Julian Beltrame – The Canadian Press

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.

Comment: How can people be careful when they need a home? You need a mortgage, you are bound to the prices in a given area.

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.

Comment: Check some bidding wars, some buyers ARE acting irrationally.

“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.”

Comment: Is it clear? The average price in mid-June was $582,000 with current best mortgage rates of 2.97%. With 10% down, that makes for monthly payments of $2,470. In 1994, the average price was $208,921 and mortgage rates were 10.69% in July of 1994. With 10% down, that makes for payments of $2,613 in inflation-adjusted dollars. Amazingly, houses today cost less per month than they did 10 years ago. Add to that fact that average incomes have risen (Canadian average went from $59,700 in 1994 to $79,600 in 2011) and it makes the payments a smaller percentage of monthly income. Thus, by looking at the actual data, we can see that homeowners are actually MUCH MORE able to handle a financial shock than they were a decade ago.

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.

Comment: But the risks do not seem to be real, they appear to exist mainly in the minds of the experts.

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 3%.

Comment: So the federal finance minister and Bank of Canada head are both NOT CONCERNED about the real estate market Four out of five major bank heads are not concerned, with only TD giving some weird numbers. That means only 1 out of 7 major financial people in Canada are worried – and that single one has numbers that are being proven wrong every day.

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.

Comment: But there won’t be a shock, so it does not matter.

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.

Comment: But he has been wrong for 3-1/2 years, stop talking to him.

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.”

Comment: But that was a criminal financial fraud, stop comparing it to the Canadian real estate market. That is like comparing Charles Manson to the selling of Girl Guide Cookies. Yes, it really is.

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

Comment: But it is going down. Isn’t that what everyone wants? Isn’t that a good thing?

As well, the Canadian Real Estate Association reported that national average price for homes sold in May rose by 7.1% 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.

Comment: Mainly it is because the size of mortgages is increasing all the time as home prices rise. That is the main reason.

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.

Comment: And all of the recent lending has happened with strict rules. Four new mortgage rules, new financial oversight. The rules are anything but relaxed. That is what makes the market so safe and solid.

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto real estate agent with Century 21 Regal Realty.
He did not write these articles, he just reproduces them here for people who
are interested in Toronto real estate. He does not work for any builders.
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