Canada Tries To Bail Out Real Estate Developers With 30-Year Mortgages

Canada is rolling out new policies to help its highly indebted households support soft demand for new housing. Earlier today, the Government of Canada (GoC) announced new measures to increase the amount of capital used to buy new homes. New home sales have been weak at these prices, and rather than letting prices fall, it appears policymakers have concocted a scheme to make the higher prices more “affordable.” Not just by increasing the amount of debt households can carry, but they’re also encouraging first-time buyer’s to divert more money from the country’s capital markets and put it towards housing.

Canada To “Help” First-Time Home Buyers To Pay Higher Prices

Canadian finance minister Chrystia Freeland announced new measures to help with “affordability.” Starting August 1st, mortgage lenders can start offering 30-year amortizations to first-time home buyers. These loans will be restricted to new construction. 

In addition, Canada will also dramatically raise RRSP withdrawal limits. First-time buyers will see the amount they can withdraw for a down payment increase to $60,000. That’s double the current limit in place. 

Canada Is Really Just Bailing Out Developers With Soft Home Sales

The measures are being sold as an affordability scheme, but appear to be a developer bailout. Recent new construction demand has been soft at the current prices, meaning incoming price cuts need to be made in order to keep inventory moving. As a result, developers are looking to minimize exposure to any potential price declines by pausing or reducing new projects. 

Rather than prices coming down, they want first-time buyers to be able to pay more over a longer period. Extending amortizations from 25 to 30 years allows a borrower to qualify for a loan about 7% larger, at the expense of more interest over a longer period.  

Canada Says Improving Affordability. Central Banks Call It Stimulus

Measures like those introduced today are called “demand inducement” schemes. They’re exactly as they sound—a way to get more people to purchase something. They usually involve expanding debt service capacity or diverting capital from “less important” areas to help stabilize prices. The US deployed similar strategies after the Dot Com bubble, resulting in the 2006 Housing Bubble. 

It was followed by another one once prices started to fall, a strategy they thought so effective they declared the market correction over by 2008 (spoiler: it wasn’t). The big difference is the US openly stated these measures were designed to stimulate demand and increase home prices, whereas Canada has said the same type of strategies will improve affordability

It’s an odd sales pitch, since virtually no data agrees with it. The increased amortization has a similar impact to lowering interest rates, allowing borrowers to qualify for larger loans. Bank of Canada (BoC) researchers have demonstrated that only lowering carrying costs doesn’t improve affordability. It produced the opposite effect, actually driving home prices higher over the past 30 years as the increased credit capacity is absorbed by home prices. 

US Federal Reserve researchers also looked at the influence of lower carrying costs earlier this month. They suggested the belief that this improves affordability is “naive,” since it ignores the influence it has on demand. Afterall, cheap credit is meant to stimulate demand and raise prices, as per basic monetary policy theory. 

The RRSP withdrawal increase will also throw gas on the fire—and not the fires increasingly burning down new homes at stalled construction projects. Canada is seeing global capital flee its capital markets at a record rate, primarily due to the lack of productive growth.  

Productive investment isn’t flowing into markets as a result of more and more investment being sunk into housing. Canada isn’t just encouraging people to sink more money into housing, but also wants people to take more capital out of their RRSPs. The country is doubling down on the transfer of money from capital markets to non-productive shelter investment.  

19 Comments

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  • Jay 1 month ago

    Harper Jr will bring back 40yr mortgages once he’s defaulted onto the throne by JT haters.

    Sunny ways.

    • Fraser 1 month ago

      lollllllll, housing prices were fair up until about the year 2000…after that crazy…the last 24 years have made no sense at all. Until they come back to 2000 levels, most of us will never own….Canada, a sad state indeed….Sunny ways, ya right.

      • Anthony Cirelli 1 month ago

        That is exactly what they did…assist the builders in offloading inventory…not to mention give a slap in the face to anyone who wants to buy a resale…which you don’t have to wait 2 to 4 years to gain occupancy/ownership….such bull#$@* policies…they were insuring mortgages with 40 year and only a decade or so ago…

  • H2O 1 month ago

    Fraser, house prices were fair even up until 2016 in some areas.

    For example, Vancouver was out of reach even pre-2000. However, Ottawa had decent houses available even as recently as April 2016.

    All markets are out of reach at this point as investors squeezed out every last drop.

  • dave frazer 1 month ago

    When prices are rising fast or falling fast. Government actions have marginal effects. The housing market is showing signs it’s about to fall, few sales, lots of listings.
    Longer mortgages will help some buyers but if the majority see falling prices, they will not buy regardless of Government assistance. large developers who fund a lot of the politicians have been asking for help. This action is the consequence, but i doubt it will affect sales particularly in the condo market. Condos are a noose around your neck. High management fees with little control and shortly becoming a liability rather than an asset.

  • Teddy Smith, Realtor 1 month ago

    Lower rates to zero to save house prices. Canada needs it.

  • The Property Consultants 1 month ago

    Bang On article. Totally agree.

  • BORIS Kondarassov 1 month ago

    yes it’s great for Canadian banks, but you are f….ked

  • Scott.S 1 month ago

    Would we expect anything less than this government doubling down on bad policies? Instead of easing the bubble they just inflate it even higher so when it does burst it will make 2008 look like a walk in the park.

  • Nathan Barnes 1 month ago

    Canada is addicted to housing inflation. It keeps JT in a job, keeps all the “paper” millionaire’s happy and the immigrants keep coming. The ship must always rise above the storm!

  • Frank 1 month ago

    Remember before all this fiasco, libs promised no gst to builders for purpose built rentals. Once again with implementing 30 year on new builds only is direct support for builders who are hurting. The 30 year should be across the board. As well, there should be rent to own. This givs policies are just bonkers.

  • GringoinBrazil 1 month ago

    I retired at 48 by leaving Toronto and buying a condo in Sao Paulo Brazil. My brand new Brazilian condo cost me less than 20% of what a similar condo in TO would have. The maintenance fees are also about one third of what I would pay in TO. I predict many Canadians will move to Latin America when they realize how affordable it is down here. Of course there are people who like minus 35 windchill, five months winters and $1,500/square foot condos.

  • Woolsock 1 month ago

    “Canada Says Improving Affordability. Central Banks Call It Stimulus”
    I would call this an ignoble attempt to make the monthlies cheaper (~4%, woot!) by making new home buyers be debt slaves for five years longer.

    Just not sure we can, as a nation from top to bottom, realize quickly enough to save our own future that we shouldn’t be putting every danged thing we’ve got into real-estate; that letting people actually keep some of their pay-cheque might actually be a good thing.

    Otherwise it’s gonna look like some weird version of “Children of Men” where there won’t be any young people left living in Canada, and Realtors will be ruthlessly trying to sell the properties of the long retired to the more recently retired while no one will have useful healthcare, or even their kids around to help them. But yeah, one more glorious bidding war and “sold above listing” for old times sake.

  • George Carl 1 month ago

    the amount of interest paid over 30 years….yuck! Nobody is addressing the main issue. Multiple dwellings hoarded by few investment companies. Unless the residential investments is being banned or taxed heavily, we will NEVER see any corrections. This article is a clear example they want this circus to continue and those who will join will pay the price later.

  • Jolene Higgins 1 month ago

    What a joke. It doesn’t do anything other than bail out developers and keep the banks rolling in cash and then likely pushing housing prices further away from first time buyers. Housing affordability can only be fixed by throwing the brakes on immigration for the next ten years and then investing in infrastructure to stabilize things. Freeland doesn’t have a clue.

  • dave frazer 1 month ago

    Probably not make much of a difference to sales. Price drops look like they are coming as listings are increasing much faster than sales. Particularly in the Condo market. Increasing condo maintenance fees are making condos a liability, rather than an asset. Selling prices of some condos are already being affected considerably by these fees.
    Falling prices and high fees could destroy the condo market overnight. If you buy a detached house you as least know the probable outgoings, maintenance and mortgage. With a condo increasing fees and assessments can bankrupt you quickly and make it difficult to sell.

    • Bob hope 1 month ago

      I think the correct financial terminology for this circumstance is called “kicking the can”.

  • PL 1 month ago

    The government of Canada, in their own self interest, continues to poor gas over the fire to continue the spectacular rise in home prices, under the guise of improving the affordability of homeownership. The governments irresponsible fiscal spending requires that home prices continue to rise as a source of increasing property tax revenue. True affordability means allowing real estate prices to revert back to a sustainable mean.

  • jim 1 month ago

    Just like lower interest rates, this will provide more easy (i.e. just sign here) money available to those that felt that they could not compete. Those willing to take on a larger and longer debt burden will out bid others (i.e. pay more) to satisfy the seller, and further inflate or maintain a house price. Its a balancing act for the BOC and government trying to keep inflation just high enough and interest rates low enough so that the real value of house (for many it is either their greatest asset or greatest liability) is maintained. The government and BOC does its part by further jacking up or sustaining the tax payer support (i.e. government’s bank bond and repo purchases) for lower interest rates.

    In the end: the only way to solve the housing crises is to have house prices fall. Unless employers find a way to be more productive, rising salaries to service a debt leads to inflation, as employers pass on the cost of their product or service. Many are willing to sacrifice much to support an inflated house price, causing other parts of the economy to suffer. Real estate has become the economy’s cancer. It is time for some keom.

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