Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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OSFI does not try to forecast about current state of Canadian residential mortgage market nor its future. It observes the market closely and is ready to take corrective action, if necessary to protect the interest of consumers, depositors and the lenders. This was told by Superintendent Julie Dickson of Office of the Superintendent of Financial Institutions (OSFI) in CAAMP forum.

She pointed out that the recent financial reports and media articles from few places are considering some factors to outright declare a housing bubble in Canada that is soon to pop.

The factors that are mainly used by the OECD, IMF and The Economist reports are;

  • Price-to-Income
  • Price-to-Rent
  • Residential investment as a share of GDP
  • House completions had outpaced household formation
  • Household debt-to-income ratio

No questions that Canada gets a top rank on all of those real-estate scare factors but forecasting a meltdown based on those factors alone is not convincing.

Dickson said that it is very hard to predict a bubble. So far, only a handful was able to correctly predict a bubble. So, acting on a probability of 50%, or even less will just choke the market and slow down the economy.

OSFI can never be 100% certain about the aftermaths of its actions, so it prefers to take a reactive role than being proactive. But that may not always be wise. So, it rolled out B-20 guidelines and that placed some restrictions on mortgage underwriting.

Apart from regulations, OSFI is also poking the financials to test their abilities to withstand stress. Following the lead of the regulators around the world, the office has asked the banks to run number of “what-if” cases.

We can only hope that they cover the epistemic uncertainty. What is the real reason that the predictions often fail. She was aware of that fact – Although such stress tests are useful to spark discussion about risks, banks should not rely on stress test results alone in managing their risks.

The soft spot of Canadian economy may be not the banks but the consumers. The losses from the borrowers default can be overwhelming for the country and the economy. The most serious issue she pointed out was – However, delinquency rates and credit scores are lagging indicators that can deteriorate rapidly if economic conditions worsen.

OSFI is asking the banks to be on the top of the following matters;

  • Reserve ratio – the amount of money held by the banks.
  • Borrowers qualification.

The superintendent mentioned that the Canadian mortgage lending is somewhat different from many other places in the world. The insured mortgages in Canada are full recourse loans – means that a borrower cannot simply handover the keys and walk away from the house. Canadian uninsured mortgage sector represent high quality loans than other countries.

So far there were no indications that there will be any new changes soon but we never know what is coming as no one can predict the future.

1 Comment
  1. This is the very informative blog and gives the good information about Canadian housing and mortgage market. We understand the Economist reports about OECD, IMF. thanks for this post.

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