Last year, in response to the COVID-19 crisis, the Bank of Canada implemented a policy of quantitative easing, or QE. For anyone who may not be familiar with this practice, it essentially amounts to a federal entity buying securities from banks, with the intention of providing those banks with money, easing interest rates, and ultimately stimulating an economy. In the case of Canada’s response to the pandemic, the policy began with a $1 billion purchase of various five-year government bonds.
This marked the first time the Bank of Canada has ever ventured into QE — a process that most in the western world associate with the U.S. reaction to its 2008 financial crisis. Furthermore, it ultimately marked only the beginning of a larger QE process that the Bank of Canada has largely been reluctant to draw back on.
Quantitative easing is something of a controversial process — intended to boost struggling economies but typically affecting different aspects of those economies in different ways. For instance, we have already noted that quantitative easing is driving down the value of money, which is of course a curious side effect for a practice meant to help! But our aim here is to assess what QE is doing specifically to the housing markets in Canada. And in doing so, it’s helpful to first cover the impact on other major aspects of the economy as well.
Consumer Spending
As mentioned the primary point of QE is to pump money into banks. This enables the banks to do more lending at smaller interest rates, which in turn encourages consumers to borrow and spend. Or that’s the idea, at any rate. In this specific instance, it’s difficult to say whether or not the strategy has worked as intended. Consumer spending certainly bounced back following initial QE announcements in April, but has since been up and down. And it largely seems to have followed patterns relating to COVID outbreaks rather than government stimulus. That’s not to say QE has had no effect, but it’s difficult to measure alongside ebbs and flows in COVID spread and restriction policies.
Stock Market Performance
In some respects, boosting the stock market is among the main goals of quantitative easing. Logically speaking, injecting more money into an economy should result in both investor confidence and spending. Investors with the means to buy stocks anticipate an economic uptick when QE policies begin, and begin to buy up assets. Meanwhile, if consumer spending does tick up and business performance improves as a result, investments can pay off. Accordingly, we have seen the U.S. markets shoot up at times during quantitative easing. And in this regard we may well be seeing a similar benefit in Canada. The S&P/TSX Composite Index shows clear upward movement from the time when QE began to now.
Commodities
The effect on commodities is less clear. Using gold as an example, the common thinking is that when an economy is in turmoil — and thus most likely to implement QE — gold thrives as a safe-haven investment. And some believe that QE ultimately devalues currency, which makes gold investment even more valuable as a store of wealth. On the other hand, if QE succeeds in stimulating an economy and boosting stock market performance, investors might pull funds from gold and other commodities in order to invest for gains elsewhere. It’s tough to argue definitively in either direction, though the performance of top gold ETFs like IAU and GDX over the past year would seem to point us toward the latter assessment being correct. Both show declines in value since last summer, when QE began to take effect, perhaps indicating that economic uptick was mirrored by waning gold investment.
The reason it’s helpful to look at these examples is that they demonstrate the fact that quantitative easing does not always lead to clearly defined results. Between different aspects of an economy, and even within individual areas, it can have both positive and negative ramifications. And to some extent — at least in theory — the same can be said of the housing market.
QE’s impact on the Canadian housing market is a complex issue, and one that will be easier to understand looking back in another year, or perhaps several. This is particularly true given that the Bank of Canada is already evaluating changes to the policy. As of now though, the impact resembles many effects of QE on economic performance: There are pros and cons, and the balance is somewhere in between.
Written by Amelia Leonard
