Pulling on levers - The Feds and BOC are running out of options

Whether it is a tactic to gain political popularity or to prevent an economic recession, the Federal Government is running out of options. The Housing Minister made waves this week with the new mortgage rule announcements, which caught not only the public by surprise but also every industry expert. The changes? They increased the insured mortgage ceiling from $1 Million to $1.5 Million with the option for 30-year amortizations for insured mortgages, extending the previous cap of 25 years.

With a country so zealous about real estate, why would the Canadian government implement such a demand-sided policy? The truth is they have very few options to handle the impeding oversupply coming to the market and to create long-term supply for the future without either A. crossing Provincial/Municipal jurisdictions or B. taking on mass deficits.

Let’s start with the first issue. Major metropolitans like Toronto and Vancouver are on pace for record condo completions in 2025 and 2026. Investors, and more importantly, Banks, will need Buyers willing and able to purchase these new condos. There are current rumblings that as many as 20% of pre- construction buyers are having issues closing their purchases. It is one thing when an average " mom and pop” investor defaults; it’s another issue if a builder defaults on their loan with the Bank. The Feds may have been pressured by the Banks to make a change to soften the blow.

The second issue the Government is dealing with is how to create long-term supply. We have a significant housing shortage in Canada. The Liberal Government metaphorically “lifted the lever” on immigration during the pandemic to offset our Country’s falling productivity problem. This, in turn, increased the demand for housing. The Government has tried in vain to tackle the supply issue by promising to build 3 million homes and cut red tape on construction. However, without cooperation at the provincial and municipal levels, there is no chance of building at double the annual rate our Country has had for the last thirty years. And with every politician doing what’s in their best interest to remain in power, policies implemented by the Feds lose effectiveness as each jurisdiction finds loopholes or ways to oppose change.

High interest rates, rising construction prices, and record-low sales have led private construction to a grinding halt. Building permits and new home sales are at twenty-year lows. Without demand for new construction, we will see more housing shortages for years to come. The government is acutely aware of this. This is why the new mortgage rules to increase insured mortgage amounts are a double-edged sword. The Feds have found a way to increase demand without stepping on the toes of the Provinces or taking on massive deficits (taxpayers' money) to improve future supply.

The mortgage announcement is coupled with the falling interest rates from both the US Federal Reserve (which was unexpectedly large) and the BOC, and inflation back to the target of 2%. It’s not all sunshine and blue skies. As much as Trudeau may have been looking to garner political favour from the youth by making housing more affordable, the general sentiment that I am hearing is, “Oh great, now I can take on more debt for longer, so the older generation can cash out.” They are not wrong. We are effectively kicking the can down the road and putting more risk and debt onto the next generation.

The final question is, if this doesn’t work, does the Federal Government have any more levers?