Housing Minister Gregor Robertson recently said the federal government’s new Build Canada Homes agency is actively working to bring Canadian banks and pension funds into the financing of affordable homes.
The ambition is understandable, but the structural challenge is not new. Steve Pomeroy, senior research fellow at Carleton University and one of Canada’s leading housing policy experts, has long pointed to the legacy constraints of public housing:
“The key legacy features of public housing are: Aging assets, constructed 40-60 years ago; deeply targeted properties (most at 100% rent-geared-to-income) in which rents are insufficient to cover operating expenses and capital renewal; most have negative income and no capacity to leverage financing for capital renewal.”
New public housing stock would, in theory, be in better physical condition. But the core issue remains the same: projects must generate enough stable income to cover operating costs and ongoing maintenance before market-based financing can reasonably enter the picture.
Without that foundation, it’s difficult to see why banks or pension funds would deploy capital on deals that are not economically viable at market rates. Addressing this gap is possible, but it requires changing the economic calculus, either by improving returns, reducing risk, or both.
Financing Affordable Housing Through Municipal Bonds[i]
U.S. local governments have the power to raise debt in public markets through bond issuances to finance operating and capital needs, including housing. The U.S. municipal bond market is the largest in the world, with US$4 trillion in outstanding debt. Between 60 and 70 per cent of these bond proceeds are used to fund municipal infrastructure and housing projects.
A key driver of demand for municipal debt is the tax advantage for investors. Interest earned on municipal bonds is generally exempt from federal income tax, making these bonds attractive to both institutional and retail investors. Since investors are willing to accept a lower rate of return in exchange for reduced tax obligations, local governments can borrow from the public debt markets at lower costs, typically 100 to 160 basis points below comparable taxable bonds.
One specialized category, private activity bonds (PABs), can provide financing for multi-family residential housing projects. PABs are subject to annual capital raising limits—US$48 billion in 2025. While they fund a variety of initiatives, they are critical for developers building affordable housing projects. Roughly 44 per cent of PABs (US$18 billion) are allocated to affordable rental housing projects, helping bridge financing gaps where traditional market-based funding may not be feasible.
Direct Lending for Social Housing
In the 1990s, CMHC introduced its direct lending program to deliver mortgage funding for existing social housing facilities at a lower cost to the government. Loans were provided by the private sector, with the federal government offering a subsidy to social housing groups to help offset the costs. The program delivered roughly $2 billion a year for this targeted social housing mortgage portfolio at a lower cost than private-sector financing.
Direct lending mortgages are non-prepayable, and each mortgage pool is fully funded with fixed-rate Canadian dollars on a matched-maturity basis. Various financial instruments—such as basis swaps, accreting swaps, interest rate swaps, and cross-currency swaps for foreign-denominated debt—were used to manage any differences in asset and liability cash flows, reducing interest rate risk on this portfolio to a negligible level.
At the time, the government was concerned about its debt and deficits, so Crown corporation debt was not consolidated into federal debt. As the government’s fiscal position improved, the debt was consolidated back into the overall federal debt. CMHC began borrowing from the federal government at a spread over Canada bonds to fund this program, rather than borrowing from capital markets directly.
This form of funding would suit a certain segment of the affordable housing spectrum. The key challenge today is determining how to deliver this type of funding efficiently.
Pathways to Financing Affordable Housing
Private activity bonds (PABs) could be a source of financing for building affordable housing. Banks such as TD and RBC have extensive experience with this product in the U.S. and could provide the framework to deliver it to investors. The cost to the government is limited to the foregone tax revenue on interest earned on the debt.
A key challenge remains: how to finance this housing once it is built and requires a mortgage. Deeply affordable housing—where rents are below operating and capital renewal costs—is not suitable for market-based financing without additional subsidies. However, there is likely a segment of housing that does not qualify for CMB (Canada Mortgage Bond) financing but could be viable with slightly lower financing rates.
The government could also consider reintroducing the direct lending program. Investors would finance the program by purchasing government debt. Using a CMHC guarantee could provide an indirect way to fund these projects; in the past, CMHC guaranteed the housing debt of Quebec. This type of debt would likely be of interest to pension funds. However, it is unclear whether the cost of funds would be low enough to make the financing efficient, and there is also a question of what fee is appropriate for the guarantee—or whether the guarantee effectively acts as a subsidy.
Finally, for affordable or multi-family housing projects eligible for funding through CMHC securitization programs, there is an interesting incentive through the $9-billion annual guarantee threshold. This threshold limits the amount of NHA MBS (National Housing Act Mortgage-Backed Securities) an individual issuer or lender can issue before a penalty fee applies. For lenders at their limit, the guaranteed threshold could potentially be waived for multi-family market MBS, which would:
- Encourage expansion of the market MBS program
- Involve institutional investors in funding this housing supply
- Incentivize banks and other lenders to source more of this product
The federal government benefits because the measure is not costly to implement and broadly supports housing affordability through vacancy chains.[ii] Vacancy chains occur when one household moves into a newly available unit, freeing up their previous home for another household, and so on, creating a ripple effect that increases the effective supply of housing without building new units. While this may not directly increase the stock of low-income housing, it can increase the overall supply of affordable housing.
Financing affordable housing requires a mix of solutions. Each approach has its strengths and limitations, and different segments of the housing market will require tailored strategies. While deeply affordable housing may still need additional subsidies, there is significant opportunity to expand the supply of market-rate and affordable housing through these mechanisms.
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[i] This section is based on material from A Housing Trifecta: How governments can tap private capital to improve supply, sustainability and affordability, RBC Thought Leadership, Myha Truong Regan, June 5, 2025.
[ii] Bratu et al. (2023) studied vacancy chains created by new multi-family buildings built near Helsinki. They found that the supply of new market-rate units triggers moving chains that reach middle- and low-income neighborhoods, improving affordability and benefiting lower-income residents.
Independent Opinion
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