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Deputy Prime Minister and Minister of Finance Chrystia Freeland listens to a reporter's questions in Ottawa, on Sept. 26.Spencer Colby/The Canadian Press

The federal government is increasing the size of its mortgage bond program by 50 per cent in an attempt to funnel more private capital toward rental home construction amid surging demand for financing from developers.

Finance Minister Chrystia Freeland announced on Tuesday plans to increase the annual issuance of Canada Mortgage Bonds to $60-billion from $40-billion, with the additional proceeds going toward financing rental building construction. Two weeks ago, the federal government announced it would remove the goods and services tax from rental home construction.

Ottawa has been under pressure to create more affordable housing with the average monthly rent across the country exceeding $2,000 and the typical selling price of a home more than $700,000.

Canada Mortgage Bonds are a pillar of the country’s housing finance system. They are issued by Canada Mortgage and Housing Corp., which uses the proceeds to buy pools of insured mortgages, known as mortgage-backed securities, from private lenders. This ultimately reduces the cost of financing for developers.

The government is not making loans to developers through the bond program. Rather it is helping channel private capital toward mortgage lenders, by transforming relatively unpopular mortgage-backed securities into a higher-quality asset that investors want. This provides an important source of funding for smaller banks and alternative lenders that have less access to traditional sources of funding, such as bank deposits.

“It is foundational to multi-unit rental construction in Canada,” Ms. Freeland said about the Canada Mortgage Bond program during a news conference Tuesday.

“We know that it’s going to become even more important, both because interest rates are elevated … and also because having lifted the GST, we are already seeing new projects get under way, and this is to ensure that the financing is available for those projects.”

The government claims the change will help build up to 30,000 more rental apartments a year.

The recent spike in building and financing costs had been slowing the pace of rental construction. That is because rental-only buildings, also known as purpose-built rental, require developers to use their capital over a longer period of time. Purpose-built rental developers only recover their expenses and earn a profit after their units have been rented. In contrast, condo and house developers realize their profits as soon as the unit is sold.

Since Ottawa announced it would eliminate the 5-per-cent GST on new purpose-built rental units, apartment developers have announced plans for thousands of rental apartments.

Dream Unlimited said the GST waiver would allow it to proceed with more than 5,000 new rental units in Ottawa, Saskatoon, Calgary and Toronto. Dream president Michael Cooper called the waiver a “game changer,” and said his company will start construction on 1,350 units this year and the remaining 3,700 over the following two years.

Fitzrovia Real Estate said the tax discount would allow it to build 3,000 more rental units within the next 10 months. Tricon Residential Inc. said it would start work on more than 1,000 units within the next six months.

Even before the GST change, CMHC was directing an increasing portion of the Canada Mortgage Bond program toward multi-unit developments. In a background briefing, a Department of Finance official said that 53 per cent of the bond issuance so far this year has been 10-year bonds which are used to finance larger developments.

The federal government can lead on housing

Tenant advocates have pushed for more purpose-built rental units because it typically provides renters with a more secure form of housing. If a renter is leasing a house or condo from a homeowner, their tenancy can end if the homeowner decides to move back into the unit or sell their property.

Purpose-built rental units used to be the dominant form of housing for renters but that started to shift in the 1990s when builders turned to condo development. Federal and local governments have been pushing for more purpose-built rental though the rate of construction has fallen short of demand from renters.

The announcement on Tuesday appeared to be something of an about-face in the government’s approach to the Canada Mortgage Bond program. In its spring budget, the government contemplated scrapping the program and funding the purchase of mortgage-backed securities by issuing more Government of Canada bonds. The government said it could potentially save money by doing this, but the idea was widely criticized on Bay Street, where investors like having access to these bonds and dealers make money administering the program.

Ms. Freeland said the announcement on Tuesday was “separate from our ongoing consideration of how the Canada Mortgage Bond program itself will work.” She added that the government had finished the first stage of consultations on the proposal to consolidate the bonds into general government borrowing and that it was approaching the issue “very deliberately.”

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