Canada has tried and created A Bigger Bubble to stop real estate prices from falling!

Last March, when the news of a pandemic struck, the Canadian government took action. No, not, as you might imagine, for the PPE. An email shows that they have rejected a major N95 provider offer that states that ‘masks are not a priority.’ If health care was not the top priority of the government, what was it? It would appear to preserve real estate prices. Here is a short list of actions taken that have contributed to domestic price growth overwhelmingly. rent

Cuts in interest rates 3x Bank of Canada

Interest rates are the most obvious contributor to the overheated real estate market. In less than one month, the Bank of Canada (BoC) made no single cut, not two cuts, but three overnight rate cuts. The overnight rate on 4 March 2020 was 1.75 percent and on 4 March it was cut by 50bps. Another one was followed on 16 March, and a third on 27 March 2020. The rate now stands at 0.25%, which effectively negates interest rates in real terms.

This is one of those cases in which panic seems to dominate actual data. According to the BoC, “the impact of a rate change takes between six and eight quarters” (18 to 24 months). You might have argued why (Fed needed debt, currency), but the consequences were yet unexpected. They also made several cuts before they had a thorough evaluation of the problem. This is always the risk that too much stimulus will be added. Not surprisingly, as the general rule is to err in terms of social inequality rather than losing profits.

Canada Eased the “Stress Test” mortgage purchaser

The BoC also reduced the conventional five-year mortgage rate used for stress testing. On 11 March 2020, the rate was 5.19 percent and three cuts were made until it reached 4.79 percent on 12 August 2020. This added a further ~4.5% in qualified purchasing power. The stress test applies only to lenders regulated by OSFI, but it is the majority of activity.

Initially, the implementation of the stress test was bad and should have been more responsive. Regulated non-OSFI lenders are not required to undergo stress testing. Many lenders (including credit unions) are actually qualified at the contract rate. Banks may also exempt a number of borrowers as long as they properly manage the risk.

In my opinion, this was quite useless, but even so the timing of the cuts added fuel. Credit should be tightened, not loosened during a downturn. If access to credit is increased over and above relief during a downturn, the economy becomes a priority over borrowers.

The Bank of Canada (BOC) has purchased trillions in mortgage bonds

The BoC began adding Canada Mortgage Bonds (CMBs) to its balance sheet in January 2019. The move was similar to that made in 2009 by the US Federal Reserve to stimulate domestic price growth after the collapse. It was only a routine operation that the BoC assured people. You would buy it only on a non-competitive basis. At the time, it was questioned whether a mechanism for quantitative ease (QE) was implemented when necessary.

Rapid until March 2020, the BoC announces a program to start the competitive purchase of CMBs. The central bank began to compete actively with investors to lower rates. A QE program was born and had mortgage instruments already. A good coincidence.

There were only a few months before the program came to an end in October 2020. By December 2020, they had CMBs worth $9.66 billion, up 1,803% from the previous year. This move reduced yields and injected into the system billions in liquidity. It is not the size of the program, but the excess that it provides. A sh*t ton in this case.

Banks have no money to pay for hypothecary deferrals

Canada did what many countries did last March — rolled out deferrals on mortgage payments. Contrary to other places, Canada did not require a reason for a deferral of payment. It was only an interruption from paying your bills and an interest-free loan. CBA statistics show 16.7 percent of the loans granted payment deferrals by the Member Banks. That is one in six member banks’ mortgages. The deferment rate was even higher than the highest rate of unemployment.

No, it’s not about delaying people’s payment. Banks aren’t survolunteers. They always try to grant deferrals for mortgages for people who need them. They must usually put capital aside for their mortgages, which they defer, as a security measure. Regulators allowed banks during special treatment to skip that. They therefore handed them out like sweetheart and received a liquidity injection. Can you see here a trend?

More than double the income lost in Canada

The Canada Emergency Response Benefit (CERB) has been a popular program for all. The chosen amount and the lack of targeting were however a bit odd. The government eventually replaced the lost income with nearly 3 times the loss of income. Even the political partners offered the government, despite not exactly facing hardship.

The result of cash being delivered to people who did not need it is a high rate of savings. Economists have stated that they expect this to further push property sales. Future expectations play an important role in determining current behaviour. This added gas to the real estate markets driven by FOMO.

Banks Get $300 trillion Credit Liquidity Injection

The domestic stability buffers are extra cash that must be put aside by the largest local banks. Domestic Systemically Important Banks (D-SIBs) were told to buffer in December 2019. A note from OSFI notified banks that buffers were increased from 1.0% of risk-weighted assets to 2.25%. This was to take effect on 30 April 2020, giving them several months.

The reason was “strong vulnerabilities… remain high, with signs of increasing in some cases.” They add a list of vulnerabilities, “including domestic debt and asset imbalances in Canada.” At the time, households were worried about too much, largely mortgages.

Banks cannot just scale the capital they reserve at once by one point — they need time. By March, they largely had put aside the cash needed for the buffer. OSFI announced the reversal of the measure on 13 March 2020.

This injected 300 billion dollars of cash into what? You know it? You know it? Okay, liquidity. That’s right. Sudden vulnerabilities in the household didn’t matter. It was more important to issue loans as soon as possible, most of which were mortgages.

The US has a similar set of rules, but on a timeline, to increase bank liquidity. The rules will expire on 31 March 2021, with senators fighting to ensure that they expire. The liquidity shortage is no longer a threat. Too much liquidity is the problem they are trying to address now. Canada has not even had this debate yet.

This was far from a full list

Now, it was only a short list of some of the measures affecting home prices over the last year. This is not a critique of the correct or wrong movements, but only a partial list of price influences. That said, incentives for the early loading of the property are generally a very bad idea.

If you do, you’re not just trying to predict when an immovable price will happen. You try to predict when home prices crash and then try to stop it. It is a difficult task to determine how much domestic prices will fall. Furthermore, it makes it impossible to determine how much cash you need to lend to people to prevent it.

In March, the government thought the world would come to an end… for real estate at least. The BoC expected to increase delays by more than 300 percent. The CMHC expected real estate prices to decrease by an average of 11 percent. The government planned and tried to prevent its response with the same data.

When the world was not finished, they had already given a “response” to fix it. As they thought, the average home price did not drop by 11 percent. It has fallen only *checks* oh, it has increased in the last year by 23.5 percent. If you think that the CMHC forecast was bad, you should ask the Fed how much stimulus they determined.

Now, let’s get rid of it. This is not a comprehensive list of measures affecting prices, but many. By the end of March, interest rates had decreasing, stress test rates were reduced, mortgages bonds were purchased, payment delays were granted, income over lost wages had been replaced and credit liquidity injecting hundreds of trillions into large banks alone.