Canada Begins Real Estate Developer Bail Out With 55 Year Loans
Canada’s record population growth combined with slowing new home construction might seem paradoxical at first. The Government of Canada (GoC) claims it’s because housing is “illegal” but a confidential memo sent to lenders indicates it’s an issue of leverage. The CMHC quietly notified lenders they’ll be extending the maximum amortization, or length of repayment. The developer bailout will help borrowers repay their loan over two generations, with projects at risk of default now able to extend their repayment term up to 55 years.
Canadian Multi-Unit Mortgage Loan Insurance Program
In a “protected” class document sent to lenders, the CMHC presented changes and timelines for its Multi-Unit Mortgage Loan Insurance (MU MLI) program. The MU MLI is the only mortgage insurance program for multi-unit residential housing, de-risking lenders with the state assuming the default risk. The capital for this program is typically raised via investors, but earlier this year the GoC began borrowing money to buy these bonds, setting a cap of $40 billion for 2024. The latest Budget proposes raising that cap to $60 billion, since investors have been pulling back from Canadian exposure at a record rate.
Despite the housing minister’s claim that Canada needs to “legalize” housing, the insurance changes indicate that’s not why new housing has slowed dramatically. It’s due to excessive leverage, which the agency is seeking to address with… drumrolls… more leverage!
Canadian Taxpayers To Back Mortgages Up To 55 Years Long
These changes are rolling out in two specific segments, with the first being new market projects. “CMHC is extending the maximum amortization period at initiation for new construction market projects from 40 years to 50 years,” reads the update, which goes into effect June 24, 2024.
Canada isn’t just using new leverage to help newer projects continue with inefficient costs. The credit injection is a part of a bigger shift, trying to mitigate delinquencies from occurring.
The agency changes continue, “In addition, for the purposes of re-amortization as a default management tool, the maximum amortization period will be extended from 40 years to 50 years for loans approved under Market MLI and up to 55 years for loans approved under MLI Select.”
Yes, up to 55 years. There’s a whole host of issues here, but let’s stick to some of the more obvious ones.
A Short-Term Solution That Creates Much Bigger, Long-Term Problems
Introducing more leverage doesn’t help with inefficient project fundamentals, it makes them more inefficient. Virtually every central bank has produced research showing that more credit only lowers costs temporarily, but those costs now have less friction to grow. This makes it even more expensive in the long run, and since the same labor and materials compete for housing, it will drive the cost of housing higher.
That may or may not occur before a correction, but ultimately this isn’t an affordability measure so much as a bail out, without regard to the secondary and tertiary impacts.
An amortization that runs for a half-century is also problematic as a risk down the road. While there are well built brick homes that last 100 years, the reality is that buildings become functionally obsolete much more quickly without significant renovation. The most efficient use of land changes, characteristics of neighborhoods shift, and/or the building becomes so cost ineffective to renovate. A lot can happen during 50 years, the span of two generations.
Researchers found the service life of most buildings to be shorter than the actual theoretical value. Residential housing has an average lifespan of 50-60 years, meaning many buildings will have an average lifespan shorter than the actual mortgage.
The government itself estimates a useful life for social and affordable buildings five-stories or less to be just 42 years on average. You thought people who buy a fleet car with a service life of 6 years and a payment plan for 8 years were dumb? In Canada, taxpayers are backing mortgages for multi-million dollar residential buildings with an expected life shorter than the useful life.
All of this highlights the poor & opaque planning conducted by policymakers when it comes to housing. Short-term solutions are adopted at the expense of real solutions, while they’re sold as the exact opposite of what the public needs, and are being told.
Rather than improve affordability, this is largely a developer bailout to reinforce land values. Which makes sense when the same policymakers state they were never trying to improve affordability, they were trying to maintain home values to fund investments.