The dynamics of the homebuyer landscape in Canada always have a great deal of undercurrents beneath them, and it’s been a long time since we’ve had those currents rippling quite the way they are these days. Another one seems to be on the near horizon as last week the BoC (Bank of Canada) announced its plans to buy government backed mortgage bonds.
The move is designed to increase the bank’s assets, and arguably assist the housing market. The assistance will sound really good to would-be homeowners, and the realtors like you who would assume the correlation between that and a surge in the number of prospective clients out there. For realtors who are new to the business, anything that will both increase the numbers of these types of people and help them get in touch with them first is going to be a huge benefit.
Here at Real Estate Leads, our online real estate lead generation system for Canada is one such resource and it very much does help realtors get more out of their prospecting efforts, putting them in touch with greater numbers of potential clients who are genuinely considering selling or purchasing a home in the near future.
But back to topic here; while this buying of government-backed mortgage bonds might seem to be a plus, when you look deeper you’ll see that’s not exactly how these things work. In truth, the situation is very similar to the one the US Federal Reserve created ten years ago that contributed in part to the country’s housing crash.
A Brief Overview of how Central Bank Balance Sheets Work
The balance sheet at the Bank of Canada is like any other, filled with assets and liabilities. Assets are anything they pay for, and Government of Canada bonds make up the Lion’s share of them. Liabilities are anything given out, every bit of money put out into the national economy. When a central bank buys asset, it is done by crediting the account of the seller, and typically with money that’s ‘created’ for the purpose of doing so. This is referred to as a ‘print’. In the simplest sense, doing this is a strategy for inflation.
All Central banks, ours included, buy assets to increase the money supply, and they do so because these ‘prints’ are required. Done right and used with interest rates, this maintains inflation at target. In some instances, however, a central bank can’t find enough assets to buy. Or they need to provide market liquidity. When this happens, they’ll expand their mandate or the types of assets they line up for acquisition. This is currently what’s happening at the BoC, and is dictating the course of action they’re about to take
BoC Will Buy Canada Mortgage Bonds
The BoC announced plans to buy government guaranteed debt issued by Crown corporations. Canada Mortgage Bonds are first on the list, on a non-competitive basis in the primary market. This buying will commence early in 2019. They are stating that this is for ‘balance sheet management purposes’ and that there will be no implications on their monetary policy.
While this may be true in the most basic sense, with an understanding of what exactly Canada Mortgage Bonds are it is easy to perceive it might not exactly be like that. So what are Canada Mortgage Bonds, and more importantly what’s the primary purpose?
Understanding the Significance of Canada Mortgage Bonds
Canada Mortgage Bonds (CMBs) serve many financial interests, but the main one is to allow lenders access cheap funds for mortgages. Investors pony up cash for a CMHC guaranteed loan, backed by the Federal government. These loans are considered to be secure. The appeal of secure investments is that they don’t pay all that much, which is great for lenders and the borrowers. Low cost funding means more profits for lenders, and less interest paid by borrowers.
Relevance
Depending on who they are, and the amount of CMBs bought via their mortgage lender, which may suppress rates from rising too fast for your clients as a borrower. That would translate into lower funding costs, some of which are passed on to the borrowers, who again would be the homebuyers you’re helping purchase the home
The overarching problem with all of this is it’s a sign of market weakness. The fact is that, time and time again over our history, the central bank only provides liquidity when liquidity concerns are seen on the horizon. Mortgage credit growth in Canada recently fell to multi-year lows, and is likely to drop further as they hike to a ‘neutral’ policy rate. Further, any time we see a government institution step in to address liquidity concerns, it’s regarded as having an ominous feel when it comes the housing market.
We should note as well that 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 BoC’s covered bond program. It is another tool designed to provide low cost financing for mortgages.
These moves should be a cause for concern regarding the housing market in Canada and all the industries that are tied into it. As realtors, any type of significant downturn will have ramifications for us as well.
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