Insured NHA mortgage-backed securities enter negative growth territory in July, most since October 2012

Back in August, Statistics Canada's national home price index contracted the most since December 2009, entering negative territory. Meanwhile, the latest Teranet-National Bank data posted the slowest growth pace in home prices going back over 10 years. All eyes are on the housing market, especially now that the summer sales season is in full swing.

So, the Stats Can data for July didn't really show us a significant deterioration in commercial bank residential mortgage credit. No, because this is the summer sales season. Sales are booming, according to the mainstream press. We're actually seeing a seasonal bounce unfolding in the bank credit market, as well, which began back in April of this year. Check it out:

Actually, yesterday the CEO of CIBC came out and said how their "pull back" from mortgage issuance may have been a mistake. But, I suspect this bounce in mortgage credit is due to the seasonality of the housing market. That's not to discount the idea that the bank might have finally caught on to the fact that no loan growth equals no price growth; maybe they are trying to wiggle their way out of this situation.

But wait! There are other clues in the residential mortgage credit statistics in the chart above. Take a look at the data for insured NHA mortgage-backed securities (MBSs) growth (red line). Here, growth is now registering a negative 1.8 percent. I scanned the historical data and this is the first contraction since October 2012.

NHA MBSs are investment products that are backed by bundles of mortgages. These are insured mortgage products, backed by the Canadian Mortgage and Housing Corporation (CMHC), a state entity backed by the Canadian ministry of finance. The mortgages that form the NHA MBSs originate in bank and credit union lending departments. Then, they're sold to investors in the form of a securitized product with an artificial interest rate. But, they're quantity is now shrinking for the first time in 7 years.

The other week I published a story about how the Bank of Canada (BoC) started purchasing MBSs nearly 9 months ago to prop up the Canadian mortgage lending market. And, here we are, these MBSs are now contracting. It goes to show you that, no matter how hard the BoC tries to keep mortgage interest rates down, it's not going to "spur" economic activity in the housing market. There's still the massive issue of affordability and downside risk in housing assets. Folks can't afford to buy them, and they're afraid if they buy a house they'll owe more than it's worth. 

In the July data, we can see that non-bank mortgage growth is beginning to slow at a faster pace. What these non-banks have yet to realize is that, price momentum of the asset against which they've lent out existing money, is tied to commercial bank credit. So, no matter how hard they try, they won't be able to replace the commercial bank monsters who dominate the lending market and whose credit is required to keep propping up the assets underlying their loans.

Once this sales season is over, I suspect both commercial bank and non-bank mortgage growth will tank. The result might be disastrous for home prices and sales.

There's no bounce in sight for home prices, so odds are high that this deceleration in home price growth is going to turn into an acceleration in home price shrinkage. Who will be the first victims? Probably the non-banks who've been taking market share from the banks in the mortgage market.

July showed us that things are not as hunky dory as they may seem, and that we've just walked into the woods. The problem with our current trip into the woods is that, most of us are walking in from different locations and don't have compasses or walkie-talkies with which to communicate. Those watching the credit statistics have a compass, and we'll be able to at least partially navigate the impending disaster in the Canadian housing market.