Canada

Canada’s Central Bank Is Getting Ready To Provide Mortgage Liquidity

Relax, everything’s fine. Or maybe it’s not. The Bank of Canada (BoC) quietly made plans to buy government backed mortgage bonds, last week. The move is designed to increase the bank’s assets, and arguably assist the housing market. That sounds great, until you realize how these things work. It’s a similar set-up to the one the US Federal Reserve created ten years ago.

Central Bank Balance Sheets 101

The BoC balance sheet is like any other, filled with assets and liabilities. Assets are anything they pay for, usually Government of Canada bonds. Liabilities are anything they give out, like that roll of loonies you picked up for laundry, or the deposits in your bank account. When a central bank buys assets, they do it by crediting the account of the seller, usually with money that didn’t exist before. The cool monetary policy kids call that a “print,” and they are strategic for inflation.

Editor’s Note: There are no cool monetary policy kids.

Central banks buy assets to increase the money supply, since a print is usually required. This is strategic, used with interest rates, to maintain inflation at target. Sometimes a central bank can’t find enough assets to buy, or needs to provide market liquidity. In this event, they’ll expand their mandate or the types of assets they intend to acquire. The BoC is basically announcing both.
 

The Bank of Canada Will Buy Canada Mortgage Bonds

The BoC announced plans to buy government guaranteed debt issued by Crown corporations. Canada Mortgage Bonds are the first to be bought, on a non-competitive basis in the primary market. The buying will begin at the end of this year, or in early 2019. The BoC reiterated that this is for “balance sheet management purposes” and has no implication to monetary policy.

To reiterate, Canada’s central bank is buying assets from federally owned companies, guaranteed by the federal government, with money they’re authorized to print by the federal government, secured with assets by the federal government… and it won’t have an impact on monetary policy. We’ll take that statement at face value today, and move onto more important things like “what are CMBs?”

What Are Canada Mortgage Bonds?

Canada Mortgage Bonds (CMBs) are one way lenders access cheap funds for mortgages. Investors fork over cash for a CMHC guaranteed loan, backed by the Federal government. Since the chances of the CMHC and the Government of Canada disappearing overnight are slim, they’re considered secure. Secure investments don’t pay all that much, which is great for lenders and/or borrowers. Low cost funding means more profits for lenders, and less interest paid by borrowers.

Canadian Mortgage Credit Growth (Real)

The annualized pace of mortgage credit growth at large Canadian lenders, adjusted for inflation.

Source: Bank of Canada, Better Dwelling.

This Sounds Goo… Ba… No. Definitely Good… Maybe?

Depends on who you are, and the amount of CMBs bought. The upside is the increased liquidity, which may suppress rates from rising too fast. That would translate into lower funding costs, some of which are passed on to borrowers.

On the other hand, it’s a sign of market weakness. The central bank only provides liquidity ahead of liquidity concerns. Mortgage credit growth fell to multi-year lows, and is likely to drop further as they hike to “neutral” policy rate. Any time we see a government institution step in to address liquidity concerns, it’s a bad sign.

Further, this is the second mortgage liquidity tool proposed just this year. Earlier this year the Office of the Superintendent of Financial Institutions (OSFI) said they’re looking into expanding the covered bond program. The covered bond program is another tool to provide low cost financing for mortgages. If everything is fine, why is the government stepping in to help out on so many levels?

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22 Comments

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  • Mac 2 weeks ago

    This is a gateway drug. If you think housing driven growth is bad, wait until we see what central bank driven growth looks like.

    The US did this before quadrupling their balance sheet over 10 years.

  • Hadi Bodack 2 weeks ago

    Does this mean cheap mortgages are coming?

    • Quan 2 weeks ago

      No. It means “cheaper” mortgages are coming than they would without liquidity assistance. Providing liquidity doesn’t necessarily bring rates down, but it smoothes peaks and troughs, so we don’t see extreme spikes in an illiquid market.

      If it’s not to provide liquidity, it’s unusual that they can’t find enough bonds being written by the federal government. That’s how you know we’re at peak Canadian debt.

  • Ahmed 2 weeks ago

    lol. This is where Canadians go “yay, my house is going to be worth so much!” Not realizing that this means their house will stay the same price at best, but their buying value. Printing money this was just minimizes large debt pools.

  • JJ 2 weeks ago

    I’m not incredibly familiar with capital markets and BoC policies: Will something like this be enough to prevent prices from dropping?

    • Ethan Wu 2 weeks ago

      Not usually. It usually prevents lending rates from greatly detaching from interest rates. Sometimes in really bad markets, lending rates will continue to rise beyond typical hikes. They’re trying to prevent that from happening this time.

      The problem is once this happens, the central bank usually becomes addicted to preventing the market from regulating itself. Japan started this in the early 2000, and home prices are close to where they were 20 years ago in cities like Tokyo.

      • Taki 2 weeks ago

        Also worth noting that opening this route leads to wages not reflecting the true rate of inflation. Japanese kids are never going to own a home, even though home prices are relatively close to inflation. The cost of everything else rises so quickly.

      • John Schappert 2 weeks ago

        On point Ethan.

  • Dar Robbins 2 weeks ago

    Where will they get the money to pay for those bonds?
    Currency dilution.
    A bag of milk will be $10 soon.
    The taxpayers are always the bag holders…until they wake up… which may be never.

  • Fred 2 weeks ago

    Hold on….there are no cool monetary policy kids!? I am devastated, because I thought I was one of those kids. :_-(

  • Brad 2 weeks ago

    Hey look a preemptive bailout!

  • ken 2 weeks ago

    This is:
    1)Fake out to get the sideline money into the market, people who think this will just be a dip to buy and are knowledgable of central banks and their role.

    And…the REAL REASON

    2)Providing liquidity to big banks so they don’t go under during the crash, or at least not right away.

    Don’t think for one second this is “Canada’s QE” and will result in a big housing boom. This credit cycle is SOOOO over and the bankers know it better than anyone.

    • SUMSKILLZ 2 weeks ago

      But RBC just declared 12 billion in profit….what’s next, 20 billion? 25 billion? The “vig” seems to be getting out of hand.

      • Jan 2 weeks ago

        So did Lehmann and Bear Stearns and numerous US banks a year or so before they were gone forever. Financial engineering or creative accounting can do the trick re reporting huge paper “profits”. Positive cash flow is what really matters, and also the ability for bank debtors to keep servicing their huge debt to the bank – especially if the market forces interest rates up.

    • vnm 2 weeks ago

      A while back someone posted here posted that to buy the average detached house in Toronto you should have family income of $300,000. Even in this crazy bubble it sounds absurdly high, but in fact, long term, that would indeed match the “housing costs as percentage of income” guidelines.
      Even at current interest rates prices prices in Toronto are going to have to fall by 50% unless wages double over the next few years.
      As you say, the measures have gotta be aimed at trying to prevent a national mortgage crisis as Toronto and Vancouver melt down. They won’t fix the mind boggling 50% mismatch between prices and what 95+% of local residents can afford.
      The bubble popping will do it, they never don’t pop!

  • Jan 2 weeks ago

    SELL everything yo have in Canada and get ALL your money out of Canada now! Smart hedge fund money is making a killing already on the collapsing loonie, crashing Cdn debt markets and horrid Cdn stocks (among the worst in the world for ten years).

    Cdn QE and exchange controls are coming. Bank freezes and bail-ins (it’s the law ow). The loonie is going to go to near zero in value.

    The BIS (Bank of International Settlements), which is the Central Banks of Central Banks, has issued a RED FLAG stating that the Canadian financial system is in the worst shape in the WORLD and is at “high probability of a banking crisis and systemic collapse next year”. The currency (loonie) will crash to near zero value rapidly, all Cdn assets (incl your stocks, house, rrsp) will become almost worthless in terms of real money, and Cdn banks will suddenly close in bankruptcy (they are already technically insolvent).

    Why? Housing leverage in Canada and Cdn consumer debt is the worst in the world and actually now twice as bad proportionately as it was in the US before the US housing-led financial crisis 11 years ago. AND the US had the huge luxury of owning the global reserve currency, so they could monetize and only suffer 60% price crashes in houses & stocks. Canada will suffer 90% or worse price drops in terms of real money, and the currency (loonie) being a non-reserve FX will become essentially worthless. As has happened before elsewhere in history in the same situation. It IS going to happen here too, before long.

    • Bluetheimpala 2 weeks ago

      Holy shit, I didn’t realize when I hooked my dead hamster to a car battery he would come back to life, learn how to use a computer, find BD and then go bat shit nuts. Seriously, I mean did you think no one would do a quick fact check on this ‘damn what the heck is that smell’ turd bomb you just exploded? Why not tell us to go buy dinar or move to the desert? Hi, I’m Blue. I take joy in finding twats like you. In fact, it is sort of a hobby. You can’t come here with this shite and get out…this isn’t the sun or breitbart or greaterfool where anyone can spew garbage. If I don’t attack you then the more of your ilk come and it gets reeeaaall messy. TLDR; You are garbage. I eat garbage for breakfast and before you try to zing me, ‘lulz u eat garbage, stoopid’, understand that I EAT GARBAGE FOR BREAKFAST. See you tomorrow muffin. Am I getting banned? Tick tock. BD4L.

      • SCE 2 weeks ago

        LOL. Sure big boy, whatever say. Has anything you ever wrote on this site been correct? Keep on typing behind your big bad ass comp.

        Tick Tock. BD4L

      • Jan 2 weeks ago

        Granted it’s hyperbole and even exaggerated but the general message is on point. Let me rephrase less flamboyantly:

        Hedge funds have and are positioning SHORT against Cdn markets: currency, equities and fixed income which have all under-performed and are going down, in some cases sharply (eg, credit, badly, as of late).

        Canada will probably suffer a serious banking and financial crisis before long, per the BIS. Canadian assets will suffer, especially the currency and Cdn asset values expressed in terms of foreign FX.

        As a result, QE, bank bail-ins and exchange controls seem likely to be implemented in Canada. Canada has already passed bank bail-in legislation (why?). QE has already been touched on by the article and someone above. Soft FX controls already exist in Canada now, but when the crisis hits, hard exchange controls will emerge just as it does almost everywhere in such circumstances (the US was an exception in its financial crisis as the US had the luxury of having global reserve currency; obviously Canada doesn’t).

        Cdn banks, and others elsewhere for that matter especially in Europe, are technically insolvent and/or will be when the Cdn housing bubble pops and mortgage assets on the balance sheet of the bank must be marked down (unless of course Canada engages in an ill-conceived US-style regulation change like in March 2009 when it ordered FASB to repeal its “lower of cost or market” valuation principle), thereby feigning bank solvency for technically insolvent banks.

        Canada is vying with Australia (which has its own housing bubble that has apparently begun to pop) for the dubious distinction of having the worst consumer debt per capita in the world. Nevertheless, the BIS has singled out Canada as the most dangerous banking system in the world, not Australia, as I described above.

        Conjecture: the bubble will pop and there shall be major consequences,

        And I could have painted a worse picture by pointing out how Asian money is leaving Canada, Asians abroad are generally disinterested in Canadian housing today, and more broadly Canada is suffering from an acute lack of foreign investment interest.

        Therefore, it would seem prudent to move your personal savings and investments outside Canada as a precaution against a financial crisis in Canada. Like for example, government pension plans like the Ontario Teachers Pension Plan and the Canada Pension Plan are now invested about 85% outside of Canada now. Why? They have a fiduciary duty to protect their beneficiaries to the best of their ability.

        Cheers.

      • Andrew Jerabek 2 weeks ago

        God damn this was cringey to read. You really see yourself as the defender of BD? A name-calling crusader? “I take joy in finding twats like you. In fact, it is sort of a hobby.” Jesus Christ dude I can only take so much second-hand embarrassment. There was a time where I’d say that I’d hate to see you go, but that was over a year ago. Today’s Blue I’d prefer to see banned.

    • Mike 2 weeks ago

      Where did you read the following: “high probability of a banking crisis and systemic collapse next year”? It has quotes around it so I assume it’s from a report, but I can’t find it anywhere. And the loonie will become worthless? Please elaborate.

  • Curtis Joseph 2 weeks ago

    If you have a Mortgage with 25% or lower down payment that you took in the past 5 years, you should be really worried because it will hurt those group the most if the housing market bursts. Look up “bettingresource money management” and read that article. Then have a side investment portfolio using that money management in sports so that there is something to rely back on for side income if the impending crash happens soon. Thank me later.

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