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The second-in-command at Canada’s top banking regulator told an audience of heavy hitters in the housing industry that the risks posed by red hot Canadian real estate aren’t going to go away in any meaningful way any time soon.
Mark Zelmer, deputy superintendent of Canada’s Office of the Superintendent of Financial 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 in an address at a housing policy conference in Toronto. His speaking notes were distributed to journalists.
Although he said household credit is now growing at a slower rate of 4% a year, OSFI remains concerned because Canadians are unlikely to see a big jump in salaries. Household incomes are expected to “remain moderate” over the coming years, Mr. Zelmer said.
This latest warning on household debt comes a week after new data emerged showing that Canadians’ ratio of debt-to-disposable income fell to 163.2% in the first quarter, from 163.9% during the final quarter of 2013.
That marked the second straight quarter of such declines. Canadians’ debt-to-disposable income ratio hit a record high of 164.1% during the third quarter of 2013, suggesting that consumers have since taken steps to reduce their debt loads.
Even so, OSFI remains concerned because demand for 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 are “borrowing against their home equity” to boost their retirement incomes; and consumers who are “taking on debt to make ends meet.”
“Now I would not presume to claim that borrowers are acting irrationally or do not know what they are doing. But, by 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,” Mr. Zelmer said.
He noted that, with interest rates already very low, there is not much scope for them to fall further, “something that helped people weather storms in the past.”
And while Canadian banks are well capitalized and have the resiliency to manage under a variety of “stress scenarios,” OSFI is warning that such models are not perfect.
“Thus, one should not view stress test exercises as safe harbors,” said Mr. Zelmer. “Boards and senior management of financial institutions need to apply judgment in a forward-looking manner and not become too complacent in their capital planning exercises,” he said.
Agencies/Canadajournal
