Canada Is Spending $73 Billion On Affordable Housing, and It Will Push Prices Higher

Canada’s massive multi-billion dollar program to create affordable housing will only have a “limited” impact. That’s the take from the non-partisan Parliamentary Budget Officer (PBO), tasked with explaining the numbers behind policies, to lawmakers. They found the federal program is billed as a “$70+ billion plan,” but failed to find a significant impact. In fact, in some cases they indicate it might be taking credit for existing supply in the pipeline. It’s actually generous to say it does nothing though. The plan creates an environment that actually attempts to drive home prices higher.

Canada’s $73.4 Billion Affordable Housing Plan

First, let’s start with the PBO’s breakdown of where the $73.4 billion in spending actually comes from: 

  • The CMHC is delivering $36.7 billion to execute the National Housing Strategy from 2018 to 2028;
  • An additional $24.4 billion will be delivered through the same plan; and
  • Existing spending represents $12.3 billion of funding. 

That’s not all. according to the PBO. On top of that, new and existing loan authorities get $31.2 billion. Non-incremental provincial-territorial cost matching, also adds up to another $7.4 billion. Though they explain these commitments aren’t a budget issue for the Federal government. They are commitments undertaken by other taxpayer entities.

The Plan Doesn’t Make Much More Supply, It Mostly Takes Credit For Existing Plans

Let’s forget the dollar amount and look at the “affordable” supply creation right now. The biggest factor pitched is they’ll facilitate the creation of new supply. It’s largely done by construction loans to developers, who can now build with cheap debt. “… loans have a much more limited ability to induce the creation of units that would not otherwise have been created,” said the PBO. 

Okay, so it doesn’t create homes. They must at least be subsidizing the units to make sure the rents are capped, right? “Some programs with less strict affordability criteria that allow market-rate housing to be funded, like the Rental Construction Financing Initiative, may also be supporting private market activity that would have occurred anyways, or may be crowding out private markets activity that would have otherwise occurred.”

More bluntly, the loans are given to developers that already have plans to finance a project. Existing projects likely planned to pay 5 to 10 percent interest on construction loans. Now the Fed comes along with a dump truck of money, and offers it a lower rate. They even forgive a part of the debt sometimes, because taxpayers are that generous. Sweet, right?

That existing project is now a part of the number of “homes created” by the program. This is similar to finding people that have enrolled in college, giving them money, and then saying you created more enrollment. It didn’t encourage anything, it just took credit for the existing progress being executed… and made it more profitable. 

Some argue this de-risks a project, thus making the process more secure. One would have to ignore the biggest reason projects fail — weak demand. Canadian real estate has everything but issues with demand levels. It’s a plan that might work if real estate wasn’t profitable to build, but it is. This just messes with the mechanics of the natural home development cycle.

More importantly, it doesn’t add any additional supply — so it has no impact on prices. It really only makes projects more profitable. Not that I’m against developers improving profits. The exact opposite, actually. I hope it leads to huge profits, with bigger ad campaigns since I’d like to buy one of those new Ferraris. It just doesn’t create more affordable housing, and it needs to be pointed out. The plan plays on desperate people for votes.

Borrowing Debt To Build Market Rate Housing Isn’t Very Effective

That’s just one large and expensive boondoggle of a program. The rest of the program doesn’t do much either though. In the words of the PBO, the whole strategy has a “limited” impact on achieving affordability.

The agency forecasts housing needs will greatly expand under the current delivery. By 2025, they estimate state-assisted housing will grow to 1.8 million people in Canada. We’re now talking about 1 in 7 households unable to be housed without help from the government. The agency hilariously suggests the government needs to spend more to handle this. The idea of fixing market inefficiencies in Canada never occurs to anyone, apparently. Here’s why that’s bad.

Fixing Housing With More Government Debt Creates Higher Home Prices

Analyzing affordable housing and government debt in a vacuum ignores secondary impacts. Typically debt is borrowed to create a stronger economy. We know debt has negatives, but we trade those off for an improved quality today. In this case, significant debt is borrowed to execute a program with limited benefits.

First, let’s clarify something — I’m not against government spending on social services. I’m not saying the Fed should never spend money, or become a penny pincher. I’m saying it needs to have a positive impact, large enough to offset the negative impact created. With a limited positive impact, you’re only left with the negative one created. Let’s talk about how that drives the cost of housing higher.

Cheap Debt Drives Home Prices Higher

You’re probably thinking, “what impact? Debt is cheap, so the government should borrow as much as possible,” right? That’s a common take from economists, that suggests governments should load up when it’s cheap. Except they neglect to discuss the mechanics of why it’s cheap, and its impact on the credit market. 

Stimulative policy is used to create cheap debt, often involving balance sheet expansion. The central bank bids competitively against other market credit bidders. It’s essentially executing a kamikaze mission, to drive yields lower. Generally, the more money the Fed needs, the more a central bank has to buy to keep yields low. The goal is to crowd out market credit buyers, or have them accept yields much lower than inflation. They’re nailing crowding out the market too, since the central bank owned 40% of Federal debt back in April. Yay, we all get cheap debt — right? This definitely isn’t a free lunch.

This creates two distinct issues for housing affordability — credit expansion and yield chasing. Low interest rates expand the amount of debt a household carries. This is meant to incentivize purchasing and cause inflation to rise. Since lockdowns artificially lower inflation by restricting velocity, low inflation readings are junk. They don’t mean what they would in an environment with unrestricted free-flowing activity. When activity returns to normal levels, we’ll see what the true rate of inflation is.

For now, households are given money so cheap, mortgages have negative real rates. They gave households cheap money in an environment with a limited ability to use it. Few households are going to use cheap debt to create a new business with financed machinery during a pandemic. The only thing they can really do is buy a house, a car, or refinance existing debt. The program created significant demand for the first two. Actually, so much demand it was like the market had just crashed… without it crashing.

More Credit Means Faster Home Price Growth

Giving home buyers access to cheap debt allows them to absorb higher home prices more easily. In hot markets, home prices adjusted to the most a marginal buyer can pay. This is why lower rates mean higher home prices —  you can now pay a higher rate if sellers ask for more.

The BoC has yet to publicly acknowledge this, but their new internal forecast model does. They call credit expansion increasing home prices a “recent” innovation. It’s been in real estate finance textbooks since dinosaurs roamed the earth, but whatever. The point is excess government debt > lower rates > higher home prices. But wait, there’s more!

Cheap Debt Breaks Fixed-Income Returns

Yield chasing is something we’ve talked about before, but we’ll go through it for new readers. If the government issues more debt than capital available, they drive up the cost of borrowing. That can drive the cost of borrowing credit higher for other users. To prevent that, the central bank begins to buy bonds to drive yields lower, as mentioned above. Economists think this is great, but never ponder what happens to the investors that were crowded out. They seek alternative assets, such as housing.

Investors like Blackrock and your local pension used to lend people money to buy homes. They would collect the interest paid to mortgages to satisfy fixed income yields. Everyone was happy until the Great Recession crushed yields, and they had to seek returns elsewhere. Luck would have it, the government will do anything to protect real estate. They’re also expanding the credit people can secure to provide liquidity later? Higher asset prices, rental yield, and a government protecting your asset value? It’s a layup as long as most people never understand the relationship.

Policymakers use narrow focused-benchmarks to measure their progress. This results in meaningless metrics, like the number of homes created by a program… without the need to assess how many would be created without it. They tend to ignore how financing with non-market debt impacts market borrowers. Either the government isn’t smart enough to understand the spillover effect they’re producing, or they know what they’re doing and hope you’re not smart enough to understand it. I have a hard time believing it’s the former, since most of these programs were launched by a guy from the pension industry. Feel free to believe it if it makes you feel better though. 

Intentional manipulation of markets tends to produce a misalignment of interests. Developers build housing to sell when it’s more profitable. They build housing to rent when it’s more profitable. When the government preserves home prices by driving rates lower, they slant an incentive to create homes to sell. They’ve been doing this since the 90s, which is why few people build market rentals these days.

By stimulating market-priced rental creation when it doesn’t financially make sense, they incentivize inefficient housing costs. When they use subsidies to stimulate both, they make housing that doesn’t fit any market need. If the government is going to borrow money for housing, stick to shelters and social housing. The rest is destroying the general market, and encouraging speculation with a necessity.

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  • Omar 3 years ago

    Higher in regions that aren’t approaching a level where even foreign money has to be insane to want in. Cities like Vancouver are going to have hard time even if you made down payments zero down.

    It works for a little to apply pressure to your youngest demographic, but eventually smart people don’t live in a crisis for a long time because it’s convenient.

    • BCInsanity 3 years ago

      0.25 percent interest rates
      1.35 Trillion in National Debt and rising(
      51 percent of residents pay cheque to pay cheque
      Unbearable Real Estate and rental market
      A Canadian Dream…

      • Mike Smith 3 years ago

        I really appreciated your bold perspective and insight. Just bought a rental condo for the reasons you lay out. Also, to add to this the money printing the government does forces you into these hard assets just to preserve wealth.

        • BCInsanity 3 years ago

          You bought a rental condo for the reasons I laid out? What happens when those reason’s lead to a massive economic collapse and millions are out of work and hundreds of thousands leave Canada? Who will rent your condo? And at what price?
          And what happens when 5 years from now you go to renew your mortgage but it has jumped from 5-10x what you pay now because the government has had to raise interest rates to stave off the insanely rampant stagflation?

  • Vincent Fornelli 3 years ago

    Imagine the government paying market prices for their debt though? Political suicide.

    • Van YIMBY 3 years ago

      Plenty of countries don’t have central banks or convertible currencies and pay market price for debt. It’s political suicide to let home prices drop more so.

  • Gerald Haw 3 years ago

    By the time the average person understands the polticitization of monetary policy means the credit system is now designed to extract wealth rather than produce it, they’ll be living in their $3 million homes wondering why it’s exactly the same as when they lived in $500,000, but they can’t afford to buy as many goods as before.

  • Kimberly 3 years ago

    Everyone talks about the money and how it flows. What about
    The families and single people who are desperately waiting for this to play out ?
    The answer is right in front of our faces for a long time now. The investors will buy up the lower middle class renters supposed new housing. Then they will turn their profits from our rent and most likely a subsidy from our tax dollars for renting to us “ lesser folk “. Believe me when I say the greed on all levels is disgusting.

  • Jupiter 3 years ago

    The neighborhood with affordable housing probably wont get higher. Hmmm, I bet someone will suggest building affordable housing all over Markham.

  • GM 3 years ago

    We DO NOT need more housing in this country!
    What we really need is LESS PEOPLE ! Think about that, Please.

  • Sid 3 years ago

    The liberal Traudeau government is playing fraud with taxpayers money on affordable housing like it was doing with summer intership programs for youth. This government is nothing but a scam.

  • BCinsanity 3 years ago

    As someone who is a non-drug user on with a legitimate employment-limiting-PHYSICAL- disability in BC I can safely say that my Provincial and Federal Governments have completely screwed over the bottom 25 percent of residents in this province. Your choices are to either:
    1)Pay almost all your disability to rent someone’s overpriced basement suite and then ask the Food Bank to deliver because you can’t access it yourself because of said disability
    2)Pay 3/4 of your disability to rent a single room in a house
    3)Get “lucky” and find a “low-income” rental that only takes 30 percent of your disability but which is in a building full of drug addicts smoking crack, meth, and fentanyl which also poison you and damage your health while increasing your own chances of getting addicted.
    4)Find a motorhome-van to live in and get lucky enough to find someone who will accept you long term and pay 50-70 percent of your “rent” to a pad fee to live at a campground or farm far away from civilization.

    Its madness and the stress is insane. I know of many people with jobs who are living in motorhomes against their wills. This includes full families.

    Its really too bad were such a financially poor and geographically small country and have no means of solving this overly complicated problem…

    Oh….thousands more international students entering the province this month to prepare for school in September. I’m sure that’ll have a positive impact on the rental market…..

  • Rand Passmore 3 years ago

    Better Dwelling is a must read. Keep up the good work. Keep kicking bad buts!

  • Martha 3 years ago

    It’s a really common misunderstanding that high housing prices in Canada are due to ONLY cheap credit. This viewpoint completely ignores the fact that an excess of demand over supply in many urban markets. We don’t want to reduce demand- high levels of immigration and new household formation are generally good for a growing economy. Why is supply to low? In my opinion it has a lot to do with restrictive zoning, nimby-ism and a general disconnect between the kind of housing many new households want and the kind that can actually be built profitably and can accomodate our growing population. Either way, the government is not going to change their monetary policy to solely accomodate an overheated housing market, especially coming out of a global pandemic. Therefore, one way to increase supply is making rental units more profitable to build and financing costs is probably the easiest incentive for the government to supply. It should also be noted that the RCFi program requires that the gross rental income of a building be 10% less than it’s market rents for 10 years after the building is complete and also requires the inclusion of accessible units and emissions reductions from the 2015 standards for apartment buildings. Therefore developers are paying a very real cost for the incentive of lower financing costs and CMHC is insuring that buildings allocate some units as affordable. It’s misleading to present the program as focused on market rentals. The author clearly has done very little research and doesn’t seem to have a good handle on the issues facing the Canadian housing market.

  • Eric 3 years ago

    More tax payers waisted money to make the rich richer, we need to get rid of TURDO he is an embarrassment to Canada vote this simp out.

  • Mahdi Benmoussa 3 years ago

    I agree with most of the analysis but not the conclusions. You forgot the issue of borrowing costs. You see there’s a trick that explains the choice of the government regarding the use of the CMHC to implement this policy. The credit rating of the CMHC is not the same as the Canadian Government. Moody’s gives the Canadian Government a AA while the CMHC is granted a AAA. This means the use of the CMHC is actually a cost effective policy based on real borrowing costs. It is not as progressive as people may think but it is effective by lowering capital costs for the entire housing sector. The other thing is the effect is having on the type of housing offered to Canadians. In big cities like Montreal a huge share of available housing is disconnected from fundamentals like this website’s publications demonstrated time and time again. By focusing on low income households demand an entire segment of the market is left to the people who will not qualify for government programs. I agree that it will mean less “offer” but I argue that this “offer” is not the one we need. Less offer but more of the one we need will probably give better results for Canadians.

    • Ian 3 years ago

      This is the dumbest take that could possibly written.

      The CMCH is a Crown-corp that pays its profits as dividends to reduce tax liabilities. By giving out lower than inflation loans to companies that can already afford their development, they’re executing on a redistributive agenda. That is, they’re assuming the inflation liabilities to improve housing margins for the developer.

      You’re disagreeing with the premise because you don’t understand how, regardless of the credit rating, transferring the liabilities results in an inflation adjusted loss to taxpayers.

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