Bank regulator sees growing concerns in real estate even as credit quality holds  | Matt Gul

Canada's bank regulator said it is preparing for strain in the housing market to potentially last throughout the year as it flags the sector as a growing concern.

The Office of the Superintendent of Financial Institutions (OFSI) said Tuesday in its latest annual risk outlook that the housing market is its top source of worry, as high rates mean higher default probabilities.

"OFSI is preparing for the possibility, but not predicting, that the housing market will experience sustained weakness throughout 2023," said superintendent Peter Routledge on a media conference call. 

Credit quality, however, so far looks quite strong and residential real estate remains sound, he said.

“What's interesting now is how benign conditions have remained. Underlying that is a very strong economy, unemployment is still very low. And because of that, Canadians are servicing the higher cost of debt, quite handily."

The risk outlook is meant to remind everyone that while finances look strong, the risks are still out there, he said. 

"To better prepare for future risks, the regulator is working through its review of B-20 mortgage underwriting rules that include the stress test. Public consultations closed April 14 on the first phase looking at debt servicing measures to control risks around high consumer debt levels, while further consultations are planned as part of the process that is expected to run much of the year.

The regulator is also taking a closer look at how banks are handling variable rate fixed-payment mortgages, which keeps monthly payments the same even as interest rates rise by putting less and less of the payments towards the principle. The payments for some borrowers aren't even covering interest costs through, so banks have been stretching out the amortization period.

The specific mortgage product isn't an immediate concern, said Routledge, but it could become bone in the next two or three years as the terms begin to reset and be repriced and borrowers feel a greater hit from higher rates.

The regulator is actively assessing the risk and looking into whether banks are putting enough capital aside for potential issues from borrowers with the product"

If you are interest in buying, or selling your property, please don't hesitate to reach out to top West Vancouver Waterfront Realtor, Matt Gul with any of your questions regarding buying or listing your home.

Bickis, Ian. (2023). Bank regulator sees growing concerns in real estate even as credit quality holds.