Ten years ago this week, the Federal Reserve announced it would start buying agency MBS. Asset purchases are now arguably a standard non-standard monetary policy tool, as all three major central banks have since embarked in some form of asset purchases, and are currently in different stages of implementation.
And on Friday, the Bank of Canada became the latest to join the parade, when it announced for the first time plans to buy government-backed mortgage bonds in an attempt to boost its balance sheet and arguably, to stabilize Canada's flagging housing market.
The move, part of a decision to include government-guaranteed debt issued by federal Crown corporations, will allow Canada's central bank to offset continued growth in bank notes, the central bank said in an statement Friday. It will also give it flexibility to further reduce its participation at primary auctions of Canadian government bond "to help increase the tradeable float of those benchmark securities and hence support their secondary market liquidity."
As part of this expansion, a “small portion” of its purchases will be Canada Mortgage Bonds, which are guaranteed by Canada Mortgage and Housing Corp. Purchases of mortgage bonds will be conducted in the primary market starting later this year or early 2019, the central bank said. The key excerpt from Friday's statement is blow:
As part of these changes the Bank plans to allocate a small portion of its balance sheet for acquiring federal government guaranteed securities by purchasing Canada Mortgage Bonds. These purchases will be conducted in the primary market, on a non-competitive basis, and are expected to commence in the latter part of 2018 or in the first half of 2019. The Bank will continue to adhere to its principles of neutrality, prudence and transparency and conduct its transactions in a manner that limits market distortions and minimizes impact on market prices.
According to Bloomberg, the federal Crown corporation has an issuance limit of C$40 billion ($30 billion) for 2018.
"In terms of CMBs, we need a little more detail on how the BoC will be participating, but it does look to be supportive of spreads,” said Mark Chandler, head of fixed-income research at RBC Capital Markets. “I would suggest only a modest impact until we learn more."
The Bank of Canada held C$78.2 billion of Canadian government bonds and C$22.2 billion of treasury bills for balance sheet management purposes as of Nov. 21, according to its website.
While the central bank said that expanding the list of eligible assets "is for balance-sheet management purposes only and has no implications for monetary policy and financial stability objectives of the Bank", some couldn't help but wonder if - like 10 years ago in the US - this is just another implicit backstop of Canada's housing market.
While that is debatable, there is no doubt that 2018 has marked a turning point in Canada's closely-watched housing market, which can no longer count itself among the countries with the world's hottest residential real estate. While that is good news for the housing bubbles in Toronto and Vancouver which has priced out most local residents out of the market for a new house, it's bad news for everyone else who has come to count on steady house price growth to boost their wealth (or their ability to borrow more money).
As Daniel Tencer noted recently, Canada tumbled to 37th place in the latest global ranking of housing markets from commercial real estate firm Knight Frank, from fourth place in the same survey a year earlier. That places us firmly in the bottom half of 57 countries surveyed.
With average price growth falling to 2.9 per cent in the latest survey, from 14.2 per cent a year ago, Canada actually fell behind the U.S. on price growth — a rare occurrence since the U.S.'s housing bubble burst a decade ago.
"The rising cost of finance, an uncertain political and economic climate and currency instability in some markets is likely to be tempering demand," the Knight Frank report noted, and that certainly seems to be the case in Canada, where rising mortgage rates and tougher new mortgage rules have reduced the maximum buying price that homebuyers can afford.
Furthermore, recent data from the Teranet/National Bank house price index, showed prices in Canada rising at their slowest pace since the financial crisis in August, up just 1.4%, with prices posting a modest improvement in the past two months.
"This is mostly a reflection of Toronto and Vancouver, the two most important real estate markets in Canada," National Bank economist Marc Pinsonneault wrote in a client note. Indeed, Toronto house prices grew 0.3% in August, but Pinsonneault says this reflects the usual rise in prices seen in spring and summer months. Strip out the seasonality, and Toronto house prices have been falling for five months. Meanwhile, Vancouver's house price index fell 0.4% in the month, though the index is still up 7.6 per cent from a year ago. But the momentum is gone: Adjusted for seasonality, Vancouver prices have fallen for the past three months, Pinsonneault said.
And now, the Bank of Canada seems to be taking preemptive steps, just in case this localized slowdown spreads to all other markets.