Housing insanity is in front and in the center.
By Wolf Richter for WOLF STREET.
The Bank of Canada, which already owns more than 40% of all outstanding Government of Canada (GoC) bonds – compared to the Fed, which holds less than 18% of all US Treasury government securities – announced today that it will reduce by a quarter of GoC bonds that it is adding to its package, from C $ 4 billion per week at present to C $ 3 billion per week as of April 26th.
In his statement, he pointed out the madness in the Canadian real estate market – “we see some signs of extrapolation expectations and speculative behavior,” he said.
In October, the BoC made its first cut, reducing its GoC bond purchases from C $ 5 billion a week to C $ 4 billion and stopped adding mortgage-backed securities, of which it never bought many at first.
In March, the BoC announced that it would deploy its liquidity facilities, reducing its total assets by about 17%, from C $ 575 billion at the time, to C $ 475 billion by the end of April. And this has progressed according to plan.
The BoC cited the “moral hazard” associated with this central bank madness as one of the reasons for its liquidity facilities, which are now mainly repurchase agreements (repo) and short-term Treasury bills of the Government of Canada. Its total assets fell 13% in the last month to C $ 501 billion in the most recent balance sheet for the week of April 14:
The total value of the assets decreased as the BoC deployed its liquidity facilities. The largest remaining categories are term deposits and short-term treasury bills. As it matures, the BoC recovers its money, but does not replace those securities, and the balance decreases. The rest of the asset categories, such as MBS, provincial bonds, corporate bonds, etc. – the lines at the bottom of the graph – have been mostly scrolled or are tiny.
The red line represents the growing GoC bonds, but their growth will slow from C $ 4 billion per week to C $ 3 billion per week, starting next week:
The BoC also said in a statement that it will keep its policy interest rates, overnight rate at 0.25%, bank rate at 0.5% and deposit rate at 0.25%.
But rate hikes were advanced in the second half of next year and since July next year.
Or maybe sooner or later: “In the current context, however, there is considerable uncertainty about the timing, especially in light of the complexity involved in assessing supply and demand that I mentioned earlier,” the BoC governor explained. Tiff Macklem in the opening statement.
But the madness in the real estate market in Canada was ahead and in the center.
“The bank will continue to monitor the potential risks associated with the rapid rise in house prices,” it said in a policy statement.
“You won’t be surprised to hear that we’ve spent some time discussing what’s happening in the real estate market,” Macklem said in his opening statement. Here are some tips:
“The pandemic has led to some unique circumstances. With so many households working and studying at home, we see many people wanting more living space. And interest rates have been unusually low, making loans more affordable, ”he said.
“We see some signs of extrapolative expectations and speculative behavior,” he said.
“Given the high levels of household debt and the risks that households may face in the face of rising house prices, we welcome the recent proposal by the Superintendent of Financial Institutions to introduce a fixed level of the minimum rate for unsecured mortgages,” he said. .
“The new measures just announced in the federal budget will also be helpful,” he said, including the 1% annual tax on vacancies owned by non-Canadian residents.
“We are following very closely the developments in the real estate market and we will have more to say about this in the analysis of our financial system next month,” he said.
And for your entertainment, here is the explosion in the price of housing in Toronto, according to Teranet National Bank HPI, whose method (sales pairs) is comparable to the Case-Shiller index in the US. In the last two years, the index has increased by 18% from already very high levels:
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