In a recent speech, Canada’s banking regulator cautioned financial institutions and consumers alike about exercising discretion with regards to the country’s housing market, due to increasing risks that may remain at a sustained high level going forward.
According to Mark Zelmer, who serves as deputy superintendent at the Office of the Superintendent of Financial Institutions, borrowers and financial institutions should exercise trepidation with the current risk in mind. “Now, I would not presume to claim that borrowers are acting irrationally or do not know what they are doing,” he said, incisively analyzing the situation. “
“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”, with mortgage-related risk at a considerably higher level now than it was in the past.
Recently, officials such as Finance Minister Joseph (Joe) Oliver have taken a laissez-faire attitude towards events such as banks lowering their mortgage interest rates, saying that these are matters best decided on by the institutions. Oliver had also stated repeatedly that the housing market may be due for a soft landing.
However, the OSFI remains concerned about the juxtaposition of record-high home prices and record-high household debt, which could work in concert to greatly affect consumers should fortuitous events lead to an economic crash.
This was something focused on by Zelmer in this week’s speech, as he cited the 2007-08 U.S. economic crash as an example of how the housing market and market trends thereof have a more puissant effect on the broader economy than most other sectors. “When the tide turns, a run-up in household debt can serve as a major drag on consumer spending,” he opined.