Canada boosts housing oversight
Banking regulator to tighten rules for private mortgage insurers
Canadian authorities are stepping up oversight of the nation’s housing market even as lenders such as Bank of Nova Scotia warn that tougher rules could threaten the economic recovery.
The country’s banking regulator, known as OSFI, said Wednesday it will boost supervision of private mortgage insurers while examining “emerging” risks to the financial system in several areas, including residential mortgages.
Policy-makers, including Finance Minister Jim Flaherty, have said that parts of Canada’s housing market have become overvalued as consumers add to record debt levels, encouraged by some of the lowest mortgage rates in decades. Flaherty said in his budget last week the government will enhance supervision of Canada Mortgage and Housing Corp., a federal agency that insures some mortgages.
Scotiabank chief executive officer Richard Waugh warned about making reforms to CMHC that could have “unintended consequences” and cause the market to slow too much. “Canada’s model, which has been so successful, is let the banks manage and let the policy-makers set macroeconomic policy, monetary policy, and good strong reg- ulatory supervision,” Waugh said Wednesday in an interview. Bank of Canada governor Mark Carney said in an April 2 speech that households relying on debt financing represents “the biggest domestic risk” to the economy. Some Canadians would be vulnerable to a sharp decline in housing prices, the central bank said in its latest Financial System Review. Home resale prices rose 6.5 per cent in January from a year earlier, according to the Teranet-national Bank Composite House Price Index. The S&p/case-shiller index of property values in 20 U.S. cities fell 3.8 per cent in January from a year earlier after dropping 4.1per cent in December, a March 27 report from the group showed. The country’s resale housing market is overvalued by 10 per cent to 15 per cent and there is an oversupply of new homes, Toronto-dominion Bank economist Sonya Gulati said in a March 22 report. “These excesses should be gradually unwound over 2013 and 2014, with higher interest rates the impetus for the adjustment,” she said. The Ottawa-based Office of the Superintendent of Financial Institutions said Wednesday it will pro- duce a report for Flaherty on government guarantees on mortgage insurance. An OSFI spokeswoman, Leonie Roux, said the report would apply to private insurance providers such as Genworth MI Canada Inc. and not CMHC.
The federal government guarantees the full value of mortgage insurance offered by CMHC. The government guarantees 90 per cent of insurance offered by private-sector companies.
“Elevated household debt levels not only make households vulnerable to adverse shocks but continued low interest rates could encourage even higher household indebtedness,” OSFI said in a planning document released on its website Wednesday.