As we head into the final two months of 2024, it’s becoming clear that the market is gearing up for better times ahead on the back of four Bank of Canada rate reductions since June including last week’s 50 basis point cut. This is good news since the year started in a quiet manner with limited sales transactions and lower development activity reflecting prior period monetary policy tightening.
For First National, our presence in the multi-unit residential segment of the market has enabled us to perform well through this period of change. As we reported earlier this week, total commercial fundings through the nine months ended September 30th were $10.8 billion, 17% above the previous record set in 2023. This brought our commercial mortgage book to $55.2 billion, reinforcing First National’s position as the #1 lender in the multi-unit property market. That leadership extends to the support we provide to those purchasing existing properties and developing new ones. Excluded from these numbers are the funds allocated to our construction program which exceeded $5 billion earlier this year.
In keeping with past practice, I’m sharing these details for reasons of transparency but also because digging into the numbers and the reasons for them provides insight both into current market conditions and expectations.
Drivers of recent performance
Record results reflect more than just the efforts of First National’s advisory teams across Canada, although I do commend them for the work they are doing on your behalf. Fundamentally, the market is being driven by:
- Demand for rental apartments set against a backdrop of limited unit supply.
- Compelling CMHC incentives to build and preserve rental stock.
- CMHC refinements last year and again this past June that pulled forward financing submissions that might have otherwise occurred in later periods.
- Private developers/asset owners, who have taken over the dominant spot previously occupied by large institutional investors.
On point 2 above, it’s clear that CMHC’s MLI Select is now of sufficient importance to move the market. On point 3, some of those June submissions will be approved by CMHC before year-end. This leads me to believe that Q4 will be stronger than Q3 for First National’s funding volumes.
What we expect in the short run
We expect a good finish to 2024 for the four reasons noted above, but also because of less restrictive monetary policy. As noted above, four Bank of Canada rate cuts between June and October are translating into a more constructive and predictable environment for all market participants.
The knock-on effect is seen in the resurgence of property transactions. It’s reasonable to expect this momentum to continue as price discovery becomes easier. Lower interest rates also improve confidence for those planning new multi-unit developments.
In any well-rounded outlook, other key inputs must be considered, and these include:
- trends in Canada’s unemployment rate (down modestly in September for the first time since January) and wages (up year over year)
- recently observed flattening of rental rates and in some cases negative growth
- changes to immigration policies, including restrictions on student visas
It’s also necessary to acknowledge that less restrictive monetary policy exists for a reason: to support renewed economic growth and potentially promote a soft landing.
Thinking of your safety and security
Overall, the long-term fundamentals support optimism and investment activity, however the short term feels choppy with affordability issues and a slow-growth economy. Consequently, this is no time to abandon good risk management practices, interest rate hedging being one. Bond market volatility not just in recent weeks but every year demonstrates the utility of First National’s Early Rate-Lock options.
Now that 10-year Canada Bond yields are back to approximately 3.25%, taking a long-term mortgage when matched against a long-term cash flowing asset like a rental apartment is also a sound decision for those seeking security. With more 5- and 10-year funds available than any other multi-unit lender, the choice is yours but it is important to note that there will be dramatically more funds available for 10-year loans in 2025 because of larger Canada Mortgage Bond allocations.
Better Lending starts here
To live up to our Better Lending credo, we intend to leverage our capabilities to provide you with best-in-class advice, mortgage products, funding, service and administration. We have staked our position at all touchpoints of the mortgage lifecycle because we know every one of them matters to your experience. This makes First National different, and we think better, than lenders with limited reach and limited capital.
Broader and deeper capabilities when combined with the experience gained across so many commercial financings also give us a unique perspective on the market. I absolutely encourage you to tap into that perspective and, in particular, take a moment to talk to us about recent changes in CMHC programs and the merits of qualifying for MLI Select using affordability criteria. The removal of energy efficiency alone as a means to qualify for a 50-year amortization necessitates more careful and proactive planning.
Rest assured First National will continue to advocate for our strong developer clients in discussions with CMHC in an effort to balance structures that support borrowers while also achieving outcomes desired by CMHC.
Thank you
2024 has been an unprecedented year for First National as our commercial mortgage book surpassed $50 billion. But what gives us the most pride and satisfaction is the long-lasting client relationships we’ve formed over the past three decades of growth. Thank you for giving us the opportunity to serve. We look forward to doing more for you in 2025.