As we approach year end, I want to express my gratitude to you for doing business with First National and making my first few months here both enjoyable and instructive.
Since joining the team on April 24, I’ve had the pleasure of meeting with and hearing from many clients to gather feedback and exchange perspectives. Invariably, our conversations turn to market conditions and for good reason. In my 25 years as a lender, I have rarely seen so many competing market headwinds and tailwinds.
Headwinds include higher borrowing costs courtesy of Bank of Canada interest rate hikes, building cost inflation, shortages in skilled trades and a general fear that Canada may move into an economic recession next year and experience job losses that would put additional pressure on homeowners, tenants and general discretionary spending.
Governments counter with tax relief and liquidity measures
Tailwinds come in the form of government-driven policy changes aimed at the purpose-built rental housing market. Chief among these is recent news that the Ontario and federal governments are acting in concert to eliminate all of the 13% HST on qualifying new rental housing projects (apartment buildings, student and senior residences) constructed between September 14, 2023 and year-end 2035.
We estimate this collaborative move could reduce the cost of a typical construction project by as much as 8% to 9% depending on location. As tailwinds go, that is pretty forceful.
Beyond that welcome development is the federal government’s pledge to add $20 billion in capacity for the Canada Mortgage Bond program to assure more low-cost, long-term financing is available for rental projects, beginning with November 2023 pools. In its November Economic Statement, the government also promised to purchase up to $30 billion annually in CMBs beginning in February 2024, a decision that ends speculation that this very necessary program would be eliminated.
Furthermore, that Economic Statement promised to add $15 billion to the Apartment Construction Loan Program starting in 2025. This program provides low-cost financing to builders and developers.
Support for CMHC
In addition, the Economic Statement expressed CMHC’s intention to fast track “shovel-ready projects and applications from trusted partners.” As a CMHC approved lender, First National finds a lot to like in that pledge and the news that CMHC’s current backlog will be cleared by the end of this year.
An enduring positive for Ontario
Aside from this maelstrom of competing market drivers, one fact stands above all others: Canada is in desperate need of new rental housing and Ontario is destined to be the epicenter of real estate activity due to projected population growth. A return to office is also restoring urban traffic patterns and traditional real estate demand drivers that were missing during the pandemic.
A fond farewell to 2023
How all of this plays out in the short run is hard to say. While it’s true that the Bank has held the line on its overnight rate during September 6th, October 25th and December 6th policy announcements, and many analysts believe rates have peaked, it’s also true that Tiff Macklem recently warned that he has no intention of fighting inflation “half-heartedly.” Perhaps this is another example of competing narratives. Nevertheless, it is still unclear when rates might move lower and by how much. Time will tell.
Taking everything into account, it appears likely that some asset owners and developers will stay on the sidelines in 2024 waiting for greater clarity, while others tell me they plan to move forward with their expansionary strategies. We understand and appreciate both perspectives.
First National’s pledge
In my first formal note to you six months ago, I pledged that First National would lean in, not pull back during this challenging time by offering the market’s broadest choice of insured and conventional mortgage programs.
In that regard, I am delighted to say the very same will hold true in 2024. We have many methods and strategies for helping you to de-risk your financings, including the return of First National’s Early Rate Lock options for hedging purposes. Our bridge loan programs are also proving to be popular stop-gap options when term financings are pending. And of course, First National has proven expertise in asset repositioning, refinancings and renewals.
I urge you to stay in direct contact with your personal First National advisor during this unpredictable time. Doing so will empower us to act quickly to realize whatever objectives you set for your business. Remember too that all of our efforts are backstopped by the market’s best funding and servicing teams, team sthat have grown in recent years to match the scope, scale and sophistication of the great clients we serve.
In closing, and on behalf of the 65 members of your Ontario sales team here at First National, I wish you and your family an enjoyable holiday season and good health and good fortune in 2024.