The second-in-command at Canada's top banking regulator told an audience of heavy hitters in the housing industry that the risks posed by red hot Canadian real estate aren't going to go away in any meaningful way any time soon.
Mark Zelmer, the deputy superintendent at the Office of the Superintendent of Financial Institutions told attendees at a real estate conference in Toronto Thursday that high home prices are a threat to the overall economy, especially when they're being driven by abnormally low interest rates.
"I would not presume to claim that borrowers are acting irrationally or do not know what they are doing," Zelmer said. "But, by same token, it is clear that the ability of the household sector as a whole to absorb major shocks is less now than it was a decade ago."
According to the latest data, the average price of a Canadian home rose to $416,584 in June, up more than seven per cent in the previous year.
Those gains come even after policymakers have moved repeatedly in recent years to ratchet up borrowing standards, in an attempt to make it harder for people to buy more house than they can afford.
Critics say Canada's booming real estate market is tied directly to low rates, which mask the true cost of housing right up until they inevitably rise. Zelner says that while household credit has slowed, indebtedness will remain near record levels for some time and income growth is likely to be modest.
That's a recipe for over-leveraged buyers and when you add it all up, the system is more vulnerable today than it was a decade ago, he says.
On the whole, Canadian lenders are still very well-capitalized, he said. But that diligence can't be relaxed, particularly as 60 per cent of bank lending is in the real estate market.
"Whether you believe or not that housing prices are too high, you do not hear many observers arguing they are low," he said. That's especially important for a lender to remember because they are the ones left holding the bag if the collateral they have accepted to greenlight the loan — the value of the home — is all of a sudden worth much less than advertised.
"There is a risk that the value of homes pledged as collateral may not hold up if economic conditions take a serious turn for the worse," he said.
Broadly, he outlined three types of people that are unknowingly hurt by today's low rates:
- buyers who extend themselves too much and buy more house than they can afford in the long run;
- seniors who borrow against their home equity to support retirement incomes;
- people whose economic reality is being camouflaged by low rates, because they are taking on too much debt to handle unfortunate life events such as job losses or marriage breakdowns.
Zelner says regulators have done the best they can to keep a lid on excessive borrowing, so ultimately the responsibility now lies with lenders themselves, who may end up left holding the bag.
"With interest rates expected to remain exceptionally low and household indebtedness high, these risks are likely to remain elevated for the foreseeable future,' Zelner said.