Canada

Bank of Canada To Further Taper Toxic Program That Helped Push Home Prices Higher

Canada’s central bank is closer to ending the program that added rocket fuel to home prices. The Bank of Canada (BoC) announced it will taper its quantitative ease (QE) program. QE has been a major contributor to the flood of cheap cash that’s helped push home prices higher. As the program gets close to an end, the boost to home price growth is likely to disappear as well.

Quantitative Ease (QE)

Quantitative ease (QE) is a policy tool central banks use to create inflation. The BoC injects billions of dollars per week into the bond market, sending prices higher. Like a panicked shopper looking for toilet paper last year, their goal isn’t to find a deal. It’s to find as many  rolls  bonds as they can find. By adding demand from a buyer with unlimited resources, they push yields lower. They’ve essentially flooded the market with money, making it dirt cheap to borrow.

Since credit markets compete for the same capital, it becomes cheap to borrow all credit. Even lower than it would be with just an interest rate cut. They want people to borrow the money to spend in the economy, and increase demand. Since increased demand pushes prices higher, inflation rises. Success.

The program is highly controversial and causes a host of unintentional issues. Rising inequality is one the BoC has mentioned itself. Higher asset prices, including housing, are another. It’s got to the point where there’s actually a petition to stop any future use in Canada.

Now that we’ve got inflation coming out of the wazoo, they’re considering maybe the higher goal has been met? Maybe. 

Bank of Canada To Taper QE To $2 Billion Per Week

Yeah, that’s not a typo. Billion, with a B. Per week. Today the BoC announced their widely expected move to trim their QE program. The rate of QE will be slowed to $2 billion per week, down from the $3 billion prior. The program had been cut earlier this year as well, down from $4 billion per week. The program’s size was just reduced by a third, and it’s half as much as it was earlier this year. 

Experts see QE ending, especially with the economy recovering at this pace. When it ends is a little more difficult to nail down. Desjardins’ said earlier today they expect the central bank may end the program as early as this fall. RBC and BMO said they see it happening early next year. All of the above parties are currently forecasting a hike to interest rates by mid-next year. 

Cheap Credit Helps To Push Home Prices

This cheap credit has played an important role in supporting high home prices. While the BoC refused to acknowledge cheap credit contributed to higher home prices, they don’t actually believe that. They recently updated their forecasting model to include the impact of credit on home prices. They called it an “innovation” that cheap credit can do that. The real estate industry has known this for years.

Lower mortgage rates apply two pressures to home prices — both demand and supply. By making mortgages cheaper, a borrower can move their home purchase ahead. This makes them competitive with existing buyers at the time, pushing prices higher.

The cheap money that helped accelerate a homebuyer that competes with existing buyers in the market? It also applies to the existing buyers as well. In order to compete, they now have access to even more credit than prior to rate cuts or QE. So all buyers have more money to compete with each other.

In other words, they can absorb rising home prices more easily. It makes sense, and it’s the reason central banks lower borrowing costs. Earlier this year the BoC didn’t share that opinion though, and put it solely on exuberance. Apparently, people weren’t supposed to use the capital the BoC wanted them to use. Silly people.

What does this do to mortgage rates? Technically speaking, tapering QE reduces the amount of market liquidity. Under normal circumstances, reduced liquidity means higher borrowing rates. If it actually increases borrowing rates is dependent on the supply of capital available. 

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12 Comments

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  • Christopher Barclay 2 weeks ago

    QE has a place. Using it before you see the impact of your rate cuts made no sense, and was to essentially support a political spending campaign for approval.

    • Ethan Wu 2 weeks ago

      It started less as a political spending campaign and more of a heist. We didn’t need to bail out profitable companies, and the criteria could have easily could have been based on profits. It wasn’t.

      Even after criticism, they didn’t change the criteria. They extended the program.

    • D 2 weeks ago

      Yes, QE has a place when an economy is completely in depression. Seeing how it isn’t then it was never needed. Although arguments can be made that we’ve been in a depression since 2007.

  • Ali 2 weeks ago

    The coincidental slowdown of home prices with the coincidental slowdown of QE is something to consider. Home prices are expected to moderate later this year, as the program is tapered and $4 billion per week is no longer used for dirt cheap rates

    • Whiskey Foxtrot 2 weeks ago

      It helps increase prices when they’re flat or need to recover, but no one knows anything about the programs when they get out of control. Brilliant.

  • Lauren Maddox 2 weeks ago

    Is it just me, or are central banks completely against the public’s best interests?

    • Whiskey Foxtrot 2 weeks ago

      When central banks became political, they stopped serving their role and became a tool to “unlock” future income from your revenue units (humans).

    • D 2 weeks ago

      They’re only concerned with top-pop 1% and their well-being. Everybody else is an unwashed slave.

  • D 2 weeks ago

    This is a warning signal for the big boys here in Canada that rates will raise in the near future.

  • Tom Wolfe 2 weeks ago

    ‘Quantitative ease (QE) is a policy tool central banks use to create inflation.’

    Mission accomplished.

    Caesar’s Palace doesn’t give free chips at the door but they do provide free alcohol. That’s because they know what they’re doing.

  • Dumb Canadians 2 weeks ago

    Of course they will raise rates. That’s simple economics. Naysayers are just wishful speculators that don’t know how the economy works. There are a lot of these morons, however.

  • Steve 2 weeks ago

    The B of C had a chance to let some air out of the Canadian real estate bubble. Instead, through QE they decided to blow that balloon up even more. Anytime the government at any level tries to make housing more affordable they make it worse.

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