The New CMHC Program

Mortgage alphabet

The government recently released details of a new program, first announced during the federal budget presentation. Under this initiative, Canada's housing agency will contribute up to 10 percent of the total price of a first-time buyer's home purchase, provided certain conditions are met.

Under the program, taking effect in September, first-time homebuyers with a combined income under $120,000 will be eligible to qualify. The Canada Mortgage and Housing Corporation (CMHC) will contribute up to 10 percent of the purchase price, as long as the borrower is able to put down the minimum amount required for an insured mortgage (5 percent).

The total mortgage amount, combined with CMHC's share, also can't exceed $480,000. According to government officials, this means the program will only be available for properties priced at no more than CAD $565,000, regardless of whether the borrower meets the other qualifying conditions.

If a property meets this requirement, CMHC can contribute an additional 5 percent of the purchase price for a resale home. For new construction, CMHC can contribute up to 10 percent. CMHC's share will be interest-free, meaning you won't have any additional payments to make, as you would with a traditional mortgage.

That said, according to the government, in exchange for its contribution, CMHC will share "in both the gains and the losses in the property's value." In other words, it will be entitled to a corresponding share of any increase in the home's value when the buyer eventually sells. On the flip side, the government will also share in any loss if the property's value declines over time. For example, if a home is worth $500,000 and the borrower puts down $25,000, with CMHC contributing the same amount, CMHC would hold a 5 percent stake in the home. If the home's value later rises to $600,000 and the borrower decides to sell, they'd owe CMHC 5 percent of the sale price (in this case, $30,000), rather than the original $25,000 they received from CMHC.

While the amount contributed does need to be repaid, the savings accumulate over the years in the meantime. In this example, the program would help the borrower save $286 a month in mortgage costs, or $3,430 a year.

Under the program, new homes will receive a larger contribution from CMHC than resale homes. The government sees this as an incentive for developers to expand housing supply.

The funds received need to be repaid within 25 years (or sooner, if the home is sold), though there's no penalty for buying out CMHC's share at the property's current value.

Applications will begin being accepted on September 2, for purchases closing no earlier than November 1.

One group that stands to benefit from this program is recent immigrants to Canada. Analysts and economists have spent years trying to pin down exactly how immigration affects Canada's real estate market as a whole, and what factors need to be considered when planning new construction and regulating the housing market.

Real estate markets respond to demand generated by households. Population growth or rising purchasing power is likely to put additional upward pressure on prices and rents. But how much of that pressure actually comes from immigration, the main driver of Canada's population growth?

Interest in this question has grown since housing affordability became a major issue in Canada's largest cities. The sharp rise in home prices in Toronto and Vancouver in 2016-2017 sparked concern over the influence of foreign money, and provincial governments responded with countermeasures, including a foreign homebuyer tax. That concern, and the resulting tax measures, were originally aimed at foreign speculators, not at immigrants genuinely planning to build their lives here. In the past, research mostly focused on the housing needs of immigrants trying to find suitable work in Canada. New immigrants typically found housing in lower-income neighbourhoods. Over time, as they assimilated, immigrants transitioned from renting to owning their own homes.

Immigrants to Canada don't always have low incomes. Investor immigrants, for instance, are typically wealthier than the Canadian-born population. They may have a more significant impact on property values.

Immigration is also responsible for Canada's net population growth. Given the aging workforce, the arrival of young, educated immigrants has become even more critical to the Canadian economy. That's why, from 2019 to 2021, Canada plans to welcome more than a million immigrants, most of them economic migrants. Many economic immigrants continue to choose Canada's three most populous regions: Montreal, Toronto, and Vancouver. That said, the big three now attract a smaller share of immigrants than they used to. For example, in 2004, 72 percent of economic immigrants settled in the big three; by 2014, that share had fallen to 51 percent.

That said, the pull of major cities is even more pronounced among business immigrants and skilled workers. In 2014, the three most populous cities attracted 85 percent of business immigrants and 70 percent of skilled workers.

As a rule, immigrants choose large cities because of the greater number of job opportunities available there. When home prices are falling, immigrants create additional demand for housing that helps stabilize markets. But when prices are already climbing sharply, particularly where supply in major cities is constrained, new immigrants can end up driving demand even higher.

In a paper for Real Estate Economics, Andrey Pavlov of Simon Fraser University and Tsur Somerville of the University of British Columbia found that the unexpected closure of the investor immigration program had a negative effect on home prices (1.7-2.6 percent) in the areas and market segments most popular among investor immigrants.

Immigrants account for the lion's share of population growth in Vancouver. What's more, British Columbia has long been a favoured destination for investor immigrants. That immigration program, which had existed since 1986, was unexpectedly suspended in 2012 and then closed entirely in 2014.

The program's closure gave researchers a chance to determine whether a decline in wealthy immigrants actually benefited Vancouver home prices. According to the authors, a large number of wealthy immigrants in certain Vancouver neighbourhoods had driven home prices higher.

A more significant finding was that the absence of immigration would have led to population decline and an aging workforce, which would have had a far more negative impact on Canadian real estate markets.