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

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.