We would like to thank the Committee for the opportunity to contribute to its study on the Canadian Real Estate Market and Home Ownership.
The Canadian Bankers Association works on behalf of 59 domestic banks, foreign bank subsidiaries, and foreign bank branches operating in Canada and their 280,000 employees.
Accompanying me today is Robert Hogue who is a Senior Economist at the Royal Bank of Canada. As you may know, Robert is one of leading experts on the Canadian housing market.
Canadian Housing Markets and Regulatory Environment
At the outset, I should note, as has been widely discussed, that there is not one single housing market in Canada. Rather there are several different markets across the country impacted by a range of supply and demand factors that affect housing prices.
One factor common to all of these markets are historically low interest rates.
Of course, there are other more local factors such as the city or region’s attractiveness as a place to live and work, land-use and zoning restrictions, the relative availability of certain housing types, and population and job growth.
For instance, Vancouver and Toronto have seen growing housing prices over the past few years. Meanwhile, oil-producing regions have seen either a decline or negligible housing price growth. And in the rest of the country, we have seen housing prices grow more moderately. Accordingly, when developing housing policies and regulations, it is important to account for the variability that characterizes these housing markets.
As the Committee is well aware, the federal government has introduced a number of changes to Canada’s mortgage and housing markets over the last several years. For example, on insured mortgages, the government has reduced the maximum amortization period, increased minimum down payments, and implemented more rigorous stress testing.
We understand and support the federal government’s objective of maintaining stability in the Canadian real estate market, in all parts of the country. Given that the impact of some of these changes has yet to fully materialize, we believe it would be prudent to wait and assess the impact of recent changes before contemplating additional new measures.
Canadian banks have a strong track record of careful, prudent mortgage lending. Moreover, the vast majority of Canadians are responsible borrowers who use credit wisely. This is evidenced by the performance of banks’ mortgage portfolios before, during, and after the global financial crisis.
The CBA closely monitors mortgages-in-arrears statistics. A mortgage is classified as being “in-arrears” when the borrower is more than 90 days behind on their payments.
Currently, the Canadian mortgages-in-arrears rate sits at 0.28%, which is close to the low rate prior to the global financial crisis. During the financial crisis, the rate in Canada peaked at 0.45%. By way of comparison, the arrears rate in the United States during the crisis peaked above 5% — more than eleven times the Canadian rate.
Since the 1990s, the rate in Canada has never climbed higher than 0.65%. That’s over two decades of stability, in times of both high and low unemployment, and fluctuating interest rates and a fluctuating Canadian dollar.
Canadian banks have a solid mortgage lending record, rooted in high underwriting standards, which have only strengthened since the financial crisis. Whether a mortgage is insured or uninsured, banks apply the same prudent application and underwriting processes.
Banks are rigorous in the origination of new mortgages including the verification of a borrower’s identity, employment status, income, and credit history.
Furthermore, in making a decision to extend the mortgage, banks take as paramount a borrower’s demonstrated willingness and capacity to make debt payments on a timely basis. Canada’s banks also undertake rigorous stress testing to ensure that Canadians can pay off their mortgages during changing economic conditions. This includes requiring potential borrowers to qualify at higher interest rates to ensure they are able to make future payments under higher interest rate conditions.
It is also important to note that the Office of the Superintendent of Financial Institutions plays an important supervisory function over bank underwriting practices.
In closing, banks take seriously the role they play, along with governments, regulators, and Canadians borrowers in ensuring that the Canadian mortgage and housing market remains stable and sound.
I would like to thank the Committee again for this opportunity to provide the banking industry’s perspective on Canada’s real estate markets. We would be happy to answer your questions.