A report from the Financial Post in Canada. “Bill Morneau had been finance minister for only 36 days when he first attempted to do something about runaway housing prices and mortgage debt. He announced in December 2015 that the minimum downpayment for an insured mortgage would in two months rise to 10 per cent from five per cent on the portion of the loan that exceeds $500,000.”
“It was a risky move for Morneau, a first-time member of Parliament from Toronto, since it would irritate constituents who had become wealthier by owning real estate from the beginning of the housing boom. But a response was overdue. Household debt had exploded to record levels and Canada had become vulnerable to a financial crisis.”
“History often rhymes, but unlike the rest of Mark Twain’s famous quote, it does sometimes repeat. Trudeau’s government presents itself as less cynical than its predecessor, but don’t believe it. Confronted with an acute outbreak of housing mania this spring, Trudeau and his current finance minister, Chrystia Freeland, turned to the Harper playbook. Trudeau and Freeland could have used last month’s budget to finally overhaul a deeply flawed housing policy. Instead, with the possibility of an election this year, they did the minimum.”
“Back in the summer of 2015, mortgage credit was growing at an annual rate of about six per cent, compared with five per cent or so a year earlier. The housing crisis then was really a story about massive bubbles in Vancouver and Toronto. That argued against an aggressive federal response. There’s no such thing as a national housing market, goes the cliché. It would be folly, not to mention unfair, to punish buyers in places such as Moncton, N.B., and Ottawa for the sins of the Big Smoke and Lotusland, both of which had emerged as global destinations for international high-flyers in the aftermath of the Great Recession.”
“The mania has now spread. In March, Canada Mortgage and Housing Corp. flagged Moncton and Ottawa as being highly vulnerable to a collapse, along with Hamilton, Toronto and Halifax. Victoria, Vancouver, Edmonton, Calgary and Montreal were described as ‘moderate’ risks to financial stability. ‘There is now evidence of overheating at the national level,’ CMHC said in its latest quarterly Housing Market Assessment.”
“The central bank’s job is to keep the Consumer Price Index advancing at a rate of about two per cent a year. That task now appears to require extremely low interest rates. The central bank needs the ability to deflate asset-price bubbles that are the side-effects of aggressive monetary policy. Some might say that’s too much power for an unelected body. But remember that the Bank of Canada was handed a long leash to manage inflation because it had become clear that politicians couldn’t be trusted to make the hard choices required to cool economic growth.”
“Canada’s real-estate bubble has now been inflating for more than a decade. That’s enough evidence to show that politicians can’t be trusted to manage housing policy, either.”
The Globe and Mail. “Canada’s real estate market has skyrocketed over the past year, setting off a vigorous discourse over the dangers of rapidly rising prices and steeper barriers to homeownership. And yet, inflation numbers offer a subdued – even drab – version of events. As bidding wars and six-figure price increases become the norm, it’s tough to find much of an impact on Statistics Canada’s go-to measure of inflation, the consumer price index.”
“‘CPI does not include the purchase of a property, because in this case, we don’t consider a house a consumer good,’ said Heidi Ertl, director of the consumer-prices division at Statscan. ‘We consider it an asset.’”
“A second issue, which the inclusion of resale data does not address, is the impact that interest-rate changes have on the Mortgage Interest Cost Index. When interest rates drop, the index declines, as homeowners take on new mortgages or refinance existing mortgages at lower rates. Over the past year, the MICI declined 6.3 per cent, owing to Bank of Canada rate cuts and its continuing efforts to hold down interest rates through its quantitative-easing program.”
“At the same time, however, the central bank’s ultraeasy monetary policy is throwing jet fuel on the housing market. This creates the uncomfortable impression that the bank’s main gauge of inflation and guide to monetary policy is unresponsive to the segment of the economy that the bank is stimulating the most.”
From Nine News. “Australian tenants struggling to make rent were the hidden losers of last night’s Federal Budget, as the Morrison government’s cash splash prioritised home ownership over affordable housing. Despite extending three key initiatives to encourage first home buyers to enter the property market, there was little cash spent on easing conditions for renters or providing more affordable housing.”
“Eliza Owen, head of research at property data firm CoreLogic, said much of the Budget’s home ownership policies were designed to encourage more buyers while protecting current prices for owners.
‘In contrast to the Labor party platform of reducing housing demand through the 2016 and 2018 elections (via reducing or removing incentives for housing investors), the Federal Government have utilised a different approach to boosting the rate of home ownership,’ Ms Owen said. ‘They focus on increasing accessibility of mortgages, rather than risking any downward pressure on residential property prices.’”
From Stuff New Zealand. “Amid all the noisy talk of constraints on LVRs, DTIs and interest-only loans, the Reserve Bank has quietly floated the possibility of wielding a fourth tool: treating home loans as higher risk and so increasing the capital requirements for banks to lend against residential property.”
“The Reserve Bank is on the verge of implementing new rules requiring banks to hold more capital to make the banking system safer, after drawn-out consultation and Covid delays. The four large banks must increase their total capital ratios from 10.5 per cent to 18 per cent, smaller banks must increase their capital to 16 per cent.”
“It’s an expensive obligation for the banks that has prompted grumbling from their Australian parent companies – but even before the new requirements come into force in July, the Reserve Bank has now disclosed it may go still further.”
“Finance Minister Grant Robertson had asked the Reserve Bank to consider the tools it can use to support more sustainable house process. So, in its financial stability report this month, it discusses the existing tool of loan-to-value ratios; it discusses the Bank’s desired tool of debt-to-income ratios with a question mark over whether they can just target investors as Robertson wishes, or whether they would also restrain first homebuyers from over-extending themselves. It considers (and cast doubts on) the efficacy of restrictions on interest-only lending.”
“But it also discusses a fourth financial policy instrument that will have banks and borrowers alike shifting nervously in their seats. It’s a proposal to get out an old tool that’s been rusting in the back of the kit: changes to capital requirements on a sector-by-sector basis.”
“So, as well as the blanket increase to capital requirements coming into force next month, banks would also be required to increase their capital ratios still further when lending on residential property. The Reserve Bank presents this as a response to the higher risk if there is a downturn and property prices drop, leaving both homebuyers and banks exposed. But critics are dubious.”
“Professor David Tripe, who specialises in banking at Massey University, said New Zealand banks’ capital holdings were already higher than was reasonably necessary for the risk in the housing market.”
“‘Some people think this residential mortgage lending they’re doing is unsustainably rising and there could be huge losses if there is a decline in house prices,’ he said. ‘I just don’t think that decline is plausible, when we still have such a shortage of housing. You can certainly increase the capital holdings to penalise banks and discourage housing lending further. But what that means is that those in a less advantaged financial position will find it even more of a challenge to buy into the housing market.’”
“On Tuesday night, New Zealand’s biggest bank sounded a note of caution. ANZ spokesperson Stefan Herrick said there had already been substantive change in both regulatory and fiscal policy around housing recently. ‘Initial signs are that this is having an impact, so should be given time to bed down.’”
“He indicated the bank would prefer the effects of the previous government and Reserve Bank housing, tax and lending policy changes be measured, before embarking on further changes. ‘Anecdotally we’re also hearing that while demand is still strong for houses, the rate of price increases seems to have slowed,’ Herrick said. ‘All government and Reserve Bank initiatives should be considered carefully – remembering the dangers of unintended consequences. Ultimately, the housing crisis will be solved by more houses being built.’”
From Bloomberg. “If the Federal Reserve is truly as outcome-based as it claims to be under its new policy framework, it should start winding down its purchases of mortgage-backed securities. The fact that it’s not even thinking about doing so is revealing about just how hesitant it is to make even the slightest tweaks to monetary policy at this point in the economic recovery.”
“Lost in the shuffle last week amid all the Fedspeak about inflation and Friday’s shocking jobs report were comments from Boston Fed President Eric Rosengren. ‘My own personal view is that the mortgage market probably doesn’t need as much support now. And in fact, one of my financial stability concerns would be if the housing market gets too overheated,’ he said. ‘I do think that as we think about tapering one of the things that we are going to have to think about is at what speed we taper the Treasuries versus the mortgage-backed securities.’”
“While Rosengren also added to the central bank consensus that it remains premature to focus on tapering, a view only reinforced by the U.S. labor market adding surprisingly few workers last month, he raises an interesting question: Why exactly is the Fed still increasing its holdings of mortgage-backed securities by $40 billion a month when Chair Jerome Powell himself has said that ‘the housing sector has more than fully recovered from the downturn’ and that the rapid price appreciation means ‘it just is going to be that much harder for people to get that first house.’ Couldn’t the Fed be using its bond-buying bazooka more effectively?”
“It certainly seems that way, especially when gauging sentiment within the agency mortgage-bond market itself. ‘Outside of the central bank today, there was little impetus to buy,’ my Bloomberg News colleague Christopher Maloney noted. Banks ‘mostly joined other investors on the sidelines, waiting for wider spreads.’ The option-adjusted spread on the Bloomberg Barclays U.S. MBS index fell to just 0.07% at the end of April, the narrowest since 2010. It’s no secret why: The Fed has gobbled up almost $2 trillion of MBS since March 2020, which is more than its total aggregate purchases in any of its previous quantitative easing episodes.”
“As I mentioned on Twitter during Powell’s press conference in April, the Fed doesn’t have a satisfactory answer for why it’s throwing billions of dollars at mortgage bonds at this point. His answer boiled down to three things: First, that the MBS market was in chaos during the onset of the pandemic; second, that it bought them after the 2008 financial crisis so it should do so again; and third, MBS purchases are now inextricably linked to tapering in general, so it’s stuck buying them until it reaches the nebulous ‘substantial further progress’ mark.”
“Here’s Powell’s quote in full, which doesn’t even fully capture his struggle to answer: ‘Yeah. I mean, we started buying MBS because the mortgage-backed security market was really experiencing severe dysfunction, and we’ve sort of articulated, you know, what our exit path is from that. It’s not meant to provide direct assistance to the housing market. That was never the intent. It was really just to keep that as, it’s a very close relation to the Treasury market, and a very important market on its own. And so, that’s why we bought as we did during the global financial crisis. We bought MBS, too. Again, not intention to send help to the housing market, which was really not a problem this time at all. So, and, you know, it’s a situation where we will taper asset purchases when the time comes to do that, and those purchases will come to zero over time. And that time is not yet.’”
“As long as U.S. housing prices increase year-over-year by more than 10%, as they have for each of the past three months, Fed officials should continue to face questions about the central bank’s presence in the mortgage market. After all, no one is asking for them to do this. Would-be MBS buyers are sitting out, waiting for spreads to widen, suggesting the MBS market would function just fine without central-bank meddling. Look no further than corporate bonds, where investors are all too eager to buy debt from companies with deeply speculative-grade ratings, for proof that there’s no shortage of demand for debt with a bit of extra yield. That includes appetite from banks that are flush with extra reserves specifically because of the Fed’s balance-sheet expansion.”
“In the end, the Fed seems content to be like the unwanted guest at a house party who just won’t leave. No one is going to kick the central bankers out, but it might be nice if they gave some indication that they’re exiting soon.”