Living madness is central.
By Wolf Richter for WOLF STREET.
The Bank of Canada, which already owns more than 40% of all outstanding government bonds of Canada (GoC) – compared to the Fed, which owns less than 18% of all outstanding U.S. government bonds – announced today that it would reduce the amount of GoC bonds it adds to its stack from C $ 4 billion a week currently to C $ 3 billion a week as of April 26.
In its statement, it pointed to the madness in the Canadian housing market – “we are seeing some signs of extrapolative expectations and speculative behavior,” it said.
In October, the BoC carried out the first cut by phasing out GoC bond purchases from C $ 5 billion a week to C $ 4 billion, and had stopped adding mortgage-backed securities, of which it was never bought much at the start.
In March, the BoC announced it would phase out its liquidity facilities, reducing its total assets by approximately 17%, from C $ 575 billion at the time to C $ 475 billion at the end of April. And this went as planned.
The BoC cited “ moral hazard ” in connection with this central bank’s craziness as one of the reasons for the winding down of its liquidity facilities, which are now mostly repurchase agreements (repos) and short-term treasury bills from the Government of Canada. Total assets are down 13% in the last month to C $ 501 billion on the most recent balance sheet through the week of April 14:
The total amount of assets has decreased as the BoC is running down its liquidity facilities. The largest other categories are forward repos and short-term Treasury bills. As they age, the BoC will get its money back but will not replace those securities and the balance will decrease. The other asset classes, such as MBS, provincial bonds, corporate bonds, etc. – the lines at the bottom of the chart – are mostly unwound or minuscule.
The red line represents the still-growing stack of GoC bonds, but their growth will slow from C $ 4 billion a week to C $ 3 billion a week starting next week:
The BoC also announced in the statement that it would maintain its policy interest rates, with overnight rates at 0.25%, bank rates at 0.5% and deposit rates at 0.25%.
But interest rate hikes were pushed back into the second half of next year, and as early as July next year.
Or maybe sooner or later, “In the current context, however, there is considerable uncertainty about timing, especially in light of the complexity of assessing supply and demand that I mentioned earlier,” BoC Gov. Tiff Macklem said in the opening statement.
But the housing market madness that happened in Canada took center stage.
“The bank will continue to monitor the potential risks associated with the rapid rise in house prices,” the policy statement said.
“Unsurprisingly, we also spent some time discussing what’s going on in the housing market,” Macklem said in his opening statement. Here are some tidbits:
“The pandemic has created a number of unique circumstances. With so many households working and studying at home, we see that many people want more living space. And interest rates were unusually low, making borrowing cheaper, ”he said.
“We are seeing some signs of extrapolative expectations and speculative behavior,” he said.
“Given the high household indebtedness and the risks that households can overburden in the face of rising house prices, we welcome the recent proposal by the Chief Inspector of Financial Institutions to introduce a fixed floor for the minimum qualifying rate for the uninsured. mortgages, ”he said. .
“New measures just announced in the federal budget will also be helpful,” he said, including the 1% annual tax on vacant homes owned by non-resident non-Canadians.
“We are closely monitoring housing developments and will have more to say about them in our Financial System Review next month,” he said.
And for your entertainment, here’s the Toronto home price boom, according to the Teranet National Bank HPI, whose method (sales pairs) is comparable to the Case-Shiller Index in the US. Over the past two years, the index has risen by 18% from already very high levels:
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