With the federal government under pressure to practice austerity with the release of its budget on March 28, now is the time to draw on its existing $4-billion Housing Accelerator Fund (HAF) announced in Budget 2022 to address the growing housing affordability issue, without adding new spending.
Both the federal and provincial governments have highlighted the need for new home construction. These pressures will increase as higher federal immigration targets, alongside more permits for temporary foreign workers and international students, add housing demand. Despite pronouncements about the need to massively expand supply, housing starts are declining. CMHC reports that housing starts in January 2023 hit their lowest level since September 2020. And expanded construction won’t address affordability without more targeted initiatives. But even here activity is stalling in the face of rising construction costs and higher mortgage rates.
Non-profit and municipal housing providers are being forced by CMHC to absorb much of these higher costs. And, unlike the federal and provincial governments, municipalities cannot run deficits. The result – more stalled projects and fewer low-income families being assisted.
The National Housing Co-Investment fund (NHCF), which provides a combination of forgivable loan and low-rate loans, provides financing on a 50-year amortization for a ten-year term. During the low interest period in the pandemic these loans charged only 1% interest; today they charge close to 4%, which substantially reduces the amount that can be borrowed at affordable rents.
A typical affordable unit at 80 per cent of the average market rent can allocate roughly $800 per month toward debt costs. At the pandemic low point, with loans under 1 per cent, this could borrow $380,000. But with today’s rates closer to 4 per cent, this same $800 payment supports a loan of only $210,000. That’s a difference of $170,000, most of which the borrowers are required to cover from other sources (including municipal partners).
However, non-profit housing organizations and municipalities don’t have the funds to cover the reduced leverage (alongside other cost increases). The result – projects are stalled or cancelled. Municipalities are strained and cannot commit to support additional projects. Fewer affordable homes are built, and fewer households helped. And the federal government fails to move the needle of its NHS objectives of removing 530,000 households from affordability need and ending chronic homelessness.
But there is a simple and cost-effective solution. Draw on the unallocated Housing Accelerator Fund and require CMHC to absorb its own administration costs to reduce the borrowing rate to a fixed 2 per cent (a rate that was successfully used to fund social housing through the 1980’s).
On a typical unit at 80 per cent of the average market rent, the 35-50 basis point fee for CMHC administration reduces the amount available to fund project costs by roughly $20,000 per unit. Given the annual target to build 16,000 affordable homes in the NHS, this premium to CMHC costs $320 million, money that can help build homes rather than support CMHC overhead costs (CMHC generates annual profits approaching $2 billion so it has plenty of capacity to cover its costs).
To fund these loans CMHC borrows from the Crown at the prevailing ten-year bond rate. With current rates around 3.5 per cent, a subsidy down to 2 per cent means the federal government absorbs the lost interest. At 2 per cent, the typical 80 per cent average market unit can borrow $310,000. At 4 per cent (current 10-year bond plus CMHC 50 bps) it can borrow only $210,000, a difference of $100,000.
Eliminating the CMHC overhead fee costs about $20,000 per unit so the target of 16,000 new units a year requires CMHC to absorb $320 million from its surplus.
Meanwhile, the lost interest cost to subsidize the remaining 3.5 per cent down to 2 per cent would cost $4,600 per unit, per year, over the ten-year term. For 16,000 affordable homes, this will impose an annual cost to the federal treasury of $74 million, and a total of $740 million over the full 10 years.
The federal government already allocated $4 billion in Budget 2022, so it has the funds to remove this burden from non-profits and municipalities, who cannot manage these increased costs. Subsidizing this interest rate would truly accelerate the production of much-needed affordable housing.
It’s time the federal government put their money where their mouth is to address both the supply issue and affordability problem.
Steve Pomeroy, Ottawa
Industry Professor, McMaster University, Canadian Housing Evidence Collaborative (CHEC) and 613-799-3104