Despite deep economic pain caused by the global pandemic, the Canadian economy—and the housing sector in particular—appears to be bouncing back from the near-complete shutdown of society…at least for now.
That’s thanks in large part to numerous government measures meant to keep liquidity flowing and people in their homes.
Below, we take a look at just some of the government measures that have helped keep markets functioning, including everything from liquidity support for Canada’s mortgage lenders, to mortgage payment deferrals to rock-bottom interest rates.
CMHC’s $150 billion in mortgage purchases
Within a week of the crisis, CMHC announced a $50-billion Insured Mortgage Purchase Program (IMPP), later expanded to purchase up to $150 billion of insured mortgage pools to provide stable funding for banks and other mortgage lenders. Eligibility criteria for portfolio insurance were also temporarily relaxed to help mortgage lenders access the IMPP.
“In a crisis, we want to make sure markets continue to function,” CMHC CEO Evan Siddall said in a recent online chat with Mortgage Professionals Canada CEO Paul Taylor. “People run to government because, you know, governments can print money. Governments have big balance sheets and we can solve this problem.”
CMHC employed a similar program during the 2008-09 financial crisis, although the size of the purchase program was roughly half the size, at $69 billion, Siddall said.
Bank of Canada’s Foray into Quantitative Easing
In early April, the BoC announced it would purchase $1 billion of mostly 5-year government bonds, which was considered the Bank’s first-ever foray into quantitative easing.
That, of course, was just the first of what would become many additional purchase announcements, which some say will amount to hundreds of billions of dollars worth of government bond purchases in the coming months given its minimum confirmed purchase amount of $5 billion per week until the country’s recovery is “underway.”
The BoC had also announced plans to purchase up to $50 billion of provincially issued bonds with remaining terms of maturity of up to 10 years.
“Will quantitative easing work this time around?” asked Conference Board of Canada Chief Economist Pedro Antunes. “This is new territory for the BoC…but there’s no doubt that it will work and will have the intended effect of lowering interest rates…and adding to the liquidity of the market and helping us get through this crisis.”
Bank of Canada Governor indicated earlier this month that the bank intends to continue its weekly purchases of $5 billion per week in Government of Canada bonds since they have been having their “intended effect” and have “reduced market strains.”
“As the economy moves from reopening to recuperation, it will continue to require extraordinary monetary policy support,” the Bank of Canada said during its most recent interest rate decision.
“This QE program is making borrowing more affordable for households and businesses and will continue until the recovery is well underway,” it added. “To support the recovery and achieve the inflation objective, the Bank is prepared to provide further monetary stimulus as needed.”
OSFI Stability Buffer
The Office of the Superintendent of Financial Institutions announced in March that it would reduce the domestic stability buffer for Canada’s systemically important banks to free up liquidity.
In an update letter to Canadian deposit-taking institutions on May 1, OSFI clarified that “measured declines” in capital ratios are acceptable in current circumstances for small and medium-sized banks to absorb unexpected losses arising from the impact of the COVID-19 disruption.
Bank of Canada’s Interest Rate Cuts
Another important aspect of supporting the Canadian economy was the Bank of Canada’s emergency rate reductions, which drastically lowered the cost of borrowing for millions of Canadians by reducing the country’s key lending rate from 1.75% to 0.25% in the span of just one month.
That has lowered monthly mortgage payments for countless variable-rate mortgage holders, particularly those who were lucky enough to snag a rate as low as prime – 1.00% prior to the pandemic, which translates into a mortgage rate of 1.45% today.
Not only that, but new Bank of Canada Governor Tiff Macklem provided rare rate guidance in has provided rare rate guidance earlier this month when he said, “We are being unusually clear that interest rates are going to be low for a long time.”
That rare rate guidance has surely emboldened those who were on the fence about entering the housing market. They can now rest assured that historically low interest rates will be around for at least the next several years.
“For a Bank that has eschewed offering forward guidance, that blunt admission reveals much about the severity of the current crisis as well as the BoC’s willingness to do whatever it can to counteract its ‘strongly disinflationary’ impacts,” wrote mortgage broker Dave Larock of Integrated Mortgage Planners.
“The BoC is determined to keep rates from rising until our economic recovery is well underway, and that portends mortgage rates that are the same as or lower than today for years to come,” he added.
Mortgage Payment Deferrals
Canada’s big banks announced jointly in March that they would offer clients affected by the COVID-19 crisis the option to defer their mortgage payments for up to six months.
Dozens of other lenders, including non-bank lenders, credit unions and other financial institutions, followed suit by offering their own mortgage payment deferral programs.
All eyes will be on the country’s housing industry this fall when those payment deferrals start to reach their end, which CMHC President and CEO Evan Siddall referred to previously as a looming “debt deferral cliff.”
Additional Government Support Programs
Additional measures aimed directly at consumers and businesses include:
- Canada Emergency Response Benefit Act (CERB)
- Up to $2,000 per month for up to four months. In June, the government announced an eight-week extension of the program to 24 weeks, up from 16.
- Canadian Emergency Wage Subsidy (CEWS)
- A wage subsidy of up to 75% for eligible employers for the first $58,700 normally earned by employees. The government is currently in the process of revamping this program to extend its timeframe and modify criteria to cover workers’ wages on a sliding scale proportional to their wage hit. To date, 262,200 employers have accessed this program at a total cost of $20.4 billion.
- Business Credit Availability Program (BCAP)
- A measure that will allow the Business Development Bank of Canada (BDC) and Export Development Canada (EDC) to provide more than $65 billion of additional support
- Canada Emergency Commercial Rent Assistance (CECRA)
- Financial aid to support small and medium-sized businesses that pay commercial rent
- Emergency Community Support Fund
- Funding of up to $350 million to support communities and non-profit organizations
- Canada Emergency Business Account
- Financial support for small businesses, providing access to capital to see them through the current challenges
Note that this list is inconclusive and doesn’t include numerous programs in place at the provincial level.
“If the continuing announcements of billions of dollars in government spending have your head spinning, you’re not alone. The numbers are unprecedented,” wrote CIBC economist Royce Mendes.
However, he noted that this downturn is different from any other given that many of the above-mentioned programs have clear end games, to “bridge the gap until consumers and businesses can get back to work.” In addition, the prevailing interest rate environment is “miles below the levels of 30 years ago and clearly sets this situation apart from deficits in the past.”
Of course, that doesn’t mean a long-term financial recovery will be easy or quick. “It’s true that assuming a one-and-done increase in the deficit probably paints too rosy a picture, since the economy will be underperforming for some time even after the emergency measures are no longer needed,” Mendes added.
The full cost of this crisis became clear earlier this month when the Finance Minister Bill Morneau announced a projected $343 billion deficit for this year, which would cause the country’s debt to surpass $1 trillion by 2021.
Canada has so far managed to hang on to its AAA credit rating despite its ballooning costs related to propping up the economy. The rating was confirmed by S&P Global Ratings on Wednesday. However, back in June, Fitch Ratings downgraded the country’s credit rating to AA+.
There’s no doubt the Canadian economy, like many around the world, has suffered greatly due to the impacts of COVID-19.
“Canada’s economy—like that of almost every other country around the globe—has been hammered by COVID-19,” the Conference Board of Canada noted in its Summer 2020 Long-Term Outlook.
“But while the pandemic’s impacts have been devastating, they should also be brief,” they added. “Our long-term forecast remains driven by demographic and economic expectations that are generally unchanged.”
As for the housing industry, despite a seemingly “V-shaped” recovery to date, observers acknowledge we’re not out of the woods yet, particularly with the above-mentioned mortgage payment deferrals that will be coming to an end in the next few months.
“I guess the bigger picture is one of cautious optimism,” said Shaun Cathcart, senior economist at the Canadian Real Estate Association. “The market has recovered much faster than many would have thought, but what happens later this year remains a big question mark. That said, daily tracking suggests that July, at least, will be even stronger [than June’s numbers].”
A modified version of this article first appeared in Perspectives, Issue 1, 2020.