The Bank of Canada Is Killing The Program That Helped Home Prices Soar

Pour one out for Canada’s cheaper-than-cheap flood of easy credit, because it’s on its way out. Today the Bank of Canada (BoC) announced their quantitative ease (QE) program is coming to an end. The program, which floods markets with cheap debt, was used to drive inflation and home sales higher. Now that these issues have become economic threats of their own, the governor is dialing it back. Prepare for higher mortgage rates and a tighter credit market.

Quantitative Ease, The Toxic Sludge Bankers Love

Quantitative ease is an unconventional monetary policy tool used to drive inflation higher. The program involves central banks competitively buying bonds on the secondary market. By driving up the cost of bonds (sweet if you’re selling them), they’re pushing yields lower. Since credit markets are competitive, lower yields translate into lower borrowing costs. This means cheap money that drives demand for goods, pushing inflation higher. 

More bluntly put? QE is when a central bank floods the market with cheap money, so people go on a spending spree. Buy a car, buy a house, buy whatever — but just buy something. Once demand is elevated, inflation picks up. Central banks are terrified of deflation, so your elevated cost of living in a recession is a great success.

Now that you know how it works, isn’t it funny to look back on the issue? Record sales and soaring prices for pretty much everything, including housing. Yet this is a supply issue, because it just won’t keep up with this recessionary demand. During a period where supply is artificially restricted for public safety. Okay, wealthier people might find that funnier than others — I’ll admit. 

Still confused? Here’s everyone’s favorite viral explanation of quantitative ease, from a decade ago. It explains the program in a humorous way, as it was rolled out in the US almost a decade ago. It’s not you, it’s the program.

Bank of Canada To End Quantitative Ease

The BoC announced they’ll be killing its QE program today, moving into the reinvestment phase. They’ll still buy bonds, but only to replace the ones that roll off their balance sheet. Not contributing additional liquidity, but not reducing it either.

Prior to this announcement, the central bank bought billions of bonds per week. As of last week, the target was $2 billion per week. As much as that is, it was a taper from the beginning of the pandemic, when they bought $4 billion per week. A lot of state intervention was used to make debt cheaper than interest rates would have allowed.

On one hand, most of the market appears to have been surprised by the move. Bond yields are rallying in response, as the central bank turned more “hawkish.” Banks like RBC shared some doubts the BoC would even taper the purchasing this early. That means it definitely wasn’t priced in, and financing costs will rise fairly fast.

On the other, Canada’s QE program was turning into public distrust, and the BoC admitted it caused inequality. A popular petition to ban the use of QE had been scheduled to be presented in parliament pre-election. As awareness grows about QE, more people are questioning if it’s ethical to exploit the poor this way.

The governor had recently admitted the program promoted inequality. That was a solid signal it was coming to an end, since the governor is a fan of controlling the narrative. He won’t even admit inflation is elevated, so he wasn’t going to admit QE was a problem without ending it.  

The market takeaway? QE was suppressing borrowing rates below the current low rate environment. As the program ends, interest costs will rise to more natural levels for the overnight rate. It will have a similar impact to a rate hike, without actually needing to hike rates. This will lower debt loads, as well as taper demand for goods. 

So long QE and dirt cheap money. You might be gone, but the inequality you caused will be felt for generations. 

On the upside, now is the time for the minister of middle class prosperity to shine. What’s that? The position was eliminated this week as well? How fitting. 

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  • Jeremy 3 years ago

    No one can explain QE as succinctly as you just did. Kudos to you, my friend.

    When people realize how a system works to exploit them, they’ll want to tear down the whole political system. They aren’t there yet, but they’ll get there if they keep asking why this situation isn’t working out for them.

    • Helen 3 years ago

      Pretty unbelievable to use QE when home prices were so high, but the issue is the Fed was spending so much they had to.

      This was less about driving inflation, than it was about them demonstrating they’re not a non-partisan organization.

      • Ethan Wu 3 years ago

        I believe BD has a whole analysis on that somewhere.

        But as Mortgage Broker Ron Butler says in this brilliant interview, “the bank of canada says they’re non political, but they’re not.”

        Congrats on the YouTube channel by the way. Solid stuff. Came out swinging with great content, and looking forward to seeing it become its own beast.

  • Mr X 3 years ago

    Finally. Tiff is a menace to society. The next 5 years can’t come fast enough.

    • david 3 years ago

      He is not worse or better than the previous ones. It was a ticking time bomb even for Carney and Poloz. Too bad for Tiff, the bomb goes off for him.

  • JCH 3 years ago

    Thanks Stephen for another excellent article. Unfortunately, while the BoC intends to taper, I’m not at all confident they’ll see it through.

    At some point this will all come crashing down in a mega-housing-disaster that will destroy the Canadian economy for a generation, but not any time soon.

    In Apr 2010 (with a toddler and a newborn), we were all ready to buy a house in the Lower Mainland, but we realized even then that they were already ridiculously overpriced by all historical measures.

    So we chose to wait it out. But, as the saying goes, ‘the market can remain irrational for longer than you can remain solvent’ or in our case, ‘…until your kids are grown’ !! Absolutely insane — I’ve learned to never underestimate the determination of Canadian politicians/BoC to prop up the housing market at all costs.

    I think when the house prices turn and start to fall due to the end of QE and slightly more appropriate pricing of risk, they’ll be forced to restart QE to infinity.

    We all know interest rates will ‘never’ normalize (until the Canadian/global financial system one day finally collapses under all the debt), but think QE will turn out to be one of the few tools left to prop up a falling market, so we’ll be right back here again in no time.

    I’ve recently given up on ever owning a home again in Canada, as I couldn’t stand being $800k+ in debt on something that will eventually be worth much less than that — no doubt just when I want to retire.

    In 6.5 years, the kids will be finished school and we’ll all be leaving Canada. I can stand renting that much longer, and then we’ll emigrate somewhere else and give our money and skills to another country where the cost of living isn’t insane. We’ll finally buy a house there, and in the meantime we’ll work on emigration plans/upgrading qualifications etc.

    Really appreciate you keeping it real, a voice of sensibility in a country run by idiots.

    • Fazid 3 years ago

      They don’t have a choice this time. It’s either death by inflation or death by slower rates.

      Unlike most rate hikes, this one isn’t going to be because the economy is growing too fast. It’s because easy money is pushing the cost of living higher.

      • Ron Murphy 3 years ago

        Our government and the regulators are misleading you with their rhetoric by blaming low interest rates and mortgage terms as being too accommodating on the escalating home prices. The rise is home prices is a direct result of lacking supply and increased demand. Canada opened the floodgates of immigration in 2018 and 2019 with 1 million immigrants, collectively. This was intended to offset our diminishing reproductive rates and also to provide safe harbour for those fleeing other nations for various reasons. While admirable, this was too much too fast, as we had no capacity to house these additional people. Housing starts of all types ( single family, condos, and apartment units) tend to max-out at just over 100,000 units annually. Throw COVID restrictions into the equation, literally shutting down projects in 2020 a lack of skilled tradespeople, reduced supply of raw materials, and you have the perfect recipe to create a housing crisis of epic proportions. To top it off the government is now trying to freeze rental rates, which will further drive investors away from the sector, the exact opposite of what we need right now. To top it off, municipal governments are incredibly difficult for small and medium investors to work with, putting up unnecessary roadblocks to progress and adding cost to the production more dwelling units, again causing increased rental rates as a result. Many of these investors are now looking to cash-out of the market ahead of a tide of more rent control coming down the pipe. It’s time to call it like it is, government intervention is not the solution. Having a free market, with less red-tape and faster methodology
        for development and construction of new dwellings is the answer to meet this demand crisis. If the market is in equilibrium, that in itself will solve price inflation.I guess my point is that the governments created the problem, have deflected the blame, but in reality, it is they themselves that are continuing to widen the divide between those that qualify for a place to live and those that don’t regardless if referring to the rental market or home prices.

    • SH 3 years ago

      When you leave Canada, as per your stated plan, Trudeau will be waving you goodbye with a big smile on his face. This is the Liberal plan, to force Canadians to emigrate while replacing them with foreign nationals more likely to vote Liberal in perpetuity.

      This is not a criticism of your decision (I left Canada years ago). It’s just interesting and disturbing to see the Liberal plan to kick Canadian citizens out of their own country be realized with so little pushback.

    • george 3 years ago

      Nice comment and i can relate 100% to your situation and approach to RE. With regards to going into another country, which one do you have in mind?
      Thanks, take care of you and your family and good luck with your plans.

  • Linda Browne 3 years ago

    Great article and an even better ending! Thanks for the laugh.

  • Sam Huizenga 3 years ago

    Very good article.

    One question. What would of happened if the BOC sat on their hands and didn’t QE at all? Did the BoC need to QE to keep the CPI in check? Was QE necessary to keep the CPI within the parameters during the pandemic? Even if some measure of QE was helpful or even necessary, was it preferable to print sooooo much money and inject such an inflationary adrenaline boost to the “recovering” economy”?

    There;’s a silently loud voice in my conscience that tells me we might have been better off if the BOC just let things ride on their own.

  • Steve 3 years ago

    Three weeks ago Tiff deflected a gauntlet of questions about inflation during his QA and now released a monetary policy report that mentioned the word (phrase??) “inflation” over 130 times. That report has been a quarter in the making and doesn’t add up to his language from his QA. Just stinks how orchestrated the timing of all these events seem to be.

    The more worrisome metric is the GDP growth coming in under forecast with velocity of money continually decreasing. So now that the supply will start tightening then what does that mean for GDP growth – no chance it grows under these conditions. And after acknowledgment of stagnant growth we will more then likely get another round of money expansion (back to square one). I can’t help but think this is a fake pump.

    Last comment. The wildest part about all of this is the commodity “boom” and the lack of positive impact to the Canadian economy. We got complacent with the easy money (selling assets, service industry pump), meanwhile our greatest asset of natural resources was kicked to the curb. Record commodity growth would you think lead to a robust economy.

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