Why Not Two Prime Rates?

I often ask the question, “If we were able to send a human being to the moon and bring them back alive back in 1969, how, in 2023 while holding more computing power in the palm of our hands, more than NASA had 54 years ago; how can we not make this one thing happen?” And yet ‘this one thing’ often proves more difficult than a lunar mission… somehow. One of the best replies I’ve had to challenge the above question was from an underwriter who stated, “Not with our computer system they didn’t.” That said, I understand there are challenges to what I’m about to propose, but it really does seem straightforward. The Proposal Create a specific ‘mortgage prime rate‘— Perhaps the formula is ‘Mortgage Prime = Prime -3, with a floor rate of say 3% and a ceiling of 5.25%. Combine that with a 50yr amortization. Boom, you have a critical component back in play – confidence. Developers building rental homes (multi family) can access a 50yr amortization (via the CMHC MLI Select program) on a condo they would rent out to me, so why (why CMHC) can I not have a 50yr amortization on an individual condo unit that I purchase? If a 50yr Amortization is good enough for a property developer/landlord – why isn’t it OK for an owner occupier? OK, sidetrack over – back the the Prime debate… Arguably a dual (even a multi) Prime rate model already exists, as at least one chartered bank has for their residential mortgage division their own ‘bank prime’ set at 0.15% above mainstream Prime. This can be done. The net result of a specific mortgage prime rate would be the stimulation of new construction, which is in desperate need of stimulation right now. What would stimulate construction? Consumer confidence. Without confident consumers builders don’t build. And consumer confidence is based on certainty. (IE certainty around ability to qualify and make payments) Certainty, confidence, construction; at the moment we’re lacking all three. A lack certainty leads to a lack of confidence for all involved, the consumer, investor, and developer alike. And this leads to reduced construction, which leads to… what? Turmoil? Social unrest? Worse? What do we need? Housing-wise we need, based on CMHC’s latest reports a combined owner-occupied and purpose-built rental stock of 5.8 million additional units built in 6 years. What are we gonna get? At the current pace, maybe 1.5M doors. So ya, a shortfall of 4.3M 4.3 million housing units required, the people will be here for them… but the units will not exist. Not without radical action. And no, closing the doors to immigration isn’t the right radical action to take, that’s more of an inaction. It doesn’t fix this shortfall equation, and in fact a moratorium on importing new able bodies into Canada probably makes our situation worse… but that’s another topic for another day. On the day of this post, it’s unlikely the 5.8M number will be met. In fact, it’s unlikely that even half that number of housing units will be built. This is a fact. So, where does that leave us? It leaves us with a clear need to make massive strides towards stimulating the housing market. And I will repeat it, a mortgage-specific prime rate running, let’s say, 3% below the current prime, with a floor of 3% and a ceiling of 5.25%. Launch it with a fancy name; Housing Action For All Canadians. HAFAC HAFAC indeed. A bonus to this proposal is that it would result in  inflation numbers reporting lower re housing costs. Although there’s the unavoidable fact that the creation of 5.8 million housing units over the next 6 years would be inflationary in many ways, and that’s not something the Bank Of Canada wants to see. So there is resistance to making things affordable, because affordable is inflationary. Affordable housing is inflationary. We cannot have that. But if you cannot have one without the other, sometimes you have to accept both. As much as we want to have our cake (lower inflation rates) and eat it too (housing for all), we simply can’t have both of those things. Which one (housing vs inflation) matters more? Obsessing over the inflation rate, as low as it actually is at this point, while ignoring a clear crisis in housing seems like the very definition of navel-gazing. As short-sighted of a policy as any government could implement, if political survival and/or socio-economic stability matter to anyone in power at all. Because while taming inflation might score a few votes, fixing the housing supply would secure millions of votes… voters care about a roof over their own heads more than just about anything else. Now, because I’m based in BC, the summer wildfires are top of mind… so a bit more to consider in all of this… A current, and profoundly sad, example of how broken the housing system is can be seen in the small town of Lytton, BC, destroyed by wildfires in the summer of 2021. Two years ago. And two full years later, nothing has been rebuilt: not the hospital, not the RCMP station, not the Tim Hortons, and very few homes. In other words, the government can’t even replace their own government buildings, businesses can’t replace their buildings, and residents can’t replace homes.. because bureaucracy… and now vastly inflated costs as well. Part of the reason for this is that many of the town’s records and administrative documents were destroyed when the City Hall burned down. Nonetheless, when a municipality cannot even begin to replace the buildings lost on top of the exact same foundations, in the exact same positions, on the exact same lots they pre-existed on… which all seems pretty straightforward… Well clearly, our housing… or at least the zoning/permitting/approval systems are broken. Who will step up and fix it? Setting aside the question of who, one thing that would have a stimulative effect would be a lower interest rate specific to mortgages, if not all mortgages, then certainly construction mortgages. But why limit it only to new construction? Why not include purpose-built rentals? Why not individual investor owner rentals? Why not owner occupied homes? Why not assist every Canadian in getting a roof over their heads, either owned or rented, by better managing a very controllable and critical piece of the puzzle. The Prime Rate! Fix Prime! Thank you. DW