High prices, low mortgage rates should be red flags on housing market: OSFI

OTTAWA – Canada’s banking regulator is warning both lenders and borrowers to be careful about moving deeper into the still pricey housing market, saying the risks are increasing and are likely to remain elevated.

In a speech at a housing conference in Toronto, Mark Zelmer, the regulator’s second in command, gave a general caution to lenders, mortgage insurers and borrowers.

“Now, I would not presume to claim that borrowers are acting irrationally or do not know what they are doing,” said Zelmer, deputy superintendent at the Office of the Superintendent of Financial Institutions.

“But, by the same token, it is clear that the ability of the household sector as a whole to absorb major shocks is less now than it was a decade ago…So, from a prudential perspective, the environmental risks associated with lending to households are higher now than in the past.”

In recent statements, both Finance Minister Joe Oliver and Bank of Canada governor Stephen Poloz have played down the vulnerabilities in the housing market, although the latter still regards it as the top domestic risk to the economy.

Oliver has pointedly said he expects a soft landing and was not overly concerned that major banks had dropped their key five-year mortgage rates below three per cent.

But it appears that OSFI, which recently gained oversight responsibilities for the Canada Mortgage and Housing Corp., is still concerned about the record high level of home prices and near-record debt levels of household debt — a crippling combination if there was a shock to the economy.

Some economists, particularly David Madani of Capital Economics, have also flagged the likelihood of a sharp downturn in the market and the warnings get more strident each time a report shows a pick-up in sales or prices.

Zelmer notes the lesson from the 2007-08 U.S. collapse was that housing impacts a large segment of the economy, including construction, durables and related industries, and when the “tide turns, a run-up in household debt can serve as a major drag on consumer spending.”

Last week Statistics Canada reported household debt to disposable annual income had edged down to 163.2 per cent in the first quarter of this year, but remained very near the 164.1 per cent record for the measure reached in the fall of 2013.

As well, the Canadian Real Estate Association reported that national average price for homes sold in May rose by 7.1 per cent from year earlier to $416,584.

Zelmer said the growth in indebtedness can be attributed to households taking advantage of super-low interest rates to buy homes and cars, individuals borrowing against home equity to support retirement, and people who borrow just to make ends meet because they have been dealt a serious life blow, such as losing a job.

For banks, he cautioned that past experience shows it could become tempting for mortgage lenders and insurers (such as CMHC) to ease up under the “enchanting lull of the siren song of market share.”

OSFI will be careful to ensure that lending rules are not relaxed, he said, but ultimately the responsibility lies with the banks and insurers.