Massive withdrawal risks accompany the central bank's attempts to ensure mortgage liquidity, observers say
The Bank of Canada is injecting millions of dollars weekly into mortgage liquidity to support the market, but an analysis by housing industry data portal Better Dwelling said that this trend is likely to trigger a vicious problem-stimulus cycle instead.
Data from the central bank showed that it has purchased $7.95 billion in Canada Mortgage Bonds (CMBs) from the beginning of this year up to July 22, amounting to a staggering increase of 1,450% annually. The BoC said that it has pumped $234 million in these bonds over the previous week alone.
This mortgage-based stimulus comes with “massive withdrawal risk,” however.
“By lowering rates, the market doesn’t receive new demand. It borrows demand from the future,” Better Dwelling’s analysis said. “Only so many people are stimulated into buying with lower rates, and it largely just results in higher spending. After the market burns through people incentivized by lower rates, it creates another gap later on. This becomes a whole other problem when that cohort of buyers is smaller due to borrowed demand.”
Another possible problem is the fundamental volatility of a post-stimulus environment.
“If the market buys on stimulus, it holds back when it disappears,” Better Dwelling said. “The return to normalized rates is so difficult for the market to accept, it rarely happens. And when it does, it causes another pressure against buyers, and lasts just a few months.”
“Even worse, this stimulus is so large, it creates an overhang the government will have to deal with later. Combine this with the payment deferral cliff, and the market is increasingly lining up issues that will require even bigger stimulus to prevent a disaster.”
