In a move which was unexpected by some in the market, at least at this stage, it looks as though the Canadian authorities have taken pre-emptive action to ensure that the Canadian financial markets do not crash and burn like so many around the world. The situation was far from serious but it seems as though the authorities are determined to underpin the financial system and the economy in a bid to ensure that as little as possible benefit of the boom years are lost.
The plan
The plan by the federal government is to acquire up to $25 billion of mortgages from an array of financial institutions in Canada. However this is not a US style bailout whereby they will be taking poor quality mortgages off the hands of the banks, this is a business style approach which should actually start to deliver a return from day one.
It was revealed that the deal will be administered by the Canada Mortgage and Housing Corp which will look to acquire mortgages with a maximum of 5 years left to run. By allowing the banks to sell their mortgage books and raise liquidity it is hoped that this will pre-empt any possible slide in the Canadian economy and ensure that the property market does not collapse and all (or at the least the vast majority) of mortgages acquired will be repaid in full.
The action
The first tranche of $5 billion worth or mortgages was acquired this week in what is commonly known as a reverse auction. The government warned that they would not even consider acquiring loans with a yield of less than 3.925% although as it happened the average yield on the $5 billion tranche came in at 4.241% with a high of 4.679% and a low of 4.041%. The deal was structured in this way as to ensure that the yield on the mortgage books acquired is more than the funding costs which the authorities are paying on the funds in question.
The in coming Conservative government has confirmed that tax payer’s money will not be put at risk to clear the decks at all costs, something which may not be true for other countries around the world. As we covered recently the Canadian property market and the economy have held up very well over the last few months when many others have foundered badly.
The consequences
The Canadian property market has show substantial growth over the last few years as the country moves away from the shadow of its giant neighbour, the US. The market is seeing substantial interest from all areas of the globe and while the employment market can be a little tricky to break into in places, this interest seems set to grow.
The move to shore up the financial system could actually be timed to perfection as the general woe felt around the world is starting to creep into some of the previously untouched areas. We have also seen a fall in the price of a number of commodities such as oil which will have impacted somewhat on the value and income from Canada’s substantial reserves of oil and minerals.
The property market
Surprisingly, when you consider what is happening around the world, there have been very few distressed property sales in Canada and even though the situation may change there appears little chance of the country suffering as the likes of the UK has. However, we have seen a softening of prices in some of the country’s property hotspots with the likes of Vancouver and other areas of British Columbia suffering falls of up to 6% over the last 12 months. This may seem a little high and of concern but when compared to the recent performance of these markets and the general trend in the country it is not a real concern.
As we touched on above there has been a distinct lack of distressed property sales in the country and even signs that some people are pulling their prices off the market until conditions and prices stabilise. This if nothing else is a sign that the economy and the country as a whole is fairing a great deal better than many around the world.
Financial markets
The lacked of forced sellers in the property market has ensured that no additional pressure is placed on the shoulders of the country’s financial sector. It would be foolish to say that the Canadian money markets have not seem some reduction in volumes based on the worldwide trend, but the $25 billion reverse auction and additional liquidity injected into the market will surely see the country through to a time when world markets return to a more even keel.
There have been no major companies stepping forward to suggest they are in trouble, there have been no significant mortgage defaults and the government’s pre-emptive strikes may well head off any turbulence over the next few months.
Conclusion
While it would be foolish to suggest that any country in the world is total insulated from the credit crunch and the worldwide economic slowdown, there is no doubt that countries such as Canada are, and continue to, fair better than most. Whether this is the fact that they have been able to study other markets over the last few weeks and see which moves have worked, then take out pre-emptive strikes of their own, or the underlying economy and property market is stronger remains to be seen.
It was very interesting to see the fact that there are very few distressed sales and more sellers have pulled properties off the market to wait for better conditions. This reduced number of properties for sale and the fact that there is still demand in the market should help to support the property sector over the short to medium term. However, as we have seen all around the world over the last few months, those governments which sit back and think it will never happen to them may be the ones at greatest risk.
Thankfully, the $25 billion mortgage purchase program and increased liquidity in the financial market before it is even required bodes well for the future.