Government’s increased mortgage bond-buying spree could backfire, housing agency warns
Canada's approach to stabilizing its mortgage market is drawing criticism for blurring the lines between normal market function and crisis-mode intervention.
The plan, which includes direct funding of mortgage borrowing, has experts warning of potentially negative consequences.
In a 2022 report, Canada Mortgage and Housing Corporation (CMHC) said the government's plan to eliminate CMBs and fund loans directly would erode Canada's reputation for stable capital markets. This could divert investors elsewhere and drive up borrowing costs across all government services.
"Direct funding for [financial institutions] FIs by the government has been traditionally reserved for crisis action and the application of this model during normal markets could distort the line between 'business as usual' activity and crisis intervention," the agency said.
The CMHC explained it currently operates mortgage funding on a breakeven basis, passing costs to lenders, rather than generating revenues.
The government would be essentially competing with itself, the CMHC said. Removing the slight premium CMBs offer over standard government bonds would reduce the appeal of Canadian bonds to foreign investors.
Shifting to direct government mortgage funding would also be “unusual for a sovereign" outside emergency situations. An RBC estimate found Canada's COVID support programs had already widened federal borrowing costs by 10 basis points in 2020, equating to $4 billion in extra interest given the country's $4 trillion fixed-income market.
Read more: CMHC explains what kept the Canadian housing market strong during the pandemic
CMHC also pointed out that Canadian investors, such as pension funds, could see reduced investment returns.
Despite CMHC's warnings, Canada has already initiated a CMB buying program.
While the government has not eliminated the mortgage bond program – initially launched with a $30 billion limit – it has since expanded to $40 billion, with the latest budget proposing an annual increase to $60 billion.
CMHC's analysis of the program's potential impact on Canada's housing market has been redacted.
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