Canadians are scrambling to get mortgages, and pensions are scrambling to get the credit on those mortgages. Numbers from the Bank of Canada (BoC) show pensions are turning to residential mortgage credit for growth. Much like Canadian real estate prices, this trend accelerated last year.
Pensions Have Been Moving Into Mortgage Credit
Since the world adopted ultra-low interest rates, global pensions have been chasing yield. In plain English, they want better returns from interest or dividend paying instruments. These yield chasers have been increasingly turning to “illiquid credit,” like mortgage credit. Dutch pensions led the way, and UK pensions have been following since 2015. Canadian pensions have also been doing this at a rapid pace as well, it turns out people just aren’t aware.
Pensions Own Over $27.7 Billion of Mortgage Credit
Canadian pensions have been rapidly acquiring residential mortgage credit from lenders. The current balance of residential mortgage credit held by pensions is now $27.7 billion as of December. This is a 4.92% increase from the month before, and a massive 37.49% increase compared to the year before. It’s hard to get a sense of scale when dealing with such large numbers, so let’s break this trend down.
Source: Bank of Canada. Better Dwelling.
Residential Mortgage Credit Held By Pensions Doubled In 3 Years
If those growth numbers sound huge, that’s because they are. In 2017 alone, pensions acquired more that $7.55 billion of residential mortgage credit. That brought the balance up to double what it was, just over 3 years ago. Before that, it took 27 years for the balance of their mortgage debt books to rise. The purchasing of this form of illiquid credit does appear to be a little more hurried than normal.
Source: Bank of Canada. Better Dwelling.
Pensions are just as hungry for real estate exposure, as most Canadians have been. This trend isn’t a bad thing by itself, however, it does underline how Canada is becoming increasingly dependent on the real estate market. Pensions are looking at massive shortfalls in just a few years, and they think the solution is more exposure to real estate. Now more Canadians than ever are becoming reliant on real estate for their retirement. Even if they don’t own real estate themselves.
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Pension ponzi, meet the real estate ponzi. You’re going to be friends.
This is like a nightmare. The only way to make money is through real estate, and everyone is piling into it. Somehow, we think correcting this will be painless. In fact, the government is saying we won’t have a recession if we switch from real estate to another industry, the economy is forecasted to boom!
Can someone please explain how 30% of the GDP growth can be reassigned, and no one is impacted? Because it seems hard to adjust 20% of all employment to do something else overnight, but apparently we’re going to do it.
How are people’s pensions impacted if the market crashes?
It feels dangerous to allocate so much, going into what even the CMHC is calling a “dangerous” market.
Canadian pensions are some of the best in the world and, unless I missed something, all major pensions are fully funded for the next 10-15 years…OMERS, Teachers, etc. Not all are gold but compared to other countries our guys seem to be a little smarter and less risk adverse. Again, I may be wrong but the last report I read was quite positive. Why did they get into the mortgage game so much? My theory is that our mortgages, in many cases, are backed by a lot of cash. Even in the event of an implosion, the money men still win. Ex: $500K mortgage against a $1M house. $500K down. Let’s say we experience southern Florida corrections, 50%. THAT IS NOT GOING TO HAPPEN BTW. The cash in the house and the value of the house are still worth $1,000,000 to the bank. Sure, the owner defaulted but there is no loss for banks and by extension the pensions’ investments. Now if this was a 10% down, so $900K mortgage with $100K in it, the bank takes a $300K hit.
Maybe, what do I know…good luck everyone!
They could also be insured mortgages. There was not mention of that in the article, would be great to know this breakdown. They could be buying up only CMHC insured mortgages, getting a higher risk adjusted return on their investments. A higher yield, with little to no risk as general population will have to pay up for defaults.
“A fool and his money are soon parted”….just ask all those Bitcoin “investors” how their get rich quick scheme is going today.
Dummies.
Sounds a lot like Mortgage Backed Securities (MBS) and Collateralized Debt Obligations (CDOs) in the United States prior to the US housing market crash. Throw in some Canada style sub-prime loans (Canadians getting a higher interest down payment loan from someone else’s HELOC) and you have a replica of what happened in the US.
On the flip side, a lot of Credit Default Swaps were sold to some people holding these securities. And a lot of CDS’s were sold to some who never bought the MBS or CDO’s, but were looking to put some money down and profit on the crash (thanks AIG), If Canadian pension funds bought these mortgage backed securities, it would be interesting to know if they took out any type of insurance (swap) on default…. and who holds the responsibility on that.
Well Joe, you’ve zeroed in on the crucial aspect of this disaster in the making. In California Judge Jacqueline Connor and her fellow crooks in the Western District of the Los Angeles Superior Court in Santa Monica got wind of the vast corruption at Countrywide in late 2005 and acted to protect the crooks. Had the courts acted in early 2006, the economy would have been harmed but we would have had a correction rather than a Crash. I do not know about Canadian courts, but in the United States our courts always protect the crooks and attack whistle blowers. I hope you can avert the coming disaster in Canada.
With resources in a down cycle and housing basically the only thing driving our economy, I don’t think we need to speculate; bankers/money fueled the boom with politicians playing hot potato and allowing the insanity to be prolonged. Add to that all of the distractions over the last 12-24 months: Trump, Aboriginal issues, Racism, Sexism, Straight up rape!, Gord Downey, Never go down stock market, Nuclear War, Cannabis legalization, Russia Scandal, Crypto, (not crypto kitty, that shit’s legit!), etc, etc.
Where does housing even fit in the news cycle unless it is in dire straits? It doesn’t and we all just kept drinking the kool-aid, assuming everything gonna be peachy.
Large Canadian pension plans are among the best, if not THE best, managed portfolios in the world. They are overseen by some very bright people, with stringent, high standards. They are not prone to miscalculations. They are also very conservative in nature, not speculative.
If it looks too good to be true, they indeed accept that it is too good to be true. They are not interested in the short term, but in investments that provide five year or greater returns.
They would be interested only in the best mortgage portfolios – those insured by the government.
Something not covered in the article – i Canada, when the mortgage portfolio is sold, does the mortgage insurance transfer over?
Aren’t these, in fact, the most secure investments a pension fund can make?
Not just a guaranteed, but an insured (by the government), rate of return?
I can see how a pension fund would be interested in such an investment.
A securitized pool would be government insured, so there’s little risk. The interesting take away IMO is how much liquidity they added to the mortgage pool.
When money is hard to come by, lenders aren’t as aggressive (i.e. they don’t run ads advertising the fastest mortgages in Canada). In this case, they may have helped with liquidity, giving the market more slack.
I look forward to seeing how academics interpret pensions contribution to the housing bubble. I get the feeling history will not be kind to many things Canadians blindly trusted.
Along with the smart questions some readers have asked regarding mortgage insurance; It would also be nice to know how much assets Canadian pensions hold overall. $27B means nothing to me because I can’t come up with a % for that. I’m sorry to say but this is a little bit of a crummy article BD. Comparable to doom-porn on zerohedge.
Canadian pension plans generally do NOT invest in the stock market. They do not buy stocks, they buy companies. Generally, the investments they make are not publicly traded. Thus, they are not exposed to the whims and emotions of the general public.
Buying up insured mortgages would fit perfectly within this type of portfolio. It would be a very stable investment.
I presume that when the term expired, the mortgage would bounce back to the originating bank to renew at whatever the going rate was. The plans would not be stuck with the mortgage.
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