Free Money, Falling Rents: The CMHC Situation
A look at the record-breaking rental boom that’s heading straight for a record-breaking crash.
We haven’t seen rental numbers like this since the 1970’s. So why is this happening?
CMHC birthed a new financing program called CMHC MLI. The program, in simple terms, allows Real Estate developers to finance up to 95% of the cost of new rental construction, and then, on completion, assuming you meet the debt servicing requirements, you can refinance the building up to 95% Loan to Value, with a 50 year amortization, with a mortgage rate under 4%.
The feds opened the credit spigots, and developers rushed to the trough.
This has created a record rental construction boom, the likes of which we’ve never seen.
This is what happens when the government offers up the private sector (nearly) free money. Developers, particularly in places like Alberta where the math has worked better, are finishing one rental project, refinancing all of their cash out, and immediately starting another rental project. It’s like the BRRR method (buy, rehab, rent, refinance) you just keep doing it until the music stops. And the music is about to stop.
Soon we will see who is left standing without a chair.
CMHC has a ton of exposure to the rental market now. In fact, CMHC has pushed their exposure to the rental construction business from 5% in 2017 to nearly 90% today. They are pretty much the only game in town. If they’re not worried, they should be.
The average asking rent in Canada fell to a 35 month low in March, with rents now falling for 18 consecutive months.
In places like Vancouver, the vacancy rate has now surged to a 31 year high. Furthermore, rental units under construction are still hovering near record highs, at a time when population growth is zero! We’re adding a whopping amount of new supply into falling rents, rising vacancy rates, and zero population growth. Yet developers continue to push forward!
There were 112,000 rental starts in Canada over the past twelve months, which is more than condos and single family starts combined.
So here’s what happens next.
When these rental projects complete, rents will come in well below the developers proforma, and vacancies will be higher. The developer will not be able to refinance and take out their construction loan without injecting significant equity to cover the shortfall. In other words, if you can’t stroke the cheque on completion, you’re stuck, and on the fast track to insolvency.
This program is being abused, especially in places like Edmonton where there are few land constraints, and multiplex zoning is abundant. Stacked rental townhouses are popping up on every street corner using CMHC money, and the best part is that they’re being flogged to Toronto investors! (Toronto investors ruin everything).
Edmonton multiplexes are the new Toronto pre-sale condo.
Unsophisticated money is chasing 50 year amortizations on the illusion that it’s only 5% down and then you get positive cashflow. What could possibly go wrong?
But what happens when rents fall, and keep falling? Rental discounts and incentives are already littering the internet.
The crazy part is that these CMHC multiplexes are being PRE-SOLD!
There is so much rental supply coming online that these investors are cannibalizing each other.
Would anyone be buying these without 50 year debt and 95% LTV? Are these rental proformas embellished, and are they factoring in the glut of supply coming down the pipe?
Leverage cuts both ways.
For astute buyers, there’s an opportunity coming in the multi-family space, but it’s not today.
- Steve Saretsky
Retired Appraiser here. I have always said that when I die I want to reincarnate as a condo apartment developer with CMHC in my back pocket. CMHC , an organization of chickens run by the wolves.
3%-5% is considered a healthy vacancy rate.
The Vacancy rate in Vancouver is at a 30 year high, at… 3.6%.
Over those 30 years, Canadian Real estate has been seen for decades as a risk-free cash machine, largely due to decades of 1% vacancy rates inflating rents. Our housing market needs this correction.