Canada’s Housing Paradox: Growth Amid Stagnation

Canada is experiencing a unique and complex scenario where record population growth is joined by a slowdown in new home construction. At first glance, this might seem contradictory, but a deeper analysis reveals underlying issues related to government policies and financial leverage.

The measures introduced by the CMHC and the GoC are more about providing bailouts to developers and maintaining land values than addressing housing affordability. Extending amortization periods might offer a short-term solution, but it fails to tackle the fundamental inefficiencies in the housing market.

This approach underscores the need for transparent and long-term planning in housing policy. Real solutions should focus on sustainable development and affordability, rather than temporary financial fixes that could lead to greater problems down the line.

Government Claims and Confidential Revelations

The Government of Canada (GoC) publicly attributes the housing slowdown to regulatory constraints, implying that housing is "illegal." However, a confidential memo to lenders reveals a different story: the issue is rooted in leverage. The Canada Mortgage and Housing Corporation (CMHC) has discreetly informed lenders of plans to extend the maximum amortization periods, allowing loans to be repaid over an extended period of up to 55 years for certain projects. This move aims to prevent defaults on projects by enabling borrowers to spread their repayment over a much longer timeframe.

CMHC’s Multi-Unit Mortgage Loan Insurance (MU MLI) Program

The CMHC’s MU MLI program plays a critical role in this dynamic. It provides mortgage insurance for multi-unit residential housing, transferring the default risk from lenders to the state. Traditionally, the capital for this program was raised through investors. However, due to a significant pullback from Canadian investments, the GoC has started borrowing money to purchase these bonds, initially setting a cap of $40 billion for 2024 and proposing to increase it to $60 billion.

Leverage and Its Consequences

Despite the housing minister’s assertion that the solution lies in "legalizing" housing, the changes to the insurance program suggest otherwise. The root cause of the slowdown is excessive leverage, which the CMHC is paradoxically attempting to address by introducing even more leverage.

Starting June 24, 2024, the CMHC will extend the maximum amortization period for new construction market projects from 40 to 50 years. Additionally, for re-amortization as a default management tool, the period will extend from 40 to 50 years for loans under Market MLI, and up to 55 years for loans under MLI Select.

Implications of Extended Amortization

Introducing longer amortization periods may seem like a temporary relief for borrowers, but it leads to several significant issues:

1. Increased Inefficiency: More leverage exacerbates inefficient project fundamentals. Research from central banks indicates that while more credit might lower costs temporarily, it ultimately leads to higher long-term costs.
2. Housing Costs: Increased leverage can drive up the cost of housing, as the same pool of labour and materials competes for construction projects.
3. Building Lifespan: The average lifespan of residential housing is typically shorter than the mortgage period being offered. With an average service life of 50-60 years, many buildings will become functionally obsolete before the mortgage is fully repaid.
4. Policy Implications: The government’s focus appears to be on maintaining home values to support investments, rather than genuinely improving housing affordability.