Given that Canada is headed for a very painful recession, Canada’s central bank and top financial regulators are doing everything in their power to prevent a housing market collapse which is currently too big to fail.
The Feds and the Bank of Canada will be injecting at least $150 billion and counting into Canadian banks and mortgage lenders, to ensure they have the cash to keep lending.
This move prevented a likely credit freeze by banks and mortgage lenders which would immediately have triggered a housing collapse making the economic situation a lot worse. Without this there would have been a certain collapse in home sales. Canada more than ever is dependent on housing for its economic growth.
What this really means is that the government will own your mortgage in the coming years through Canada Mortgage and Housing Corp. (CMHC), the government-owned mortgage insurer, through which it has launched a program to buy $150 billion-worth of mortgages from lenders.
Mortgage lenders often package together the loans on their books and sell them on to investors, as a way of raising cash to lend more mortgages. This process is invisible to mortgage payers, because typically the lender that first issued the mortgage keeps administering it. Most people never realize the bank they’re making payments to doesn’t own their mortgage.
On top of that, the Bank of Canada will also buy mortgages at a pace of $500 million a week, or more than $2 billion a month, apparently for as long as the Bank deems necessary. So the total mortgages taken off Canadian lenders’ books and the cash infusion to banks could end up being far beyond $150 billion.
If it works, the banks will now have money to keep lending mortgages.
Importantly, that $150 billion that CMHC is spending to buy these mortgages will never appear on the federal government’s books as part of the deficit. It’s an investment, essentially not an expenditure. These are assets that the government owns through CMHC. It will collect the interest on those loans and will get the capital back when the mortgages mature, typically within five years.
Currently one in 10 mortgages are now in the deferral process.
Now that the government owns mortgages directly, there is a risk that it will be on the hook to cover bad loans that households can’t pay in the pandemic crisis.
After all this is over, it remains to be seen just how many homeowners who’ve been ravaged economically by this pandemic will decide to downsize or get rid of that investment property. It could well be a buyer’s market in the months to come, especially if prices start to come down to earth.