Bank of Canada Ended The Mortgage Program That Inflated Prices… Kind of

Canada’s central bank is still buying tens of million of mortgage bonds. Bank of Canada (BoC) data shows the balance of Canada Mortgage Bonds (CMBs) they hold, increased this week. The increase is a couple of weeks after the pandemic program to buy these has ended. However, it appears that didn’t mean they were going to stop buying them entirely.

Canada Mortgage Bonds 

We’ve talked about Canada Mortgage Bonds (CMBs) quite a bit, but if you missed it – here’s a quick intro. Lenders originate mortgages, pool them, then sell the pool as mortgage backed securities (MBS) to the government. To pay for the MBS, the government sells CMBs to investors for the funds. The cashflow from the MBS is used to pay investors that bought the CMBs. Therefore, CMBs are a state-backed security for mortgage financing in Canada. 

Government backed securities are usually very secure, so they don’t pay investors much. When investor demand rises for CMBs, interest paid falls. If demand falls, interest paid rises. Pretty straight forward, except when the country’s central bank becomes the investor. In this case, the activity of the BoC helps put a ceiling on rates, and can actively drive them down.

Last year, when real estate sales slowed without an obvious reason, the BoC decided to buy CMBs. It was for, uh… totally unrelated reasons, of course. They bought them on a non-competitive basis, which means they didn’t bid against other investors. This capped rates from rising. At the start of the pandemic, they began buying them on a competitive basis. This actively drove down rates, as they competed with investors. 

Rates are supposed to rise in periods of turmoil, as a form of risk management though. You don’t want people borrowing more when things are getting worse. However, when the BoC drove rates lower – that’s exactly what happened. Real estate sales hit record volumes, while mortgage rates fell to record lows. The BoC blamed borrowers for borrowing, and then announced they would end the program on Oct 26. Except, the balance of assets are still rising.

BoC Mortgage Bond Balance Up 1,748%

The balance of CMBs held by the BoC is still rising fairly fast, even post “end” of program. The balance held reached $9.722 billion on Nov 11, up 3.45% from a month before. The increase works out to a 1,748.10% rise from the same week last year. If that sounds like an absurdly large increase, that’s because it is. 

Canada Mortgage Bonds (CMBs) Held By The BoC

The dollar value of Canada Mortgage Bonds held as assets by the Bank of Canada, in millions of dollars.
Source: Bank of Canada, Better Dwelling.

BoC Mortgage Bond Balance Increased $122 Million After Program Ended

The program was supposed to end in October though, right? Well, on October 28th, two days after it officially ended, the balance was $9.601 billion. The balance has increased about $122 million, or about 1.26% from then. That’s still a fairly aggressive increase, despite the end of the program.

Now, this may answer one of the questions that was lingering – the program ended, but buying didn’t. In other words, they’re still working to keep rates from rising to some degree. They just aren’t buying on a competitive basis, to try to drive them lower.

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  • Alex 4 years ago

    Can’t think how this can possibly end badly 🙂

    • John Allegro 4 years ago

      I, personally, like your explanation of how MBs work through the financial system. I would also be interested on your summerisation of how the boc controls interest rates by the purchase or selling of bonds.

    • Jimmy 4 years ago

      Alex its all good this will be the first time in human history that printing money will work out well. We’re Canadian its all good.

  • V. 4 years ago

    Ridiculous. Market interference by the Bank of Canada sending wrong signals to the real estate market leading people to believe that all is great when in fact as you say interest rates should have risen consistent with general increase in risk as a result of the pandemic.

  • Pepp 4 years ago

    Toronto is already #3 on world real estate bubble list. Time to implement real estate speculators tax and foreign ownership tax to solve the budget deficit and housing crisis problem. If they are scared they can start with Toronto only.

    • sjm5000 4 years ago

      Numerous economists outside Canada insist the only thing propping up the economy of Canada (and Australia) is the real estate bubble. I look out the window from my 1-bedroom rental in Vancouver (I make $70k/year but don’t qualify for a mortgage with 1-bedroom condos selling for over $500k) and I see 12 high rise condo towers going up. Offshore money investing in a market they don’t live in. Globalisation is a total failure for working people but banks are winning and governments are pretending everything is okay and papering over their years of gross negligence. This is about to end very badly….

  • Scott 4 years ago

    Aren’t you doing an apples and oranges comparison here? Bond buying is a result of covid loan loss concern, liquidity injections, rather than mortgage price stimulation. Canadian bank assets are by nature mortgage heavy. Therefore these are the assets boc acquiring

    • Trader Jim 4 years ago

      Loan loss concerns should make risk premiums increase, so this is directly related. Providing liquidity prevents rates from rising.

      They also injected liquidity by lowering the DSBs, which would have provided more than enough liquidity for the actual debt being issued. In case you had any doubt that this was a lot more than just an emergency measure.

      • backwardsevolution 4 years ago

        Does DSB stand for the Domestic Stability Buffer? Is this buffer there to ensure that banks continue lending if the economy turns down? Are they like bank reserves? What are they?

        “In case you had any doubt that this was a lot more than just an emergency measure.” The economy was already rolling over prior to Covid. Then Covid “mysteriously” appeared, the economy crumbled, investors stepped away (which should have sent rates UP), and the government stepped in and bought up the CMB’s to keep rates down.

        Had the Central Bank NOT stepped in to buy the CMB’s, how high would rates have gone in your estimation?

        Are you saying the Bank of Canada is purposely trying to prop up the market, keep asset prices from falling?

        IMO, Covid came in very handy for the world’s central banks.

  • chris morrill 4 years ago

    Buying bonds to put more cash in reserves at banks, keeping rates low and stimulating the economy in a time of crisis. Doesn’t seem bad to me but idk

    • Ian 4 years ago

      It’s non-productive monetary expansion. Inflation for the sake of inflation, not because of economic progress. It’s actually really bad.

    • Sam 4 years ago

      This link explains the pandemic moves the BOC is making. I don’t see a conspiracy here, but I don’t like it. Buying MBS’s via issuing CMB’s will inject liquidity into the economy…..sure. Allowing banks to use “greater collateral” i.e. mortgages, to access funding during the recovery will facilitate liquidity…..sure.

      Am I being naive to think that the long term effects will prove worse than if the BOC sat on their hands and let the situation play out?

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