Updated policy aims to prevent defaults in multi-unit housing projects
The Canada Mortgage and Housing Corporation (CMHC) is looking to help borrowers repay their loans over extended periods - at-risk projects may be able to stretch repayment terms up to 55 years.
In a confidential memo sent to lenders, the CMHC announced changes to its Multi-Unit Mortgage Loan Insurance (MU MLI) program, Better Dwelling reported.
This program insures multi-unit residential housing loans, reducing lenders’ risk by having the state assume the default risk.
Traditionally, capital for this program was raised through investors, but, earlier this year, the Government of Canada began borrowing money to buy these bonds, setting a cap of $40 billion for 2024. The latest budget proposed increasing that cap to $60 billion due to a significant pullback from Canadian exposure by investors.
Despite claims by the housing minister that Canada needs to “legalize” housing, the CMHC’s insurance changes suggested that excessive leverage, rather than regulation, is the primary reason for the slowdown in new housing.
To address this, the CMHC is introducing more leverage.
The changes will be implemented in two specific segments, starting with new market projects. “CMHC is extending the maximum amortization period at initiation for new construction market projects from 40 years to 50 years,” stated the update, which takes effect on June 24, 2024.
Additionally, for managing defaults, the maximum amortization period will be extended from 40 to 50 years for loans approved under MU MLI, and up to 55 years for loans under MLI Select.
The implications of these changes are significant. While introducing more leverage might provide a short-term fix, it creates long-term problems. Research by central banks showed that more credit only temporarily lowers costs but eventually makes projects more expensive due to less friction in cost growth. Consequently, housing costs are likely to rise in the long run, potentially driving up the overall cost of housing.
Read next: BMO reduces exposure to ultra-long mortgages
An amortization period extending up to 55 years also presents risks. Buildings often become functionally obsolete within a few decades, and significant renovations are required to keep them up to date. The average lifespan of residential housing is 50-60 years, meaning many buildings could outlive their mortgages.
The government’s estimate for the useful life of social and affordable buildings under five stories was just 42 years, highlighting the potential misalignment between the lifespan of the buildings and the length of the mortgages.
Critics argued that these measures represent poor policymaking, adopting short-term solutions at the expense of long-term sustainability. Rather than improving affordability, this move was seen as a developer bailout intended to maintain home values and fund investments.
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