Canada

Bank of Canada’s Mortgage Buying Is A Quarter The Size of New Mortgage Credit

Canada’s central bank is using billions to flood the mortgage market with cheap money. It hasn’t been very effective, considering the scale of the purchase. Bank of Canada (BoC) data shows a big mortgage bond buying spree since the beginning of the pandemic. The dollar value of the bond buying was known, but we’re only starting to see the scale. It turns out the central bank’s shopping spree is a quarter the size of mortgage credit expansion during the same period.

Canada Mortgage Bonds

We’ve already gone through this in more detail before, but here’s a quick overview to catch new readers up. Canada mortgage bonds (CMBs) are a debt security guaranteed by the government. Lenders originate mortgages, group them into mortgage backed securities (MBS). To buy the MBS, the government sells CMBs to fund the purchase. The cash flow from the MBS is then used to make payments on the CMBs. There’s few more details on the mechanics, but that’s the gist of the program, and what you need to know for today’s data.

Long story short, the more demand there is for CMBs, the cheaper mortgages can be funded. Lower demand for CMBs means more expensive mortgage rates. This is supposed to be a self-regulating function that the market determines. If the economy is slow, it should be more expensive to fund mortgages. The responsible thing to do is not lend people as much money as possible in the middle of a downturn.

If the economy is flush with cash, it should be cheap to get a mortgage. After all, people that lose a job during a booming economy can usually find another one pretty fast. All of this breaks when you’ve spent a decade concentrating the economy into real estate. Now the central bank can either purge inefficiencies during a downturn, or try to manipulate market demand through artificial credit expansion. The latter meaning borrowing a substantial amount of future economic growth, to pad home sales today.

BoC Bought $7.45 Billion In Mortgage Bonds In 4 Months

Someone once said to me, “if aliens landed, the first thing central banks would do is lower interest rates.” That statement highlights pretty much what the BoC did at the onset of the pandemic – they scrambled to get people to buy a home. The central bank held $513 million worth of CMBs in March, rising to $7.45 billion at the end of June. That works out to an increase of 1,351.85% over a 4 month period. Obviously a very large increase, even before we had the full context.

The scale of this buy wasn’t really clear until the latest mortgage credit data. At the end of June, outstanding residential mortgage credit reached $1.68 trillion, rising $29.24 billion from March. That means the BoC injected $1 into CMBs, for every $4 increase in outstanding mortgage credit. A mind blowing amount of stimulus to buy an asset that is typically dependent on employment for price growth.

Record sales volumes and rapid expansion of budget isn’t surprising in this context. However, if you factor in the pent-up demand – buyers delayed by pandemic restrictions, it gets a little more wobbly. Purchase volumes are just a little higher than normal, and ditto with price gains. What’s surprising is the amount of stimulus injected, only resulting in a relatively normal market.

Markets become less and less sensitive to stimulus, as more of it is injected. In this case, we’re barely seeing a budge from absolutely flooding it. If the BoC was only attempting to delay the drop off in home sales to get the rest of their ducks in a row, this makes sense. If they’re hoping to continue to backstop the market and continually pull forward demand, they’re going to slow even more future economic growth to support fewer and fewer supersize mortgages.

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25 Comments

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  • Trader Jim 4 weeks ago

    Soon it’s just going to be an algorithm at the bank of canada trading houses by itself for wash volumes.

    • Jamie Cass 4 weeks ago

      They better start paying people’s rent too. haha

      • alvi 4 weeks ago

        No need to pay the rent of those who have not been paying anyways because the know they cant be evicted

    • alvi 4 weeks ago

      Yeah just shows you how over-valued the USD was when CAD can go up even with this “news”

  • PK 4 weeks ago

    BC won’t let landlords evict people for non-payment of rent over the past few months, they have to give a payment option. Interesting turn of events.

    https://www.citynews1130.com/2020/08/24/tsunami-of-evictions-wont-hit-b-c-renters-when-moratorium-lifts-landlord-bc/

    • Ethan Wu 4 weeks ago

      How many renters that didn’t have enough to pay their rent, will have enough to pay what essentially translates to higher rents?

      Someone needs to take a loss on the pandemic, and we’ve socialized over a quarter trillion dollars already.

    • GTA Landlord 4 weeks ago

      Ontario has a similar program, but condo landlords are also facing falling rents. They risk people moving into a new place at a lower rent, instead of staying in the same place – paying higher rent, plus back rent.

      • The Truth Will Set You Free 4 weeks ago

        I’m assuming Vancouver is having the same problem as the GTA where many renters were simply not paying their Landlords as they could not be evicted (as they were protected up until recently by not only the city but by the province) and instead decided to jump ship not using the CERB dollars they were handed to rent an equal or better location for less money all the while leaving the landlords in a precarious position by not paying them what they owed.

  • AyyLmao 4 weeks ago

    “The nine most terrifying words in the English language are: I’m from the Government, and I’m here to help.”
    It’s ok, they can always stimulate more by extending mortgages to 35 and 40 years, then again why stop there, maybe we can get 45 and 50 year mortgages. Locals can no longer afford the houses, well lets repeal the foreign buyers tax and incentivise more immigrants.

    Welcome to serfdom.

    The governments actions trying to provide a constant safety net has rewarded those who have been irresponsible and punished the younger generations and the responsible savers who live within their means.
    The road to hell is paved with good intentions.

    • alvi 4 weeks ago

      You’ve been reading Hayek? The Road to Serfdom is the global bond market, future generations will pay for this 15-year “stimulus” program,great for civil servants terrible for those who have to fend for themselves in the private sector

    • Fight Back 4 weeks ago

      Lets start a movement and demand an investigation on government and real estate corruption.

      This government created bubble is BS.

      • backwardsevolution 4 weeks ago

        Fight Back – I’m in. Where are you located?

    • Thomas 4 weeks ago

      100% agree with what you said. Ones should max out their credit to finance whatever they want in the new Canada. If they are “financially responsible”, they will end up with no place to live and a salary that affords no more than meals.

  • straw walker 4 weeks ago

    Mortgage bond purchases are not even causing the biggest expansion of the BOC’s balance sheet..
    Repos are by far the largest contributor of the BOC spending
    Repos are essentially a pawn shop transaction
    The BOC allows a schedule “1” bank … in this case mostly smaller regional banks to pawn an asset.. mostly mortgages that are in deferral for immediate cash.. the pawned asset is then sold later back to the bank at a higher price.
    Repos are a sign…god help us.. that many smaller regional banks are in trouble.

    • Jason Chau 4 weeks ago

      Repos, the lowering of the DSBs, and the mortgage bonds at the same time are all a huge economic issue, but I think it’s fair to rip them apart one by one. They’re big concepts the average person wouldn’t really understand with a little hand holding.

    • Fight Back 4 weeks ago

      Government is basically using tax payer money to subsidize sub prime loans instead of letting house prices fall. What horrible corruption.

    • Paul 4 weeks ago

      Straw walker,

      Where do they list Repos or stats pertaining to repos? You make it seem like public knowledge but I’ve never heard of them till now?

      • iAmGroot 4 weeks ago

        The reason why you won’t publicly find the stats or info posted in some of these comments is because the poster is likely an industry insiders or, knows someone who is that likely works in a risk management role or investor services side of the business. People in the business (not talking about mortgage brokers or Realtors here) just know. In a typical working day, they see and hear things that the average person doesn’t and some begin to question what’s going on.

        • alvi 4 weeks ago

          I see you saw the film Wall Street.

          • IAmGroot 4 weeks ago

            I did many years ago but at one time I also worked in this industry 😉

  • Fight Back 4 weeks ago

    We need to hold government responsible for making housing unaffordable. We must investigate government and real estate corruption.

  • Jim 4 weeks ago

    @ Fight Back Curious what you consider real estate corruption ?

    • SH 4 weeks ago

      The political class, being almost 100% homeowners and a very large number of landlords as well, are clearly skewing the policies in favour of their own personal gain. Impossible to prove, however.

      The 30-35% of Canadians who rent have zero representation in government.

      • straw walker 4 weeks ago

        Democracy isn’t fair
        I remember when i did civic duty.. the boards were made up of young to middle age men that wanted better sports facilitates.. hockey rinks ..baseball diamonds..and they voted for them..

        Now I’m much older and realize that the elder population had no representation..like senior homes.
        That’s democracy

        • alvi 4 weeks ago

          Yeah some complain we do too much for the elderly and others too little, the biggest winners are the civil service and the biggest losers are future generations as governments borrow themselves into oblivion trying to buy votes,much more powerful than corporate elites and social justice crusaders

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