introduce new rules aimed at curbing risky borrowing.
For example, the federal government now requires an expanded "stress test" to ensure new homeowners with mortgage insurance can afford higher interest rates.
The Bank of Canada praised the federal government's changes during the release of its semiannual Financial System Review on Thursday, saying tighter mortgage rules should help keep elevated debt levels and housing market imbalances in check.
"New borrowing that creates highly indebted households will not disappear, but it will be constrained significantly" as a result of the recent policy moves, the central bank report said. "Nevertheless, it will take some time for the existing stock of highly indebted households to diminish substantially."
Additional rules to qualify for the British Columbia loans include a requirement that buyers not have a combined household income greater than C$150,000. Borrowers must also be able to make a down payment that is at least equal to the loan amount, and the home must not cost more than C$750,000.
Write to Kim Mackrael at email@example.com
(END) Dow Jones Newswires
December 15, 2016 19:35 ET (00:35 GMT)
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