Driven by federal government policy, increased immigration had a major impact on driving up both rental rates plus housing prices across the country. The federal government decided to introduce a policy to create more supply, let’s deal with one aspect of those federal government plans.One such policy is the CMHC (Canada Mortgage & Housing Corporation) MLI Select (Mortgage Loan Insurance) program to help finance rental housing by providing 95% LTV (loan to value – remember this for later) and a 50 year amortization (yes that’s right, 50 years). The CMHC guarantee results in lower than market interest rates. The program has been so successful we’ve had a boom in rental construction across the country. This sounds like a sound policy however at the same time the federal government has pulled in the reins on immigration resulting in 9 consecutive months of rental rate decline across the country.
OK, declining rental rates must be good for the affordability however it is related as much to the decline in immigration as it is the increased supply as those units under construction have not yet come to market.
Now CMHC has financed at 95% LTV, meanwhile those developers are dealing with increasing building costs, declining rental rates, longer time renting new units and higher vacancy rates. All these factors impact the value of the product CMHC are financing at 95%, as these values are declining. The solution? As with all CMHC loans the insurer pays an insurance premium, value declining means increased risk for the lender which results in an increased premium charge. When the program started in 2022 the insurance premium was 1.25% of the loan, wait for it … the new premium could be +5%.
The quick analysis is – the program to increase supply worked, the increased supply helped lower rents. Now combine that with lower immigration, more downward pressure on rents negatively impacting the value of assets financed at 95% LTV.
Do they ever see the irony?
