The most surprising story amidst the pandemic has been the unprecedented strength of the housing market across the country despite elevated levels of joblessness, a sharp but temporary drop off in immigration, and negative impacts to various industries.
By now the key drivers of the boom in housing demand have been well established. The pandemic resulted in policy interest rate cuts and the implementation of quantitative easing with an expectation of future weakness, which drove mortgage rates down sharply. The new trend of remote working emerged, and demand has risen for physical space in both suburban and smaller urban markets.
The low interest rate environment is one of the reasons why many Canadians have decided to make a move. According to the latest figures released by the Canada Mortgage and Housing Corporation, mortgage debt growth accelerated in 2020, partially mirroring strong housing market activity in Canada.
In the third quarter of 2020, credit unions added $54 billion worth of new residential mortgages since the beginning of the year. This was a 44 per cent increase over the same period in 2019; driven by property purchases, which was responsible for the highest increase in lending activity among non-bank lenders.
What could this mean for credit unions?
As the pandemic continues to influence the macroeconomy, it’s important for credit unions to once again think about prudently managing their liquidity as mortgage demand continues to grow.
There are multiple types of securitization vehicles to fund both insured and uninsured mortgages. We continuously explore options to make them available to the system. In the marketplace, we see different products, such as National Housing Act Mortgage-Backed Securities (NHA MBS), Canada Mortgage Bond Program (CMB), and surprisingly even for uninsured vehicles, including asset-backed commercial paper (ABCP) and residential mortgage-backed security (RMBS).
At the start of the pandemic in spring 2020, credit unions actively increased their overall liquidity through various means including securitization to create a buffer and ensure their resilience during challenging times.
Credit union members also cautiously set aside money, keeping liquidity pressures low while borrowing tightened, resulting in excess liquidity on our credit unions’ balance sheets. By the third quarter in 2020, the data shows lending activity widened considerably and the excess liquidity supported increased lending activity.
Lending has persisted into the first quarter of 2021. An increase in residential mortgage lending means growth in our members’ mortgage lending portfolio and reduced liquidity within the system.
Credit unions can ensure they have a buffer to address potential liquidity pressures and take advantage of low interest rates by thinking ahead. Our members can address overall liquidity through securitization, which enables them to diversify their risk, gain access to funding, lower the cost of funds and increase margins.
The cost of funds in the securitization programs are at historically low levels for insured programs. This is the moment to benefit from the low cost of funding and enhance credit unions’ lending margins.
In the first quarter of 2021, Central 1 has facilitated securitization transactions only for our large credit union members while securitization transactions for our small to medium credit union members remains at nil.
Given increased lending will quickly absorb excess liquidity, we’re encouraging our members, particularly the small to medium credit unions to actively increase their overall liquidity in advance to ensure their resilience in the future.
Increasing housing market vulnerabilities
At present, the pandemic is still influencing housing market conditions. Housing sales remain elevated relative to new listings in several regions across Canada and there are signs of overheating – beyond Toronto and Vancouver – at a national level.
My colleague Bryan Yu, our Chief Economist, says that the pace of price growth we are seeing is unsustainable and if it does not cool, we can expect the federal government to step in with a policy response. That said, the market should begin to exhaust itself. He added the erosion in affordability and concerns about household debt could lead regulators to initiate further lending or mortgage insurance restrictions to slow demand.
Our Treasury team is here to help
My colleagues and I are committed to providing our member credit unions and clients with expertise, products and services to ensure their success. We’re here to help you every step of the way. If you’d like more information about securitization, repurchase agreements or other funding and liquidity solutions, please contact me or treasury@central1.com.
