Despite “Exuberant” Canadian Real Estate, Credit Risk Has Risen Only Slightly: OSFI.jpg

OSFI: Credit Risk Has Risen But Only Slightly

Today, the company’s head charged with managing Canada’s federally controlled lending institutions stated that the threat to mortgage credit has increased “just decently.” Peter Routledge, head of the Office of the Superintendent of Financial Institutions (OSFI), remarked on a virtual speech to monetary experts in Vancouver.

With “extremely substantial” housing price increases, up 23% since October compared to a year ago (on a seasonally changed basis), at an average of $716,585. In some markets, house prices are up over 30%. At the same time, real estate supply has dropped to low levels, with simply 1.9 months of inventory being offered, below a long-lasting average of about 5 months.

Property mortgage credit has grown overall and continues to grow at a rate of about 10% every year.

“Although the word ‘abundant’ identifies the real estate markets in numerous Canadian cities and towns because the fall of 2020, we at OSFI think property mortgage credit danger has actually increased just decently,” Routledge stated in his prepared remarks. “Despite this spirit and increasing mortgage credit levels, Canadians are committing less income to debt service payments such as mortgage payments, vehicle loans and charge card payments.”

Peter Routledge – Superintendent of Financial Institutions (OSFI)

Routledge included that OSFI has leveraged many “prudential tools to increase the margin of security” in the mortgage credit market. This consists of stress-testing customers at a greater rate of interest (presently 5.25%), plus extra examination on home assessments and developing “vibrant” loan-to-value limitations that much better show the threat of particular homes and markets.

“Nevertheless, we think about the present imbalance in between real estate demand and supply to be a product prudential danger, and all stars in the Canadian real estate system need to act if we are to reduce the threat,” he stated. “The biggest prudential threat in Canada’s monetary system is the supply/demand imbalance in real estate.”

He kept in mind that intergovernmental efforts are needed to attend to Canada’s real estate demand and supply “inequality.”

Discussing the function of rate choice in the general threat evaluation, Routledge kept in mind that variable-rate home loans are “more popular than ever” and now represent over half (51%) of all new mortgages as of late.

“As variable mortgage rates are lower than fixed mortgage rates, brand-new property buyers might be accepting the raised rates of interest run the risk of that features variable-rate home loans in order to end up being property owners,” he stated.

Readvanceable HELOCs Under OSFI’s Microscope

Routledge included that non-traditional housing-backed lending, such as Combined Mortgage-HELOC Loan Plans (“CLPs”), might increase home appraisals as they go hand-in-hand with re-advanceable credit that increases as principal payments are made. 

“CLPs are a focus for OSFI as they represent a substantial part of uninsured Canadian family mortgage debt.,” he stated. “The usage of HELOCs and non-traditional real estate backed items can cause higher mortgage balances, putting increasing danger of loss to lending institutions.”

He included that these items can make it harder for lending institutions and regulators to evaluate credit threat exposure throughout periods of stress.

“When OSFI sees items growing rapidly, it is our task to comprehend why and evaluate what dangers that development might provide to institutions and the economy,” he stated. “Further, as item structures progress, there is a capacity that such items end up being non-compliant with our underwriting expectations. We have actually asked lending institutions to carefully examine the threats emerging from their own combined loans and HELOC-mortgage structures.”

BoC Says High Household Debt a Concern

In a different speech on Tuesday, Bank of Canada Deputy Governor Paul Beaudry stated the increasing occurrence of the highly indebted homeowner is a growing issue for the Bank.  

” … the upward pattern that we saw for 20 years in the share of homes thought about extremely indebted– that is, with a debt load that goes beyond three and a half times their income– came to a stop,” he stated in prepared remarks to an Ontario Securities Commission conference. In 2019, 1 in 6 homes with any debt were considered highly indebted.

“From our analysis, we discovered that the general frequency of extremely indebted families most likely enhanced throughout the first year of the pandemic,” Beaudry stated. “But we likewise discovered that the weakening quality of brand-new mortgage borrowing throughout recent quarters is now most likely the larger culprit of home insolvency. By the end of 2021, the share of extremely indebted homes will likely have more than reversed its preliminary figures and topped its 2019 peak.”

Ian Clark

Ian Clark is a graduate of The College of The North Atlantic's School of Business and is a Mortgage Broker with East Coast Mortgage Brokers. Prior to ECMB, Ian was brokering with Mortgage Alliance Provincial Mortgage Group. Ian is also an active member of Mortgage Professionals Canada, Canadian Mortgage Brokers Association, Canadian Progress Club and the Mount Pearl Paradise Chamber of Commerce.