Strong credit resilience among homeowners supports a stable housing market, says regulator
Canadian homeowners have shown more resilience during the current credit cycle than expected, according to the country’s banking regulator.
Peter Routledge, Superintendent of Financial Institutions, said homeowners have managed their debt “quite well,” despite the economic challenges of recent years.
“There is no evidence to suggest credit’s going to really deteriorate in a material way that might affect the broader economy or might affect the housing market,” Routledge said on Wednesday.
While he acknowledged it was too soon to “declare victory,” Routledge noted that the outcome so far had “pleasantly surprised” the regulator, crediting stronger underwriting standards for the positive results.
Routledge also pointed out that a large number of mortgages will soon face renewal. As of February 2024, 76% of the country’s outstanding mortgages were set to renew by the end of 2026. Despite potential risks associated with this, Routledge expressed confidence that the situation remains manageable.
The federal government has recently introduced changes aimed at easing mortgage borrowing, which could increase risks slightly.
Prime Minister Justin Trudeau’s administration announced plans to extend 30-year home loans to all first-time buyers and those purchasing newly built homes. Previously, only buyers who required government-backed insurance on their mortgages had access to 30-year amortizations, while others were capped at 25 years.
Additionally, Ottawa raised the price cap for government-insured homes from $1 million to $1.5 million, giving buyers more flexibility when bidding on homes, even with a smaller down payment. These changes take effect on December 15, 2024.
Routledge said that while the new policies could lead to a “modest increase in risks,” he doesn’t foresee a material threat to the financial system.
In a separate move, the Office of the Superintendent of Financial Institutions (OSFI) has removed the requirement for a second stress test on borrowers with uninsured mortgages when switching lenders.
The stress test, which checks borrowers’ ability to manage higher interest rates or rising household expenses, will no longer apply to borrowers making a straight switch to a new lender. This decision was made after hearing concerns from Canadians who felt the rule created an unfair barrier to switching mortgage providers.
Read next: OSFI eliminated mortgage stress test to avoid losing public confidence: Routledge
On the topic of bank capital, Routledge reiterated OSFI’s commitment to implementing international rules aimed at strengthening the financial system, despite some delays.
In July, OSFI postponed key rules on “capital floor levels,” part of the global Basel III reforms designed to enhance financial system stability. The changes, set to be revisited in July 2025, require banks to calculate more of their loan risk using standardized models instead of internal methods.
Canada has made more progress on these reforms compared to other countries, according to Routledge.
“Some of our peer signatories to these reforms inconveniently have further progress to make,” he said.
In the United States, the Federal Reserve has faced opposition to similar reforms, with critics arguing the new rules could restrict lending and negatively impact the economy.
However, Routledge emphasized that concerns about stifled loan growth in Canada were “overblown,” and OSFI’s calculations show the capital-floor rules will be “capital-neutral” for Canadian banks.
Next July, OSFI will decide whether to move forward with the implementation or extend the delay.
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