Canadian real estate demand has been so weak that developers are struggling to stay afloat. Naturally, the Government of Canada (GoC) sees this as the perfect time get households to take their shot at playing developer with state-backed loans. This week the GoC announced homeowners looking to turn an “unused basement or garage” into a rental property will be eligible for high leverage, insured mortgages. These loans, ultimately backed by taxpayers, arrive in a market where even well seasoned investors and real estate developers with less leverage are struggling to break even.
Canada To Offer High Leverage Loans To Homeowners Looking To Play Developer Starting Next Year
Canada will be making big changes to the country’s insured mortgage program. Next year those looking to add an accessory suite to their home can obtain a high-leverage, insured mortgage. Those with properties up to $2 million in value can borrow up to 90% of the value, with an extended amortization of 30 years. The plan goes into effect on January 15, 2025.
Only a few details have been released, but they definitely take Canada’s mortgage insurance program into uncharted territory. For example, the home need not be owner occupied if the property is occupied by a “close relative” of the owner. In addition, the units built can’t be used exclusively for short-term rentals, and need to be self-contained and conform to municipal zoning requirements.
Canada Wants Homeowners To Take Out Risky Loans To Compete Where Developers Are Failing
It’s unclear what the appetite for these loans are in the current environment, especially given the turbulence existing investors face. Experienced developers are having trouble profitably navigating the current market with significant capital and substantial profit margins that can absorb mistakes. Leveraged investors are also having difficulty tenanting their properties, increasingly taking possession of cash flow negative properties.
An inexperienced homeowner using high-ratio mortgages with as little as 10% equity are going to face a much higher rate of failure. It also isn’t likely to add a significant number of homes considering the vast majority of units are now added via multi-family developments, not accessory suites and basement units.
More likely, this plan resembles the mortgage insurance extension for “first-time” homeowners. That is, there’s no basis or reasonable expectation of households using the program. Rather it’s a boutique incentive for a small group, designed to transfer risk from lenders to the public.
Ah yes, CEWS, CERB, Ontario Small Business Support Grant, and all the other loans like that worked out so well! No issues with abuse and repayment or fraud at all! Sunny ways!
Canada’s solution to over leveraged homeowners is to import young Indians who will give half their salary to cover half the mortgage to live in the garage or basement?
The group calling everyone racist for calling for tighter immigration seems to be deflecting from their predatory racist plans.
The racist is the one who accuses everyone else of being a racist…
Why would it be racist if the Indians themselves take pleasure in becoming slaves ? I could go to any Indian city or village today and there would be a long line of wage slaves willing to take up the offer to come here and mortgage their lives away.
If the slave dealer (government) or the slave owner (banks) really at fault? It is all a willing arrangement.
Typo….
Is the slave dealer (government) or the slave owner (banks) really at fault? It was all a willing arrangement.
Regardless of whether you think a boutique loan is able to make supply, the very acknowledgement that it takes $2m to create a home with a basement suite shows how delusional this government is.
Correct me if I’m wrong, but won’t this apply to all insurers? The taxpayer exposure is limited to a third of the market, so it does introduce taxpayer risk but not at the expense of the whole market.
Technically all of the insured programs are ultimately backed by the CMHC, so taxpayers are on the hook all of the time.
I think these cockamamie plans are actually to absorb all of the bonds that taxpayers already bought. They tried to move the bonds from QE to the internal program, and saddled taxpayers with more debt to lower the cost of mortgage borrowing. No one is biting though, so they need to helicopter the money and hope that other people use it.
Agreed, the unfunded liability for the chmc and the rest of us is about $1.2Tr. Any program that adds to this is only there to reduce risk for banks, and dump it onto taxpayers. If Freeland wasn’t a shill for the banks, she would have installed a loan modification program to bring down prices and costs of mortgage debt because banks clearly violated the rules of lending.
This is what they did in the USA.
The problem for Trudeau and Freeland is if they do that, prices will fall immediately, and the few people who still like them will be gone, so much better to make this a PC problem in 2025, by adding even more risk to tax payers. It also means banks like RBC and TD will owe them and give them a 8figure job after they are fired.
They also did this to force the zoning changes to increase the tax value of single-family residences. A short-term solution to falling values and adopting risk, but also a way of transferring higher assessment costs to the owners—they’ll face a greater share of the roll that was previously distributed to vacant land owners.
Important to note this won’t impact resale prices since a home price is set by trade value and credit leverage, just the amount of revenue a city can receive. Which is why all of the cities have been so quick to adopt the Federal plan. A handful of units were made, but 40% of housing will soon have to take on a higher share of costs when it comes to property taxes, subsidizing developments.
Ruining nice neighborhoods everywhere, just because the Liberals were not able to organize immigration properly.
I stand to benefit from this and I still don’t understand why the government would venture down this path to insanity.
It’s very simple, the liberals are picking the banks over Canadians again. To keep lending, the banks have clearly told Freeland that they won’t take the risk of new mortgages unless the chmc insures them.
I was shocked to see that many banks offer a 50bp lower rate for high ratio mortgages? So someone like me with 80% equity pays more interest than someone with zero down, and a house that is 50% over valued? If my house drops in price by 50% it’s still means I have 60% equity, the chmc guy has negative equity.
The other major problem is how the chmc sets reserves for bad mortgages. They have about 3-4% in reserves for debts they insure. So, if 30% of these mortgages default, we will need to pay to make the chmc solvent?
So, after 9 years of predatory lending, zero mortgage regulation, and unsustainable housing prices, the govt seems to think adding more overpriced ‘supply’ will magically reduce prices? Now let’s say that housing prices are materially determined by supply, and not mortgage qualification, if we are to believe that supply can at some point affect prices (glut on the market of rentals, new housing for sale), first one must reach that tipping point where there is so much supply that landlords and sellers drop prices to sell. That is an issue because we really don’t know what the supply situation is, and it will apparently take years to reach that point?
Let’s look at an alternative analysis. Housing prices are determined by 3 factors, income, availability of credit, and replacement/building cost, in that order. Income should be the driving force, as the govt and Boc are supposed to make sure every buyer, tenant, etc is spending no more than 33% of their income on housing, heat, property tax? But we know in Toronto and Vancouver, that is a fantasy. The income gap in these cities from average family income to average family home price is 100k per year or more? That means families are being financed at 70, 80, 90% of pre tax income?
Now since banks are not only supposed to qualify them on the actual payment, they are supposed to qualify them on a stress payment of 150bp more? So, the first issue is that this govt has ignored what is clearly predatory lending, and mortgage fraud at truly scary levels? Why? Well with low rates, banks need to lend out double, triple the amount to maintain income to the bank from interest. Banks don’t really have to worry about the principle, since they are able to create the money to lend as long as the appraisal for the house is in line. If all this sounds familiar, it’s because it’s exactly what happened in the USA in 2007.
This also resolves the second point which is the amount of cash available to lend out. Since banks just create the money based on some risk protocols like the stress test, and liquidity measures, this means that there is still too much easy money in the system. Since banks and other lenders have basically decided that income tests and affordability don’t matter, they are relying on appraisals to justify creating net new money. The problem with that is, if the M3 money supply increseby 150% in nine years, without any real gdp growth, it means you are debasing your currency – and causing inflation – which is why Canadians are feeling the cost, of living crunch like no time since the last dummy named Trudeau was in power, and for the same reasons.
This brings us to the last point, replacement cost. The massive increase in all costs related to construction are 100% in line with the increase in prices. So basically, the debasement of the dollar, to help banks make money, was obviously causing inflation in construction, building materials, realtor income, bank income, municipal, provincial and federal prices. So it was a very short trip for this to break through to other sectors in 2021, 2022.
When you add to this that gdp per capita has been flat since 2014 – 2023, we have a financial disaster. People not only are making about the same nominally as they were in 2014, because of this mortgage scheme, the are actually making 40% less in 2014 dollars? So instead of helping the middle and lower classes, this behaviour by the govt and banks has effectively killed the middle class in Canada.
This brings us to the final point, how to fix this mess? Well obviously, the govt could enforce the regulations on banks and lenders? This would immediately drop prices in Toronto and Vancouver by 40-60%. Clearly Freeland isn’t doing that, as she continues to harp on ‘supply’ to reduce prices, at the same time saying that prices need to stay high? So it doesn’t take a degree in economics or finance to tell you that prices can’t stay high, and homes become more affordable without incomes rising faster than everything else – which is the main contributor to cpi by stats can. So what’s happened to keep cpi low is wages have been reduced by importing cheap labor from abroad. This further strains ‘supply’, but most importantly keeps unemployment at 6-10%, and keeps wages low?
In addition, we see the various schemes Freeland and her bank buddies have dreamed up to ‘help’ don’t address any of this. The new home sp, increasing amortizations, high leverage loans for Renos do 2 things: keep prices high, mainly by shifting high risk debt to the taxpayer, and generate even more profit for banks? So clearly, either Freeland doesn’t understand finance at all, or she knows what she is doing is bad for everyone, but is seeking a bank job when she is fired in the next election?
For you and me, it doesn’t matter at all why her and jt are doing this. The only real solution is for prices to go back to fmv, at half or less what they are today. One can assume Freeland and Trudeau’s smug attitude is mainly because they are kicking this mess onto the next govt, while protecting themselves and the banks.
The solution used in democracies is not to throw 50% of the population into financial ruin, but demand that lenders comply with the regulations, and modify the principal of the mortgage. This is clearly not in the cards with this govt. we can only hope that the next govt decides that Canada’s banks have had an easy path, and need to feel the pain from the scheme with the liberals.
However, RBC has already said they are looking to improve their client base by not taking on new mortgages through brokers without other business, so we see that Freelands actions are once again to mitigate risk on banks by tossing us under the bus.
Feudalism 101, indenture the population, saddle them with lifelong debt, with no chance of escape.
Why would a homeowner become a landlord due to current laws protecting tenants and the dysfunctional Ontario LTB.
This is a major announcement and will allow for the increase of international students!!
A major win for everyone!
How’s this going to work?
Won’t the City want 34″ doorways, 43.5″ corridors and stairwells, 2 fire exits, smoke alarms in every room and closet? Fire-rated wall and ceiling assemblies between units, backflow preventers in the water lines, fire-rated doors with closers and fire extinguishers?
Or are they and the insurers supposed to look the other way?
I’m not against this, mind you. Just trying to understand who and where the authorities are going to draw the line?
This might never come into action as we most likely be in a federal election by the end of the year
Ridiculous. Sell your overpriced Canadian house and buy new USA homes for 400K or less. See youtube, zillow, redfin and landsearch
The Canadian Dream used to include being able to afford a free standing house in an upscale rural neighbourhood.
Then it changed to owning a box in the sky in a 15 minute city or living in a tent on the street.
Now it seems to include living with your family and parents forever in a hole in the ground (basement) or in the garage (you’re too poor to afford a Tesla anyway)
Liberal utopia.