OSFI : High costs, low mortgage rates should be warning flags

The second-in-command at Canada’s top banking regulator told an audience of heavy hitters in the housing industry the risks resulting from in demand Canadian real estate aren’t likely to disappear in almost any meaningful way in the near future.

Mark Zelmer, deputy superintendent of Canada’s Office from the Superintendent of monetary Institutions, said Thursday that banks still face a “riskier” lending environment because household debt remains near record levels.

“With interest rates expected to remain exceptionally low and household indebtedness high, these risks are likely to remain elevated for the foreseeable future,” Mr. Zelmer said within an address at a housing policy conference in Toronto. His speaking notes were distributed to journalists.

Although he explained household credit has become growing at a slower rate of 4% a year, OSFI remains concerned because Canadians are unlikely to see a large jump in salaries. Household incomes are required to “remain moderate” over the coming years, Mr. Zelmer said.

This latest warning on household debt comes per week after new data emerged showing that Canadians’ ratio of debt-to-disposable income fell to 163.2% within the first quarter, from 163.9% throughout the final quarter of 2019.

That marked the second straight quarter of these declines. Canadians’ debt-to-disposable income ratio hit an archive a lot of 164.1% throughout the third quarter of 2019, suggesting that consumers have since taken steps to lower their debt loads.

Even so, OSFI remains concerned because interest in credit is being fuelled by three groups. Among them are people who are using low interest rates to “leverage up” to buy homes, cars and other consumer goods; seniors who’re “borrowing against their home equity” to boost their retirement incomes; and consumers who’re “taking on debt to create payments.”

“Now I wouldn’t presume to claim that borrowers are acting irrationally or don’t know what they are doing. But, by same token, it’s clear the ability of the household sector as a whole to absorb major shocks is less now than it would be a decade ago,” Mr. Zelmer said.

He noted that, with interest rates already very low, there isn’t much scope to allow them to fall further, “something that helped people weather storms previously.”

And while Canadian banks are well capitalized and have the resiliency to manage under a number of “stress scenarios,” OSFI is warning that such models aren’t perfect.

“Thus, you ought to not view stress test exercises as safe harbors,” said Mr. Zelmer. “Boards and senior management of financial institutions have to apply judgment inside a forward-looking manner and not become too complacent within their capital planning exercises,” he explained.