Bank of Canada Ending Pandemic Program That Helped Real Estate Prices Surge

On the day Canadian home sales and prices hit record highs, the central bank announces an end to the program partially responsible for the surge. The Bank of Canada (BoC) flooded the market with cheap mortgage credit in March. Yesterday, as market data showed a fever pitch had been reached during the “worst” recession in years, they committed to stopping the program. The bond buying program that helped drive rapid price growth, comes to an end this month.

Canada Mortgage Bonds 

First, a quick refresher (or intro) to Canada Mortgage Bonds (CMBs). 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 to get the funds. The cash flow from the MBS, is then used to pay investors holding the CMBs. In other words, a CMB is a state-backed security for mortgage financing in Canada. Easy, right? Totally obvious, and I’m sure you got that on the first read. 

These influence the cost of borrowing based demand for these bonds. When investor demand for CMBs rises, interest paid to investors falls. When demand falls, interest paid should rise. It’s a simple concept based on demand of the free market, which changes based on the risk environment. Except in a country that may have a housing bubble. Then when demand evaporates due to risk – the state steps in.

Last year, real estate markets began to see sales volumes drop and price growth stall. The BoC decided, for unrelated reasons *wink, wink*, they would buy CMBs to improve liquidity. Improve liquidity is bankster for, keep rates lower than the market wants them to be. When a buyer picks up any lack of demand, they prevent any increases. This puts a cap on how much interest paid can rise. There’s always a buyer willing to buy in this case, so there’s no need to increase how much is offered. The purchases climbed very slowly, as the weeks went on.

When the pandemic struck, the BoC treated CMBs like toilet paper and hand sanitizer – by hoarding. They began buying them on a competitive basis, meaning they didn’t just buy what couldn’t be sold. They actively competed with bidders, driving rates lower. Normally in periods of increased risk, funding is supposed to become more expensive. This lowers the risk of losses to households borrowing.

Instead, the BoC flooded the market with the cheapest money possible. Who cares what risks households face, right? Essentially, they provided a trap and inflated asset values as unemployment increased. One of the few times in history this has occurred.

BOC Mortgage Bond Spree Rises Over 1,710%

Just how carried away did they get with purchasing CMBs? The central bank now holds $9.32 billion of CMBs as of Oct 7, up 4.91% from a month before. This represents an increase of 1,710.1% from the same week last year. For context, from March to August this balance increased $8.10 billion. Total mortgage credit growth only grew $42.10 billion during this time. This shows how astronomically large the scale of this operation was, and understandably helped inflate asset values. 

Canada Mortgage Bonds (CMBs) Held By The BoC

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

The BoC announced they’ll put an end to their mortgage bond hoarding. The central bank has notified investors they’ll end their program on October 26, 2020. Without a surge of deep pocketed investors looking for crap yields, this will likely slow mortgage rates from falling further. They did inject a lot of liquidity, so an increase may not be in the cards for a while. However, they are still forecasting mortgage defaults will rise by multiples. The bank had always maintained this would be the case in Q1 2021, rising through next year.

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  • OM 3 years ago

    Imagine? There’s a crisis and we think the world is ending. Let’s lower mortgage rates! haha

    • Jon 3 years ago

      Thank you for the clear explanation. Does this mean that lenders will restrict lending?

  • Rob Turner 3 years ago

    This was their gift to investors to get out while deferrals were in place. If you sold while you couldn’t pay, you got a massive gift.

  • Straw walker 3 years ago

    Here lies the problem.
    The BOC has been the major buyer of not just mortgage bonds but also Canadian government bonds.
    The BOC balance sheet is full of low interest rate bonds.. now Canada is about to face a inflationary period that has not ever been seen…not just housing pricing , but a large amount of replaceable good are in short supply, including tyres, auto parts, some vehicles, some food goods including beef. any goods that require a large manufacturing plant, are now in short supply ..and guess what, prices will dramatically rise.
    This will cause escalating rises interest rates..and rates will rise dramatically.
    The BOC will be then setting on low rate assets which will be falling in value…which no one will want.
    So how does the BOC sell bonds back into the market to reduce the money supply and control rates?? When no one will be buying bonds in an inflationary economy..

    • Grizzly Gus 3 years ago

      They will just hold them until maturity. In fact, I bet the print a lot more new currency to buy more bonds and bail out large institutions. Do not hold currency

    • George 3 years ago

      Dear Straw Walker,
      The BOC will not be buying selling their bonds back into the market. They can’t. Look at what happened when the Federal Reserve tried to do that (Taper Tantrum, high REPO interest rates). The Bank of Canada and Fed, as proven by the Fed’s inability to shrink its balance sheet will never be able to sell these bonds without crashing the economy. Given that we live in a bubble economy with low interest rates leading to high prices for all financial assets including stocks, bonds and real estate, should the BOC or Fed start shrinking their balance sheet, it will crash the economy. Therefore, it likely won’t be done. Their money printing is a one-way ticket…they say it is temporary but nobody believes them anymore.

  • Nazrul Islam 3 years ago

    Please end pandemic program urgently before our house buying dream ruin permanently . Please …………..People will need to live out of home if you continue this program 6 more months. This program saving in total around $25K in 5 years. Contrarily, house price increasing $100K every 1-2 months.
    So, what should you do?????????????

  • George 3 years ago

    Dear Straw Walker: The bank of Canada is never going to sell those bonds. It’s a one way street (buying only, money creation). If they sold, they would crash the economy (stocks, bonds and real estate). All these assets are priced as a function of low interest rates. Bank of Canada and Federal Reserve acting like a hedge fund to prop up asset values to keep the bubble economy going. #artificial #debtfueled

  • fred 3 years ago

    Do not be worry they have lots of other tools in their toolbox to pump up real estate as they said
    1- Negative interest rate. and maybe negative mortgage rate .
    2- 30, 40 and even may be 50 years amortization.

    • Groot 3 years ago

      You are correct Fred. Don’t forget the can reduce or scrap the stress test as well. That’s probably the easiest thing can do and the banks will just rates in return. Basically you’ll pay more interest but also qualify for a larger loan.

    • Asterix1 3 years ago

      3. Keep turning a blind eye to local and international money laundering in RE.

  • Sam 3 years ago

    Watching a video on how important real estate is to the economy because of all the jobs it supplies….agents, lawyers, renovators, home inspectors, bankers & other mortgage financial staff….

    Also how important the mortgage industry is to the many investment funds, and by extension, investor portfolio’s who have seen significant growth over the last 25 years.

    Since the resource industry has crashed, the mortgage industry has carried the torch as the #1 profitable investment venue in Canada.

    We laughed at the “stupid, greedy” Americans in 2008 and smugly stroked our egos saying to ourselves that the Canadian Banking System is so much more conservative, safe and better.

    Well, we may not have been cramming Big Macs down our gullet like the Americans, but we’ve been eating an unhealthy diet of low-interest, price rising, home-profiting for years…..

    The government just added the stint & pace-maker to keep it going through the pandemic….but that just propelled us to eat even more….when will this unhealthy market experience the heart attack that we all know is coming…?

  • SH 3 years ago

    Immigration fire hose will be turned to full blast by early next year. The Liberals intend to keep their century-high intake targets.

  • Hgbvv 3 years ago

    Oh please, we all know whats needed to solve the problems.

    1. Anyone / incorp that owns multiple residential real and if any of those are located in unaffordable places like Toronto and Vancouver than those houses needs to be taxed heavily to force hoarders to sell.

    2. Any foreigners who own residential real in unaffordable cities like Toronto and Vancouver needs to be taxed to force speculators to sell.

    3. Any PR that owns residential real estate and do not live in unaffordable cities like Toronto and Vancouver needs to be taxed.

    We all know the solution including the government, why aren’t they looking out for Canadian? They are corrupt, using all Canadian tax pay money to fatten speculator pockets instead of punishing them for tearing our society apart.

    • Groot 3 years ago

      I would go even further and tax regardless of location. If you just tax in big cities the speculators will just buy in smaller towns and truly screw the locals.

  • Peter 3 years ago

    My father owned real estate many years ago in the usa.
    One day ,he said to me that buyers were crazy, paying for properties with money borrowed as money rates were very cheap at the time ,
    5 years later, the conversation came up again. He said” oh ! to have cash now. Money is scarce now, Banks not lending, Properties are for the begging ”
    Give it time, Canada, its coming here too.
    Cash will be king once again.

  • Bev kennedy 3 years ago

    The other positive for municipal taxes is the enhanced valuations for the land transfer taxes with the selling at an inflated price as well as the increased number of transactions.

    A very very insightful article by the way!!!

  • Joni 3 years ago

    Is the central bank answerable to any authority what damage they have done to the poor by spreading wealth inequality in housing market? Why average house prices increased about 15% in about 3 months? We want to know how many real estate properties owned by decision makers, are they benefiting to themselves by pushing the house prices higher and higher?

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