When the country’s banking and insurance watchdog raises its voice over the rising economic risks of high household debt, low interest rates and inflated house prices, more than banks and insurers need to pay attention.
In its July 7 “Reinforcing prudent residential mortgage risk management” open letter to the mortgage industry, the Office of the Superintendent of Financial Institutions (OSFI) advised that because of “record levels of household indebtedness and growing risks and vulnerabilities in some housing markets [the OSFI] … will be tightening its supervisory expectations” in the mortgage arena.
The subtext here is that ballooning house prices in areas like Vancouver, coupled with persistently low interest rates and challenges in verifying the income of mortgage applicants, especially offshore income, are collectively multiplying bankers’ risks if erosion of the economy gains momentum.
America’s 2007-09 subprime mortgage collapse was triggered in large part by financial institutions approving mortgages for prospective homebuyers who should not have qualified for those loans.
In part because of OFSI oversight and Canada’s more conservative
financial system, the country’s banks were spared major collateral damage from the subprime debacle.
But household debt and inflated urban real estate prices in Canada are at the heart of the OSFI’s 2016 concerns. Numerous economists have raised eyebrows this year over the growing debt load shouldered by Canadians. For example, Oxford Economics senior economist Oren Klachkin pointed out in a recent analysis that debt-to-disposable income and other Canadian household debt metrics are at historic highs. Young, high-indebted Canadians, opined Klachkin, would find it especially hard to meet their financial obligations if the economy ran aground.
In a January report, the Parliamentary Budget Officer noted that “among G7 countries, Canada has experienced the largest increase in household debt relative to income since 2000.”
The country’s economy might
appear to be relatively robust now, but the concerns outlined above should convince Canadians and Canadian businesses that fiscal complacency is not an option.
