“From a prudential perspective, the environmental risks associated with lending to households are higher now than in the past,” Mark Zelmer, deputy superintendent for OSFI said to the C.D. Howe Institute Housing Policy Conference in Toronto Thursday. “With interest rates expected to remain exceptionally low and household indebtedness high, these risks are likely to remain elevated for the foreseeable future.”
OSFI has implemented a number of regulations to reign in the mortgage lending industry, with its B-21 and, more recently, B-21 guidelines. Zelmer acknowledged that further governance may be needed if the government deems it necessary to reign in the market further.
“We believe it makes sense to work with mortgage lenders and insurers to reduce the likelihood of serious problems in the first place by promoting strong governance and risk management controls around mortgage lending and insurance underwriting activities,” Zelmer said. “This is especially true given residential real estate lending represents more than 60 per cent of bank lending in Canada.”
According to Zelmer, housing indebtedness relative to income is expected to remain near record levels and that an increase in household debt could pose a major threat to the economy.
As for rates, the deputy superintendent acknowledged there is nowhere for rates to go but up.
“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,” Zelmer said. “Moreover, with interest rates near record low levels, there is not much scope for interest rates in Canada or the United States to fall further – something that helped people weather storms in the past.”
The housing market will remain a high risk to the Canadian economy, according to OSFI, who is willing to step in to provide further governance if deemed necessary.