The steady rise in house prices in recent years has had a severe impact on the percentage of down payment that can be covered by an RRSP withdrawal.
Perhaps five years ago, the allowable limit of $20,000 may have been enough, but the Canadian Real Estate Association now says this figure wouldn’t match a 10-per-cent down payment in many Canadian markets.
So, CREA is proposing that Ottawa boost the allowable withdrawal maximum to $25,000.
The average MLS® home price in Canada is now $275,061, and 10 per cent of that amount is slightly above $27,500.
Winnipeg is significantly better off with an average price of just over $130,000, but the number of sales through MLS® in the over $200,000 range has been steadily climbing. In October, 17 per cent of all MLS® sales were above $200,000.
While Canada Mortgage and Housing Corporation is projecting a moderation in Winnipeg housing prices in 2006 as more MLS® listings come online, the Crown agency still foresees the average selling price rising by eight per cent. And, CMHC is predicting that new home prices in Winnipeg will rise by 10 per cent in 2006. Locally, the average selling price of a new home is $259,000, according to CMHC.
The Home Buyers’ Plan, introduced in 1992 by the federal government, now allows individuals to borrow up to $20,000 from their RRSP to purchase a first home. The withdrawn RRSP funds must be repaid over 15 years.
More than 1.4-million Canadians have borrowed over $15 billion from their RRSPs to purchase a home since the plan’s inception.
The plan is estimated to have helped bring about more than 746,000 home purchases, including 63,000 homes bought in 2003.
In addition, economic spin-offs resulting from the HBP total $14.1 billion.
CREA said the maximum HBP loan has not been adjusted to take inflation into account.
“As a result, down payments via the HBP are covering an increasingly smaller portion of the purchase price,” said CREA in a political action committee statement. “Those using the plan are forced to finance bigger mortgages, causing their debt burden to rise, despite record low interest rates.”
CREA said the maximum loan available has been losing ground as a percentage of resale home prices for over a decade.
“The MLS® residential average price rose 51 per cent between 1992 and 2004. During that same period, the Consumer Price Index climbed by 25 per cent. If the maximum loan available under the HBP were adjusted to account for inflation, it would now stand at $25,000.”
Besides raising the allowable RRSP maximum to $25,000, CREA is also proposing that Ottawa readjust the amount allowed every five years to reflect consumer price inflation.
“The lack of inflation adjustment is an oversight design of the HBP,” said CREA.
The latest statistics show that home buyers are repaying their RRSP loans. Repayments as a percentage of withdrawals under the HBP amounted to 35.8 per cent in 2002, 37.4 per cent in 2003 and 41.6 per cent in 2004, the year of the latest available statistics.