Canadians have billions of dollars tucked away in their First Home Savings Accounts , a savings stockpile that has only been growing as stock markets have powered higher in recent years.
The real estate industry would love to see first-time home buyers drain those accounts, but a major question for young Canadians today is whether they want to be tempted back into a tepid housing market. The Canadian Real Estate Association (CREA) said its price index fell 0.4 per cent in March from a year ago.
Temptations will probably grow with new rules making shiny new condos in Ontario potentially cheaper, thanks to an initiative that will rebate the 13 per cent Harmonized Sales Tax (HST) from new homes in the province priced at under $1 million.
They have been burned before. Would-be first time buyers who took money out of their registered retirement savings plans (RRSPs) through the Home Buyers’ Plan, which allows them to withdraw up to $60,000 from their RRSPs, have seen housing values fall as stocks gained in recent years.
The average home price is now down about 20 per cent from the peak of $816,720 reported by CREA in March 2022, and it’s not clear whether prices have stopped falling, especially in the beleaguered condo markets of Toronto and Vancouver.
If you have opened a First Home Savings Account (FHSA) — and there is no reason you shouldn’t have — the question today is whether it is the right time to collapse that tax shelter, given the performance in it you are likely to get investing in the stock market compared with what you might see in the housing market.
The S&P/TSX composite index has climbed more than 35 per cent in the past year, and if you started contributing to an FHSA right away, you could have made an annual contribution of $8,000 starting when the accounts were introduced in 2023.
Ron Butler, a principal at Butler Mortgage Inc., calls the FHSA the best tax-sheltered savings account and said he sees more and more of them used to buy homes. What makes the account so great is that contributions are deducted from taxable income on the way in and not taxed when taken out, as long as they are used to buy a home and up to a $40,000 contribution limit.
“When you see the appreciation, you just think, ‘I can roll this into my RRSP and maybe I won’t even buy a house,’” said Butler, adding the FSHA has become increasingly popular with Canadians with a household income of more than $100,000.
To Butler’s point, if you never buy a house, the FHSA must be closed in 15 years but the funds can be transferred to your RRSP with no penalty and no impact on your contribution room. Like any RRSP withdrawal, that money will ultimately be taxed.
By the end of the first year, the Canada Revenue Agency said there were already 739,000 accounts with close to $2.8 billion in them. By the end of 2024, the total value of active FHSAs was $8.07 billion, with an average balance of $8,000 per active account holder.
Buy that home, and you will be able to take all your accumulated money out and pay no tax on it. That’s a strong incentive to, at some point, buy that home.
Phil Soper, president of Royal LePage Real Estate Services, one of the largest brokerages in the country, said there is more chatter than ever about the accounts and they are making their way into most first-time buyer deals.
“It has hit its stride,” said Soper, adding that even with housing markets off 20 per cent from the peak, it is hard trying to get together enough of a down payment to avoid mortgage default insurance, which can cost from 2.8 per cent to four per cent of the value of your mortgage. The insurance, which protects financial institutions in the event of default, is required if you have a down payment of less than 20 per cent.
Soper can sympathize with the argument that the stock market is performing better than the housing market, but he said some real estate markets are rising, and some equities are seen as overvalued today, and for some people buying a house makes sense. In that case, it is reasonable to use the FHSA, he said.
“It’s there and a new tool, but if the time is right for you and your family to get into homeownership, it’s probably the right time to pull the trigger,” he said .
Peter Wouters, a principal of financial advisory PlainTalk Consulting Inc., said buying a home is different from any other investment and added that timing the purchase is not always aligned with life stage. But he said that doesn’t mean you can’t maximize what is available under the FHSA today.
His son just bought his first home recently and made FHSA contributions a few weeks beforehand, even though he is pulling the money right back out to pay for the home. “They (homebuyers) still get the deduction for it, then they put the money (toward) their down payment,” said Wouters. “Even if you are just putting $100 in the account, open one.”
Wouters said delaying that home purchase, hoping for a larger FHSA, probably doesn’t make sense given it’s still tough for first-time buyers to find affordable homes. “You still want to get your payments down to a decent level and not have a 35-year (amortized) mortgage,” he said. “You are just paying the bank. Where else are you going to get the money?”
Other factors, such as rising mortgage rates , could also drive up housing costs even if prices are relatively stable, making the returns on your FHSA less meaningful, said Wouters.
Ted Rechtshaffen, president and chief executive of TriDelta Private Wealth, said at the end of the day, a home has to fit your personal needs and goals more than financial targets.
“This is your home, so the more important thing is, are you ready financially or emotionally? If you are, I wouldn’t let the markets decide timing,” said Rechtshaffen.
Mortgage broker Butler is adamant that people should stop thinking of their houses as investments, and said the market downturn is driving people to make purchases based on life events such as having children.
Butler sees a growing cohort that isn’t as concerned about temporary price drops because they are buying for the long term, but recognizes that today, you may be grabbing a falling knife in the housing market.
Even if your FHSA is rising rapidly due to appreciating investments within it, but you have decided to buy that first home, go ahead and cash in your tax-sheltered FHSA to buy it. But don’t feel any pressure to get into home ownership now, because those balances are going up, and housing can’t compete today as an investment.
• Email: gmarr@postmedia.com
