Canada’s Next PM Working w/Vancouver “Condo King” On Foreign Investment

Canada’s next leader hasn’t officially assumed the role, but he’s already looking to stimulate real estate. Last week, Vancouver’s “Condo King” Bob Rennie revealed that he is working with newly-minted LPC leader Mark Carney. The two are considering a plan that would see the country’s state-owned mortgage insurer use taxpayer resources to attract foreign investment for rental properties. The plan is just about as bonkers as one would assume, and similar to the one that got Canada into this position in the first place.  

On a recent episode of ConversationsLive, Rennie revealed he has big plans for the real estate industry. “[I’m]… working with Carney, surprise, and I’m trying to get a rental program in where people can buy, put it into a 25-year pool, a preferred rate from the CMHC, and let’s allow foreign buyers to buy it, they have to rent it out for 25-years, and it will show the world we are open for business,” he explained. 

The pitch is essentially a government-facilitated program to attract foreign investors and build rentals. It involves the state-owned mortgage insurer backing the project financing to reduce carrying costs, and improve affordability. Ideally, the plan would create more rental properties as the country facilitates more foreign investment in real estate. 

The biggest benefit to the public would be de-risking projects and cheap capital to build new rentals. Investors are more likely to jump into a project if taxpayers assume the risk, leading to more capital and faster development. Lower costs of production means a lower barrier to profitability and potentially more housing. 

Canada Needs Foreign Investment, But Does It Need More Foreign Real Estate Investment? 

Sounds good. Shall we start? Unfortunately, most of those benefits are theoretical and don’t consider second and tertiary-order impacts from the decision. This plan should create significant concerns around the issue of concentrating the country’s economy and reinforcing the declining homeownership rate. It’s also unlikely to build more or improve affordability due to increased competition for resources and credit.  

Attracting foreign investment is a top priority for most countries, and Canada is no exception. The investment often creates jobs and helps to bolster economic activity, becoming particularly useful for targeted economic growth. However, few advanced economies would look to foreign investors to become landlords because locals can’t afford to buy a home, and there are not enough domestic investors to become their landlords. 

This would also compete with existing foreign capital going into more productive areas. Why exactly would the state use taxpayer resources to export profits, and deter economic expansion? Further concentration in real estate would also make the economy more vulnerable to shock. Why a country would do this is beyond me, but fiscal policies are determined at the polls, not by logic.

This Plan Can Make It Harder To Build Affordable Housing  

The cost of financing may be reduced but the amount of financing can rise. When new home prices were pushed beyond the budgets of end-users and domestic investors a few years ago, the state-stepped in. The state-backed stimulus helped to prevent projects from failing, and stimulate more building. Success…. Sort of. 

Demand applies to all parts of the building process. By stimulating building beyond the existing capacity, the cost of building rises. The government can find more people, but we still have to compete for materials. This helped to push the cost of building up, pushing developers between a rock and a hard spot where they can no longer lower prices and the market can’t afford to buy the homes. Now the idea is to find foreign investors who can afford it, and will somehow accept a loss the government guarantees? Sounds like a plan! 

Government Loans Have Higher Costs Than The Interest Rate

Most people think plans like these have no cost since the government can borrow cheaply. If that was the case, the state would be borrowing on behalf of every credit segment. In reality, all credit competes and the more a government borrows, the more it will cost everyone else. 

It’s important to understand that credit is competitive. The cost of borrowing depends on how much investors will lend (supply) and how much borrowers need (demand). When demand exceeds the growth of supply, interest costs rise. If supply exceeds demand, the cost of borrowing falls.   

As the state borrows more, it crowds out other segments from the market. For example, the CMHC warned the Government of Canada (GoC) that directly funding mortgage credit may lead to a net loss, since it competes for capital. The same thing happens with other credit segments, meaning investors get a cheap loan—potentially at the expense of your uninsured mortgage or business loan. 

In a worst-case scenario, it can also trigger inflation—as was the case just a few years ago. The GoC considered borrowing at low rates a risk-free event, and did so on behalf of other organizations. The central bank described the situation as fiscal dominance, destabilizing monetary dominance. In other words, the central bank has to abandon control to facilitate liquidity at the cost of higher inflation. A cost the public pays to facilitate more of that risk-free borrowing. 

Canadian Taxpayers Went From Helping Homebuyers To Investors

The plan would also reinforce Canada’s Old Lady That Swallowed A Fly problem-solving approach. Rather than solving the initial issue, it adopts half-baked, “easy solutions” that create bigger and bigger problems that need to be solved. Eventually the original problem seems like a small issue in contrast to the bigger problems created to solve it. 

That’s the CMHC in a nutshell these days. The agency’s original task was helping Canadians with their first-home. It then shifted to lender de-risking, helping to inflate home prices. Now that it helped to make homeownership a pipedream for most, it shifted focus to help investors create homes. Now that domestic investors can’t afford it, they may help foreign investors build homes to rent to residents? Gee, thanks for the generosity with taxpayer cash. 

I don’t know why we swallowed this fly…