Housing debt load improving, BOC says

TOrON TO • Canada’s heated housing market and near-record personal debt is less of a risk than it was a year ago, but the central bank is not letting down its guard just yet, a Bank of Canada official signalled on Wednesday.

“We are seeing a moderation over the last year in both the buildup of household indebtedness and also the related imbalances in the housing market,” Bank of Canada Deputy Governor Timothy Lane said in response to an audience question following a speech in Toronto.

“At the same time ... that’s not to say that the risk has suddenly disappeared, and it’s still a risk that we’re watching very closely,” he said.

Canada’s housing market slowed dramatically in mid2012 after the government tightened mortgage lending rules to head off a housing bubble. It was the fourth such move in five years. But the market has rebounded in recent months.

Canadians took on a record high debt load during the post-recession housing boom, taking advantage of five years of ultralow rates. The latest revised data from Statistics Canada showed the ratio of household debt to income fell slightly to 161.8% in the first quarter from a record 162.8% in the third quarter of last year.

A related risk, highlighted by Mr. Lane in his speech, is the rapid increase in the securitization of governmentbacked mortgages — an activity that has doubled in the past five years and which the central bank considers to be part of the unregulated “shadow banking” sector.

Securitization is the process by which assets such as mortgages are packaged into bonds or other debt instruments that can then be traded.

Mr. Lane said the increased use by banks and non-bank lenders alike of these securities as a low-cost funding option encourages more mortgage credit and less of other forms of credit.

“A key concern is the potential misallocation of resources away from non-mortgage lending toward mortgage credit — which, in the current economic environment, contributes to the buildup of imbalances in the household sector,” he said.

In a report earlier this month, the Bank of Canada said some areas of the country’s shadow banking sector warranted close monitoring.

Shadow banking is often described as credit intermediation activities by lenders outside the traditional banking sector, such as hedge funds or private capital funds.

But it can also include more lightly regulated activities by traditional banks, as in the case of mortgage securitization in Canada.

Shadow banking is relatively small in Canada, worth about 40% of gross domestic product, compared with 95% in the United States, Mr. Lane said. Some 60% of the activity is comprised of mortgage securitization.

Other areas include repo markets, which are now considered safer due to the introduction of central clearing, and money market funds.