Canadians have accumulated billions of dollars in their First Home Savings Accounts (FHSAs), a savings stockpile that has grown as stock markets surged in recent years. However, first-time home buyers now face a critical decision: whether to use these funds for a home purchase or continue investing in equities.
The Housing Market Dilemma
The real estate industry is eager to see first-time buyers drain their FHSAs, but a major question for young Canadians is whether they should be tempted back into a sluggish housing market. The Canadian Real Estate Association (CREA) reported that its price index fell 0.4% in March from a year ago. The average home price is now about 20% below the peak of $816,720 recorded in March 2022, and it remains unclear whether prices have stopped declining, particularly in the struggling condo markets of Toronto and Vancouver.
New Incentives and Past Lessons
Temptations may grow with new rules that could make new condos in Ontario cheaper, thanks to an initiative that rebates the 13% Harmonized Sales Tax (HST) on new homes priced under $1 million. However, many first-time buyers have been burned before. Those who withdrew money from their Registered Retirement Savings Plans (RRSPs) through the Home Buyers' Plan—which allows up to $60,000 in withdrawals—have seen housing values fall while stocks gained.
Ron Butler, a principal at Butler Mortgage Inc., calls the FHSA the best tax-sheltered savings account and notes increasing use for home purchases. Contributions are deducted from taxable income and withdrawals are tax-free if used for a home, up to a $40,000 limit. Butler says, “When you see the appreciation, you think, ‘I can roll this into my RRSP and maybe not even buy a house.’” The FHSA has become especially popular among households earning over $100,000 annually.
Investment Performance and Options
The S&P/TSX composite index has climbed more than 35% in the past year. If you started contributing the annual $8,000 maximum since FHSAs were introduced in 2023, your account could have grown significantly. By the end of the first year, the Canada Revenue Agency reported 739,000 accounts with nearly $2.8 billion. By end of 2024, active FHSAs held $8.07 billion, with an average balance of $8,000 per account.
If you never buy a house, the FHSA must be closed after 15 years, but funds can be transferred to an RRSP without penalty, though they will be taxed upon withdrawal. This flexibility makes the FHSA attractive for those uncertain about homeownership.
Expert Advice
Butler advises that people should stop thinking of houses as pure investments, especially during a downturn where purchases are driven by life events. The choice between collapsing the FHSA for a home or keeping it invested depends on individual circumstances, market conditions, and long-term goals. Young savers must weigh the potential for stock market gains against the desire for homeownership in a tepid housing market.
