Housing crazy is up front and central.
By Wolf Richter for WOLFSTRAAT.
The Bank of Canada, which already owns more than 40% of all outstanding government bonds (GoC), compared to the Fed, which owns less than 18% of all outstanding US Treasury bonds, announced today that it will reduce by a quarter . the amount of GoC bonds it adds to its stack, from C $ 4 billion a week to C $ 3 billion a week from 26 April.
In his statement, it points to the madness in the Canadian housing market – “we are seeing some signs of extrapolative expectations and speculative behavior”, he said.
Back in October, the BoC made the first reduction by reducing GoC bond purchases from C $ 5 billion a week to C $ 4 billion, and stopped adding mortgage-backed bonds, of which it had never bought much not.
In March, the BoC announced that it would shut down its liquidity facilities, reducing its total assets by approximately 17%, from C $ 575 billion to C $ 475 billion by the end of April. And it progressed as planned.
The BoC cites ‘moral hazard’ associated with these fools in the central bank as one of the reasons for the abolition of its liquidity facilities, which are now mostly repurchase agreements (repos) and short-term government channel treasury bills. Its total assets fell by 13% in the past month to C $ 501 billion on its most recent balance sheet to the week of April 14:
The total amount of the assets decreased as the BoC withdrew its liquidity facilities. The largest remaining categories are the term repos and the short-term treasury bills. As they expire, the BoC gets its money back, but does not replace the securities, and the balance decreases. The remaining asset categories, such as MBS, provincial bonds, corporate bonds, etc. – the lines at the bottom of the graph – are mostly settled or few.
The red line represents the ever-growing GoC bonds, but their growth will slow from C $ 4 billion a week to C $ 3 billion a week from next week:
The BoC also announced in the statement that it will maintain its policy interest rates, with the overnight rate at 0.25%, the bank rate at 0.5% and the deposit rate at 0.25%.
But rate hikes were moved to the second half of next year and already in July next year.
Or maybe sooner or later: ‘In the current context, however, there is a lot of uncertainty about the timing, especially given the complexity in assessing supply and demand that I mentioned earlier,’ said Tiff Macklem, governor of the BoC, explained in the opening statement.
But the madness of the housing market unfolding in Canada was foremost and central.
“The Bank will continue to monitor the potential risks associated with the rapid rise in house prices,” he said in the policy statement.
“You will not be surprised to hear that we have also spent some time on what is happening in the housing market,” Macklem said in its opening statement. Here are some goodies:
‘The pandemic has led to some unique circumstances. With so many households working and studying at home, we see that many people want more living space. And interest rates were extremely low, which made loans more affordable, ”he said.
“We are seeing signs of extrapolative expectations and speculative behavior,” he said.
“Given increased 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 set a fixed floor to the minimum qualifying rate for unsecured mortgage lending,” he said.
“New measures just announced in the federal budget will also be useful,” he said, including the annual tax of 1% on vacant non-Canadian vacant homes.
“We are keeping a close eye on developments in the housing market, and we will have more to say about this in our Financial System Review next month,” he said.
And to your amusement here is the explosion of the house price in Toronto according to the Teranet National Bank HPI, whose method (selling pairs) is comparable to the Case-Shiller index in the USA. Over the past two years, the index has risen by 18% from very high levels:
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