Canada

Bank of Canada Pumping Billions Into Mortgage Liquidity To Prop Up Real Estate

Canada’s central bank is desperately trying to prop up real estate markets with liquidity. Bank of Canada (BoC) has been injecting billions into Canada Mortgage Bonds (CMBs). The central bank began purchasing a few million worth of bonds during last year’s real estate slow down. As the pandemic hit, the BoC began buying hundreds of millions worth of CMBs per week. The flood of liquidity has a limited impact on preserving prices, but creates a massive withdrawal risk.

Canada Mortgage Bonds (CMBs)

Canada mortgage bonds (CMBs) are debt securities guaranteed by the Government of Canada. Basically, lenders originate mortgages, and then group them into a pool. The pool is then sold to the government as a mortgage backed security (MBS). In order to buy MBSs, the government sells CMBs to investors to generate the funds. The cash flow from the MBS is then used to make payments to investors holding CMBs. Long story short, the CMBs are a state secured vehicle for mortgage financing.

Since the government of Canada guarantees all CMBs, they pay very little interest. In a normal market, when demand rises for CMBs, interest paid falls even further. When demand drops, interest rates typically rise to attract more investment. Simple supply and demand, right? Not in a country that’s gone all-in on its housing bubble.

When real estate markets began looking a little tired last year, the BoC stepped in. They started buying CMBs to “improve liquidity,” which is bankster for suppressing rates. At first, they said it was going to be on a non-competitive basis – meaning they would support market rates and prevent increases. Starting on March 20 of this year though, they announced they would start buying on a competitive basis. They now actively play a role in driving mortgage rates down. This drives investors even further away from the asset class, meaning they have to buy even more. In other words, money printer goes brrr.

The BoC Is Injecting Hundreds of Millions Per Week

The BoC has purchased billions in CMBs since the beginning of the year. As of July 22, the BoC held $7.95 billion in CMBs, up $234 million from a week before. That works out to a balance increase of 1,450% from the same week last year. What started as just a few million worth of bonds, has turned into a few million per week.

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.

Mortgage-based stimulus creates two key vulnerabilities – demand is pull forward, and taper tantrum. By lowering rates, the market doesn’t receive new demand. It borrows demand from the future. Only so many people are stimulated into buying with lower rates, and it largely just results in higher spending. After the market burns through people incentivized by lower rates, it creates another gap later on. This becomes a whole other problem when that cohort of buyers is smaller due to borrowed demand.

A taper tantrum is how the market reacts to the withdrawal of this stimulus. After all, if the market buys on stimulus, it holds back when it disappears. The return to normalized rates is so difficult for the market to accept, it rarely happens. And when it does, it causes another pressure against buyers, and lasts just a few months. For example, when interest rates briefly increased in 2018, and sales dropped to lows.

The BoC is pumping billions into the market to flood it with cheap money, and keep it floating. Despite stimulus, prices are starting to slip in cities like Toronto and Vancouver. Even worse, this stimulus is so large, it creates an overhang the government will have to deal with later. Combine this with the payment deferral cliff, and the market is increasingly lining up issues that will require even bigger stimulus to prevent a disaster.

Like this post? Like us on Facebook for the next one in your feed.

40 Comments

COMMENT POLICY:
We encourage you to have a civil discussion. Note that reads "civil," which means don't act like jerks to each other. Still unclear? No name-calling, racism, or hate speech. Seriously, you're adults – act like it.

Any comments that violates these simple rules, will be removed promptly – along with your full comment history. Oh yeah, you'll also lose further commenting privileges. So if your comments disappear, it's not because the illuminati is screening you because they hate the truth, it's because you violated our simple rules.

  • Peter 2 months ago

    Mortgage printer goes brrr*

  • Jeremy T 2 months ago

    Easy way to socialize any losses. Print extra money, and make sure the nominal value doesn’t decline as much at the cost of higher inflation.

    • Ian Brown 2 months ago

      Double check your facts. There is no inflation. It’s below target.

      • Trader Jim 2 months ago

        Printing money hasn’t caused inflation because it’s not moving. Once that excess capital starts moving, we’ll see inflation rise very rapidly.

        Here’s a take on the US deflation narrative being very incorrect.

        https://www.wsj.com/articles/if-inflation-is-coming-the-market-isnt-ready-11592305397

        • Ultro 2 months ago

          Exactly.. 2022 will be fun as inflation will show it’s power

          • alvi 2 months ago

            Short US treasuries for all you guys who think you are smarter than the market.

      • straw walker 2 months ago

        I’m guessing your being sarcastic.

      • AdrianR 2 months ago

        #Ian Brown – do you really believe there is no inflation. Check your grocery bill.
        Let’s go back to the original definition of inflation – increase in money supply.

      • zalzon 2 months ago

        The value of cash should be going up massively. Inflation aka money printing however steals those gains and transfers it to those incurring a loss.

        It’s always the banksters who ran up bad bets who end up being the beneficiaries of that “stimulus” while the taxpayer is told he now has to pay back that stimulus debt taken out in his name to help the banksters…opps I mean the economy.

        The robbery of cashs’ value likewise is wealth stolen from saver, pensioner and the working poor.

        As if that weren’t enough, the CPI numbers deliberately understate the real rate of inflation and is a total fabrication.

        All in all, the regulatory and even judicial capture of the nation’s govt and courts by banksters destroys the productive people in society.

        • Kerry Heseltine 2 months ago

          Brilliantly put and said! My twin brother is third gen. legal beagle, my father would have totally agreed with your response. The rich get richer and the poor get poorer N.T. K.J.V.

      • Arun 2 months ago

        Asset inflation isn’t in the goods CPI basket, genius

        • Ian Brown 2 months ago

          “There is no inflation. It’s below target.” is what I said.

          It’s cute when people that can’t read sarcastically call others genius, dummy.

      • Norm Dill 2 months ago

        So much economic analysis these days, like this particular analysis, is incomplete because it focuses on a single factor. What you can say is that this single factor will influence the overall economy, and a specific market, in a particular way. But this doesn’t account for myriad other factors that may have an impact. This is why these forecasts rarely come true. They’re too simplistic. Simple maybe good, simplistic is bad. If I was evaluating this as a paper I would give it a c+ if the topic was how will the Bank of Canada purchases of Canada mortgage bonds impact the market, all other factors equal. If the topic was exactly the same except you dropped off all other factors equal I would give it an f.

    • Norm Dill 2 months ago

      I understand the theory but experts in the theory have been calling for the collapse of the Canadian real estate market for over a decade, it hasn’t happened so far. Does this just mean we have an extraordinarily large bubble? I guess theory would say that’s the case, though it could be that the analysis is leaving out other positive factors for the price level of real estate. Things like the continued growth of population in places like Toronto and Vancouver, international demand for the relative stability of Canada etc.

      • alvi 2 months ago

        Biggest Bubble in history is global bond market at least in your home you have somewhere to live

  • Mike 2 months ago

    2 years later…..
    going out for chicken wings and a beer is going too cost u 150 dollars

    • Trader Jim 2 months ago

      “But it’s not inflation”
      — Bank of Canada

      • zalzon 2 months ago

        It’s Crony Capitalism and capture of bureaucratic, legislative and even judicial bodies of govt by banksters looking to offload their losses on the nation.

        The very reason why the power to create money or even decide what should be money should never be a monopoly of a select few. Inevitably it results in the picking of winners and losers with the winners being the entities that successfully corrupt govt and fill its ranks with their cronies while the losers are people making an honest living producing goods and services of value in an economy.

    • Hector Pluctor 2 months ago

      didn’t you get the memo? the “basket of goods” used to calculate the inflation index is constantly changed so it “appears” not to be increasing…. 😉

      • zalzon 2 months ago

        Right on.

        Real rate of inflation has been well above bogus inflation numbers out out by govt at the behest of banks. Idiotic economic theories have been rolled out over the years to justify creating phoney statistics.

  • Trader Jim 2 months ago

    Inflate it away.

    Just hope you’re not a senior looking to retire with fixed income, because you just got that future traded to housing speculators.

  • Ethan Wu 2 months ago

    When you bank the whole economy on real estate speculation, the whole economy needs to socialize any downturn.

    • zalzon 2 months ago

      The whole economy is not banked on speculation.

      There is the productive part of the economy (a shrinking minority) who are producing real goods and services.

      And then there is the non-productive part of the economy flipping homes and gambling with leverage.

      The latter want the former to bail them out. After having collected the profits on the way up, they need some sucker to offload the losses on the way down. Hence all the stories of too big to fail and the economy needs “stimulus” which is debt taken out in the name of the people to hand over to them to square their market gambling losses.

  • Forgetful Nelly 2 months ago

    Remind me why banks should be able to borrow money at the same price as the government, at the expense of my purchasing power?

    • Daryl 2 months ago

      Say what?

      • Forgetful Nelly 2 months ago

        CMBs trade at a tiny spread to sovereign bonds. The government makes sure banks never sacrifice margins in Canada, and do it at the expense of money printers going brrr.

    • zalzon 2 months ago

      More importantly, remind me why taxpayers, savers, wage earners and pensioners are plundered to bailout banks which lose huge sums of money gambling their a$$ away. They certainly keep the profits on the way up yet want the govt to do stimulus, money printing, bailouts and soon bailins on the way down.

      Break up these banks. Trying to deliberately create too-big-to-fail monopolies that are used to extort the nation’s productive people into handing over their hard earned wealth to cover banksters gambling losses is a fraud.

      Hand back the entire portfolio of sub prime mortgage garbage that taxpayers have been forced to insure at below market rates by CMHC cronies to the same banks that profited from creating it.

      Stop this corrupt brand of Crony Capitalism that has productive people of society robbed to pay for unproductive gamblers buying influence in govt with stolen wealth.

    • John 2 months ago

      Lol the bank of Canada? I don’t think so it’s like the federal reserve in the states has nothing to do with the ppl they loan money oitta thin air and charge interest what a lovely scam ppl fall for. We need to get rid of all central banks and start printing our own money like we use to up till 1973 with very little interest on the ppl we have enough resourses and stuff to back our money but our corrupt government has been high jacked by the very few that want a one world government.

      • Ethan Wu 2 months ago

        The Bank of Canada is nothing like the federal reserve. The Bank of Canada’s routine operations are the same as the Fed’s emergency operations, where they’re required to buy government assets on a non-competitive basis.

        • zalzon 2 months ago

          Bank of Canada is exactly like the Federal Reserve.
          i.e. designating private banks too-big-to-fail as they load up on risky leveraged bets, offloading the losses of these banks onto the public via $150 billion of sub-prime mortgage garbage purchases from CMHC at 100 cents on the dollar, “stimulus” which mostly is taxpayer money going towards covering the losses of these private banks…

          What’s amazing is that the Bank of Canada has steered itself into being a country club for these private banks despite clear legislation that states it is owned by the people.

          All such bailouts are framed as being in the interest of the people when all it ends up being is a robbery of wealth from the people to profit banks.

          Its insane how private banks take over the machinery of govt and the monetary system and how complicit bureaucrats and politicians become in facilitating just that.
          The power to create money should not be in the hands of govt aka politicians or so called central bankers as they are inevitably corrupted and sell the people into slavery to banks.

  • Kolf 2 months ago

    Fuk this country, this is the worst country for young people to live in. High taxes high cost of living and horrible weather for most of the year.

    • Mike 2 months ago

      Feel u

    • zalzon 2 months ago

      Don’t worry dude.

      Currency is going to be devalued thereby eliminating debts which savers, pensioners and the working class will be made to pay for. That’s how I see this end game playing out.

      Along the way add in a forced move to bankster issued digital currency so the the above robbery scheme can take place. Banking in general is a rent seeking “industry” so they got to find some host to live off.

    • SH 2 months ago

      Kolf, if you are under 35, I highly recommend you look into Working Holiday Visas. Canada has agreements with most European countries, Australia, and New Zealand. You can get a WHV easily and then use that as a stepping stone to permanent residency. I did it years ago and leaving Canada was the best decision of my life.

  • JC 2 months ago

    I don’t understand this article at all. Could someone be kind enough to ELI5? Thanks in advanced.

  • Vincent Domenico 2 months ago

    So is there going to be a housing crash or what? I’m confused

  • David Williams 2 months ago

    Why does the government let the market dictate when it comes to gas prices, food and other commodities but allows foreign workers to hold wages in check and intervenes when it comes to house prices. Either let us live in a democratic free market economy or stop pretending the average citizen has a fair chance to succeed. Stop catering to the top 10%.

    • zalzon 2 months ago

      Your 100% right.

      Its free market for some and crony capitalism for others who can get their tentacles in the machinery of govt, stock their cronies in central banks and other decision making positions and bribe politicians.

Comments are closed.