National Bank of Canada’s Louis Vachon says an 'extremely active' housing market appears to be driven – so far – by sustainable trends, not overreaching borrowers.Paul Chiasson/The Canadian Press
A booming mortgage market “needs to be monitored” to make sure rising housing prices and surging home sales aren’t being driven by borrowers taking on excessive debt, according to the CEO of one of Canada’s large banks.
But an “extremely active” housing market appears to be driven – so far – by sustainable trends, not overreaching borrowers, said Louis Vachon, National Bank of Canada’s chief executive officer, at a virtual conference on Wednesday.
Many households are using savings built up in the pandemic to move to more spacious homes as remote work becomes more common, he said. Buyers getting financial help from parents – “the Bank of Mom and Dad” – is also a factor.
Canada’s major banks are fielding a deluge of applications for home loans, and many bankers expect that will continue for the rest of this year, especially if immigration levels rebound. A rising tide for all mortgage lenders has helped shore up profits at a time when demand for other types of loans has been sluggish amid continued lockdowns.
But banking regulators have also warned that the proportion of those home loans going to the most highly indebted borrowers is spiking again after a tougher mortgage “stress test” had caused it to decline in recent years, signalling a potential risk to lenders.
trends for uninsured mortgage
originations in canada
Avg. % of income needed
to service all debts for highly-
indebted borrowers
% of mortgage loans
> 450% of a
borrower’s income
24%
47%
OSFI tightens
stress test
22
46
20
45
18
44
16
43
14
42
12
41
10
40
Q1
Q1
Q1
Q1
Q1
Q1
Q1
2014
2015
2016
2017
2018
2019
2020
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE:
Office of the Superintendent of
Financial Institutions
trends for uninsured mortgage
originations in canada
Avg. % of income needed
to service all debts for highly-
indebted borrowers
% of mortgage loans
> 450% of a
borrower’s income
24%
47%
OSFI tightens
stress test
22
46
20
45
18
44
16
43
14
42
12
41
10
40
Q1
Q1
Q1
Q1
Q1
Q1
Q1
2014
2015
2016
2017
2018
2019
2020
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: Office
of the Superintendent of Financial Institutions
trends for uninsured mortgage originations in canada
Avg. % of income needed to service
all debts for highly-indebted borrowers
% of mortgage loans > 450%
of a borrower’s income
24%
47%
OSFI tightens
stress test
22
46
20
45
18
44
16
43
14
42
12
41
10
40
Q1
Q1
Q1
Q1
Q1
Q1
Q1
2014
2015
2016
2017
2018
2019
2020
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: Office of the
Superintendent of Financial Institutions
“It is a segment that has a huge social and economic impact and it does need to be monitored very carefully,” Mr. Vachon said. “But for now, I think we somewhat understand what’s behind the housing activity. It does not appear to be excess leverage.”
Mortgage balances increased 12 per cent year over year at Royal Bank of Canada and 7 to 9 per cent at other large banks in the quarter that ended Jan. 31. “We had momentum and then you caught this big wave of people being at home – a lot of people, I think, pulling up purchases that they may have been thinking about in 2022 or [later] and saying, ‘I need more space now,’ or ‘I want to get out of the city now,’” said Neil McLaughlin, RBC’s head of personal and commercial banking, at Wednesday’s conference.
That has pushed prices up not only in major centres such as Toronto and Vancouver, but also in smaller cities that surround them.
More than three years ago, when housing markets were showing signs of overheating, the Office of the Superintendent of Financial Institutions tried to root out risky lending by tightening a stress test on uninsured mortgages so that lenders have to qualify customers at a rate of two percentage points higher than what they actually pay. That “tamped down the market” and “took some of the speculation out,” Mr. McLaughlin said, and banks still judge new loans by that tougher standard.
But last month, OSFI issued a warning that the proportion of mortgage loans that exceed 450 per cent of a borrower’s income – which declined sharply after those rules were introduced – has risen again to nearly 23 per cent, surpassing 2017 levels. Tracking those loans closely makes sense, Mr. McLaughlin said, but “I’m not seeing any signs of excessive stress in those books, and we continue to like the risk on the overall portfolio.”
As hot as housing markets are now, they could still get busier. Immigration is a key driver of demand for new mortgage loans, but slowed sharply in the pandemic. As borders reopen, it could add a new wave of demand to the market, widening an existing imbalance relative to housing supply.
“We fully expect that as the vaccine rolls out through the spring, the summer and into the fall, the federal government and all the municipalities that have benefited from immigration will have wide-open doors,” said Dan Rees, head of Canadian banking at Bank of Nova Scotia. “We expect as immigration gets going, that the housing market will continue to motor from here into [fiscal 2022].”
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