What Trudeau's new RRSP policy means for the real estate market.
Thursday Oct 22nd, 2015
In the aftermath of one of the most controversial elections in Canadian history, it's no surprise that we've all been inundated with biased critiques of the policy and individuals involved. I'll be the first to admit that I don't understand every aspect of policy that's been changed, but I do understand a part of it. What I'd like to do is take a step back and look at the economic implications of the aspects of policy that I do understand.
There are two parts of the policy that I have a pretty strong understanding of:
- The federal Liberals will provide tax breaks to rental housing developers, and provide funding to landlords. (I will get to this in a follow up post)
- The party will allow Canadians to use more of their RRSP towards the purchase of a home.
Trudeau's RRSP Program:
Some may argue this was taking a page out of Stephen Harper's book. I'm not here to argue semantics. Although, I'm glad I can capitalize on their parallel vision here, it allows me to look at the situation objectively without picking sides or offending anyone.
Trudeau's Liberal Party will relax standards for the use of the RRSP, allowing Canadians to access their RRSP more often, and more substantially, when using withdrawals towards the purchase of a home. Our previous government aggressively encouraged and incentivized first time homebuyers to get into the real estate market, when they represented one of the largest buyer groups within that market. Now, with the aging baby boomers downsizing and changing their living arrangements, we're looking at a dramatic shift in the way the market functions, and the liberals have decided to leverage that. Let's look at the positives and negatives of this change:
The good: By relaxing the withdrawal standards and frequency for those using an RRSP, the government is allowing these buyers to play a larger role in the market. This allows these homebuyers a more competitive position in a market that will not stop growing. Real estate transactions have a large ripple effect back into the economy, so encouraging the trade of real estate is always considered a great way to stimulate and sustain economic growth. Finally, we are in a strong sellers' market that many people are calling a 'bubble'. Introducing more buyers to the market, and increasing the competitiveness of those buyers, is a step in the right direction towards the long-term sustainability in the value growth we've seen since 2008. It seems that with this parallel policy, both Harper & Trudeau agree that retirees are going to have a hard time purchasing homes and saving for retirement, especially if values continue to increase. It seems to me that both parties are hedging against the eventual and inevitable market shift that will end this constant growth in real estate values, and trying to turn the 'bubble's' 'burst' into a gradual, sustainable simmering.
The bad: This move perpetuates the notion that home ownership is a savings plan. By no means am I claiming that home ownership is a poor investment. But it is worth noting that one of my favourite investors and personal finance educators has made several very strong arguments that your primary residence is a liability, and not an asset. I think that this is an important thing that we need to consider in a generation where consumer responsibility is going to play a major role in our economy.