Building solutions – The impact of CMHC loans on Canada’s rental development efforts

Reshaping Canada’s housing market in the face of a supply shortfall

In recent years, Canada’s lack of affordable housing supply has emerged as a primary talking point amongst policymakers and a primary concern amongst would-be homeowners. The growing disparity between housing demand versus available supply, in combination with historically high immigration rates, has created a significant – at times, seemingly insurmountable – challenge for the market. In fact, Scotiabank's 2024 housing poll says the number of Canadians between 18 and 34 who own a home has declined to 26% today from 47% in 2021. What’s more, half of Canadians under 30 have reportedly “given up” on owning a single-family home.

Based on current rates of new construction, the Canada Mortgage and Housing Corporation (CMHC) expects Canada’s housing stock to increase by 2.3 million units by 2030 – but in order to achieve true affordability, an additional 3.5 million homes are needed. At present, the most prominent housing supply gap can be found in Ontario and British Columbia; however, Quebec and Alberta are also projected to need more supply due to projected economic growth.

Of course, complex problems are rarely solved by simple solutions, and the housing shortage is a multi-faceted issue that requires input and cooperation from various levels of government, as well as the public and private sectors. The cost (and availability) of capital, the sentiment of investors, and the cost of development also play an integral role in the country’s ability to meet its housing targets.

However, one thing is clear – you can’t solve a supply and demand problem without creating more supply. As the cost of homeownership in popular city centres like Toronto and Montreal has pushed many residents towards renting, purpose-built rentals have become more attractive to developers – and the Canadian government.

Rent-focused policies take centre stage

In recent years, we have seen the introduction of various policies aimed at increasing rental development, including tax incentives, construction loan programs, and grants. To this effect, the federal government announced a $15 billion top-up to the Apartment Construction Loan Program (ACLP) in April, along with reforms to the program and the launch of ‘Canada Builds’, a Team Canada approach to building affordable homes on underutilized lands across the country. In July, the CMHC also launched the Frequent Builder framework, which promised to accelerate the construction of affordable and rental homes by expediting the application process for established housing providers who rely on the Affordable Housing Fund (AHF) or the ACLP for funding.

These rental-focused initiatives appear to be generating momentum across the market, as purpose-built rental construction starts represented 47% of all housing starts in Canada’s six largest Census Metropolitan Areas (CMAs) in 2024. What’s more, the annual pace of housing starts in October rose 8% compared with September, with the annual pace of multi-unit urban starts such as apartments, condominiums, and townhouses gaining 7% at 175,705, according to the CMHC.

Ontario Liberal leader Bonnie Crombie also revealed her housing plan on December 4th, which included a “phased-in” rent control plan, in addition to the promise of resources to clear the (rather notorious) backlog of disputes waiting for review by the Landlord Tenant Board. Crombie also shared her plans to establish an emergency-support fund for tenants that would help to mitigate evictions by providing short-term, interest-free loans for renters facing financial emergencies.

Key updates to the Apartment Construction Loan Program

In November, the federal government announced upcoming enhancements to the ACLP, which provides low-cost loans to support the construction of new rental housing, including affordable, senior, and student housing. The program prioritizes projects that meet specific criteria related to affordability, sustainability, and social outcomes, and offers loans ranging from a minimum of $1,000,000 up to 100% of the cost of the residential component of a project.

The CMHC’s Multi-Unit Mortgage Loan Insurance program (MLI Select) works in coordination with ACLP to provide mortgage loan insurance for multi-unit rental housing projects with reduced premiums and longer amortization periods based on commitments to affordability, accessibility, and sustainability.

“While ACLP provides much-needed funding that makes development possible, MLI Select offers mortgage loan insurance with better financing terms for the project,” notes Kerri Byers, Manager, Advisory at Altus Group. “In simple terms, ACLP helps projects get the green light, and MLI Select helps ensure projects remain financially viable over time through insurance incentives. By leveraging both programs, developers can benefit from comprehensive support throughout the lifecycle of a rental housing project, from construction to long-term financing.”

As of September 2024, CMHC has committed $20.65 billion in loans through ACLP to support the creation of more than 53,000 purpose-built rental homes. The recent enhancements to this program are as follows:

• New scoring metric: Similar to MLI Select, ACLP is now on a points system based on affordability, energy efficiency, accessibility and social outcome scoring.

• Program extension: The ACLP has been extended from 2027-28 to 2031-32

• Expanded eligibility: The program now includes on- and off-campus student housing and independent seniors housing

• Removed minimum requirements: Minimum requirements related to accessibility and energy efficiency have been removed. Instead, applicants are encouraged to make stronger commitments to desired rental supply and social outcomes.

• Enhanced appraisal requirements: Previously, applications for multi-units over 25 units did not require an appraisal. Now, appraisal reports must be produced in accordance with the applicable industry standards, contain three market valuation methods, and have an effective valuation date within 12 months from the application submission.

Conclusion

By combining the low-cost CMHC loans with the insurance incentives from MLI Select, developers can significantly reduce their financing costs and improve the overall financial feasibility of their projects. “These measures collectively help make rental housing projects more viable and attractive, ultimately contributing to an increased supply of affordable and sustainable rental housing in Canada,” adds Byers. “These programs help multi-unit projects pencil out. However, they do not address the other pressures experienced by developers in the past year, including volatility in construction costs, the high cost of land for development sites, municipal fees and development charges, and increased operating costs. All of these factors combined produce a project pro forma that can ultimately make or break its feasibility. The CMHC’s financing programs, while impactful, are a single factor in the development pro forma.”

FAQ’s

Q: How are project viability and marketability assessed by the CMHC ACLP program?

A: Project viability and marketability are assessed according to several key factors:

• Market demand

• Financial feasibility

• Developer experience

• Project design and quality

• Affordability and social outcomes

These criteria help ensure that funded projects are not only financially sound but also meet the housing needs of the community.

Q: How long does the application and approval process typically take?

• Initial submission: Once you submit a complete application, CMHC conducts an initial review. This stage can take up to 30 days.

• Conditional approval: If the initial review is successful, you may receive conditional approval outlining the terms, conditions, and additional documents required for underwriting.

• Detailed assessment: The detailed assessment and final approval process can vary depending on the complexity of the project and the completeness of the documentation provided. This stage can take several weeks to a few months.

Overall, the process from initial submission to final approval can take anywhere from a few months to over six months, depending on the project's specifics and the applicant's responsiveness.

Q: How can Altus help with this process?

Altus can help with this process by providing expert valuation and consultation services that we have always delivered. Our involvement in the development process can happen at many stages in the development lifecycle and include:

• Market rental rate surveys: Altus Group can conduct comprehensive market studies to demonstrate demand and current market rental rates for your housing project, which is crucial for CMHC financing applications as well as future project viability.

• Land valuation: Altus Group can prepare a property valuation for the initial project feasibility analysis, as well as during the acquisition phase of the proposed development site for lending purposes.

• Project valuation: Altus Group can prepare a property valuation based on proposed development parameters, as if the project is fully constructed and occupied. This can include detailed financial projections (Discounted Cash Flow analysis using ARGUS Enterprise software) if required.

• Cost consulting: Altus Group can provide cost estimation for proposed projects as well as replacement cost estimates to ensure proper insurance coverage, bank loan monitoring to report on construction progress and cash flow, and project management of the construction from start to finish.

• Valuation for refinancing: Altus Group can prepare a valuation of existing and operating properties for the purpose of financing (or refinancing), or ongoing valuations of the operating property for internal reporting purposes. This can also include detailed financial projections (Discounted Cash Flow analysis using ARGUS software) if required.

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