Finance Committee on Jan. 30th, 2017

[Sylvain Leduc]

We don't have that much data. You probably know the data I'm going to cite as well as I do. Before the taxes were implemented in Vancouver, about 10% of purchases were made by foreigners. This has fallen to about 4% of 5% in the latest data. That's the range we know about in terms of that magnitude. We don't exactly know where the data is coming from internationally, but restrictions on movement would have an impact. It's difficult to gauge by how much, but it would impact that 10%. That is about as much as we know from the data.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you.

My last question is for the Office of the Superintendent of Financial Institutions, OSFI. You monitor how lenders practise, how they approve mortgages, how they decline people. On a practical level, as Canadians walk into a bank or a mortgage lender and apply for a mortgage, they have to prove their income. I've heard stories, especially in my neck of the woods in Brampton, that income verification isn't as stringent as it needs to be. The documents are provided and that's it. There are no follow-up calls; there's no practical analysis; and fraudulent documents are having a big play in the approval of mortgages. This will very much be a regional problem, but is something that your office is looking at?

I ask because if I feel there's going be a risk to this whole thing from people getting mortgages fraudulently.... Yes, they may be working on cash businesses and may have the money to meet their short-term requirements, but if something in the economy were to change, for instance, if we were to have an economic slowdown or resource prices start to go down, those people would be the first ones to leave. That would not be to the extent of what happened in 2008, but it's a real risk for the Canadian market in certain regions.

[Carolyn Rogers]

Do we pay close attention to that? Yes, absolutely. The letter that I mentioned in my opening remarks included comments on exactly that issue, reminding lenders that it's very important to be diligent about assessing a borrower's capacity to repay, and particularly where that capacity may be originating outside the country or from sources other than a typical pay cheque where you can look at a pay stub.

[Raj Grewal, Liberal, Brampton East, ON]

Right now, and correct me if I'm wrong, as I could be wrong because I haven't dealt with a transaction since I was elected, but I was a corporate lawyer, when you provide the bank with a notice of assessment, they take it for what it is on paper. They don't pick up the phone and call the CRA to double-check that income. I've heard of and seen fraudulent NOAs out there, and I think if there is a risk to the housing market that is a real risk to banks. This may not have a major impact, but there will definitely be an impact. I'd suggest that all of you look into this.

Thank you so much.

[The Chair, Liberal, Wayne Easter]

Are there any further comments from anyone?

Just to follow up on the cash question, if I could, in terms of data collection, in terms of housing stats and the pressure on housing prices, does it make a difference to data collection if the payment is in cash or if it's through a mortgage lender? Do we have that information on cash purchases? Do we know? I do know from my own area in Prince Edward Island that there are a lot of cash purchases in the tourism industry. Some tourism businesses are being purchased with cash. It's documented, but it's cash. I'm wondering about this in terms of the housing market. Related to Mr. Grewal's question, is that data collected? It would be important to know in terms of the pressure on housing prices. It would have an impact. Does anybody know?

Ms. Rogers.

[Carolyn Rogers]

In my last job, I was in British Columbia. We were looking at this question in earnest a year or so ago. We determined that about the closest thing to a source of information that would give you this information is the real estate sector. They'll track through their contracts of purchase and sale, but what we found in British Columbia is that it's not aggregated anywhere in a way that you can do any form of analysis on it.

To your first question, Mr. Grewal, I think the only jurisdiction that is tracking purchases according to the source of the income, whether it's foreign or domestic, is British Columbia now, and that has only been since June or July.

[The Chair, Liberal, Wayne Easter]

Mr. Laurence has a comment.

[Michel Laurence]

I would just like to add that we're in consultations with Statistics Canada to collect that kind of information, starting with information from land registry data in the larger census metropolitan areas across the country. We may not collect the data right now, but we're in the process of putting forward a proposal to collect such information. Whether it is cash or through the use of mortgages or not, we would collect that information.

[The Chair, Liberal, Wayne Easter]

Okay, it's something we'll have to keep in mind.

Mr. Liepert.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Thank you, Mr. Chair, and thank you to the witnesses for being here.

Mr. Chair, I just wanted to make a comment that I think would be helpful going forward when we do these sorts of studies. To me, it would be much more beneficial if we had these folks here after we heard from all of our witnesses, so that we could ask them about some of the statements that have been made by witnesses. I just think it's something we should think about as a committee as we go forward.

I want to first focus a bit on policy development. I'm always interested in how policy is developed. This situation reminds me of the old saying, “Hi, I'm here from government, and I'm here to help.” I'd be curious to know if you could help us with the development of this policy. Is this something where the finance minister said to each one of your organizations, “This is what I want to do. Do you think it'll fly?” Or would each one of your organizations have gone to the Minister of Finance and said, “We see an impending problem here”?

I'd just ask each one of you how you would respond to that.

[The Chair, Liberal, Wayne Easter]

Who wants to start?

[Sylvain Leduc]

As I mentioned, the imbalances in the housing market and the vulnerability to indebtedness is something we've been flagging for about the past two years. It's something that's really been a concern for us in terms of financial stability, in particular the indebtedness. The two really work in tandem, if you will. House prices are going up. People are reaching maybe a little bit more and getting into more debt. The fact that the indebtedness is rising the most for highly indebted people is really worrisome, because again, the macro conjecture might change very quickly, putting people under stress and under duress. Having to repay their loans, their debt, might be more complicated, putting stress not only on the macroeconomy but also on the financial system as a whole. We think that these risks have a low probability at this point, but again, they could have material impacts and so they are clearly something to watch for.

This is something we've been really preoccupied with at the Bank of Canada over the past two years. Our way to flag this is through our financial stability review. That's our tool. As you know, we're not overseeing banks per se, but we have a seat at the table with the senior advisory council. We provide advice to the Minister of Finance through that means, but to try to steer the debate in a different direction we use our financial stability review.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Are there other comments?

[Carolyn Rogers]

As I said in my opening remarks, each of us here today has a very distinct mandate and a role to play in the financial sector, but we work very closely. There are a number of committees, some of which are actually empowered in legislation, through which we share information. We also have close working relationships with each other and with the Department of Finance. When policies that will impact our roles and our day-to-day work are being developed, we provide technical expertise when asked. We share information as well, to support each other in achieving our mandates.

[Michel Tremblay]

We have ongoing discussions with the Department of Finance on these issues. As Sylvain mentioned, obviously the vulnerability to household debt has been a concern to all three of us, but to the Department of Finance also. We've been having discussions over the last few years on this file.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Obviously, the policy development was on the advice of and discussion with each one of the three organizations. In those discussions, did you ever give consideration to something other than a one size fits all?

I represent an Alberta riding and I can tell you that this has caused a great deal of problems, as it has for Mr. Caron's province of Quebec and Mr. Albas' province of British Columbia, outside the Vancouver region. I've talked to builders in Alberta recently. Their new housing construction has dried up. We have enough problems with unemployment in Alberta, and this is just going to layer on another problem with unemployment.

Did you give any thoughts to or make any recommendations about doing selective areas to address a problem that existed in, from what I understand, two specific areas only, and if you didn't, why not? If you did, were they rejected by saying, “No, we're going to do one size fits all”?

[The Chair, Liberal, Wayne Easter]

Who wants to start?

Ms. Rogers, go ahead.

[Carolyn Rogers]

Our role at OSFI is to give advice relative to our mandate, which is the protection of depositors and policy holders—the stability of banks, basically. We talked to the Department of Finance about a narrow slice of the many policy considerations that somebody in their chair needs to consider. Having said that, I would say that I don't view the changes as one size fits all. Where they have a common impact across Canada, it is where there are common vulnerabilities or common risks across Canada. As I said earlier, sound underwriting is sound underwriting, and where there are differences in risk in the regions of Canada, there is nothing in OSFIs guidelines that precludes the lenders in those areas from reflecting those risks in their policies.

We don't dictate that a rule has to be the same or that a risk appetite for an institution has to be the same across Canada. In particular, I would draw your attention to recent changes we've made to capital requirements for banks where we have targeted the policy. We have told banks that for mortgages in regions where housing price appreciation is outstripping income, they should be holding more capital. In regions where that's not the case, there is no expectation for that additional capital.

I think where it makes sense to have targeted policies, where the risks are differentiated by region, we have done that. Consumer indebtedness, as Sylvain said, is not unique to Vancouver and Toronto; it's a concern across Canada. It's something that we watch in all regions.

[The Chair, Liberal, Wayne Easter]

Go ahead, Mr. Leduc.

[Sylvain Leduc]

As my colleague just mentioned, we think targeted policies are always better. That's why we prefer macro-prudential policies, let's say, rather than monetary policy—a bit for the reason you highlighted. Monetary policy points would be a very blunt tool to deal with financial stability issues compared to more targeted policies of the form that have been introduced, and they quite clearly involve trade-offs. Again, in our monetary policy report of October we highlighted that the policy would have a negative impact on GDP growth potentially over the next two years, subtracting something like 0.3% from the level of GDP by the end of 2018. So it's something we're aware of.

As for whether it's one size fits all, again, as I said, in our financial system review, we've noted that the policy would have an impact not only in the GVA and the GTA, but also in other regions where consumer debt is very elevated. They buy it because of that, not only because of house prices. Because we've been concerned by household indebtedness, this is something we've highlighted in the FSR.

[The Chair, Liberal, Wayne Easter]

Mr. Liepert, you had a quick supplementary question. We're over time, but go ahead.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

It's probably more of a comment than a supplementary question. One of the things I abide by in political life is that I never answer a question that starts with “if”. In looking through your reasoning behind making this policy recommendation, I have seen nothing but “ifs” ahead of the rationale for making this decision. If unemployment goes up, then you say the risk is low. If something else happens, then the risk is low. I just don't understand why this kind of a blunt instrument was used because certain people from government are here to help to say you're in over your head.

That's my comment.

[The Chair, Liberal, Wayne Easter]

Ms. O'Connell.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you, Mr. Chair.

Thank you all for being here. I guess following up a little bit, it's not really a surprise that I somewhat disagree with my colleague. In terms of the targeted approach versus the one size fits all, I somewhat see the changes in borrowing to be a more targeted approach because—and correct me if I'm wrong—if I'm understanding it, it's all relative. It doesn't matter about the housing market or the price of a house in a relative market; it's your indebtedness level. So if you're in debt in P.E.I., or you're buying a house in Toronto, but you have low debt, that's where you're going to come into issue. If you don't have high indebtedness, then it doesn't matter the market you're in, as you'll be able to deal with this. If your debt is too high to your income, then it's a big risk, and the government is concerned about making sure that the system doesn't crash, essentially, or that you can still pay your bills based on your relative income.

Where I see a larger concern is when you see.... With all due respect, I have no qualms about the fact that, for example, when you see in B.C. or in Vancouver these approaches by those governments, I'm sure it's incredibly important or what's needed. But for me, coming from the GTA, when you deal with something in one place, it just pops up worse in the other. It's still early days, but from what we're seeing in the market in Vancouver, there seems to be some indication or acknowledgement that some of the recent changes to address foreign investment are working. In Toronto in the GTA, where I'm from, it is actually increasing.

So how do we deal with creating a system that is fair and controlled without having other individual or additional markets also getting involved or pressured? It's somewhat of a very broad statement, but I think a more appropriate question would be in and around where Mr. Grewal's questions were going. If you're not tracking foreign investment, for example cash, then you're not really highlighting some of the risks. There are areas within the GTA that, if the Vancouver market has now shifted, for example, and we're not tracking this foreign investment in cash payments, we are not really assessing the associated risks that are trickling elsewhere, the first being appraisal prices, the value of homes. Are you confident in the appraisal process if homes are being bought in ways that are not even being tracked?

It's a broad question, and so anyone can jump in.

[Sylvain Leduc]

In terms of the relationship, of course in theory, if a tax is imposed in Vancouver, for instance, investors who are affected would have an incentive to try to maybe shift to other cities for a roughly comparable investment. I think the one thing to keep in mind here is that, again, there are many factors that are underlying house price growth, and it's not only foreign investment. Foreign investment is one part, but it may not even be the most significant part. There are demographic factors that are really important. There are interest rate factors that are important. There are supply constraints that are important. Just looking at GVA and GTA and seeing one still going up, and one maybe having early signs of cooling off, I think it's too early to just ascribe that to a particular source. We just have to be cognizant that these factors are really underlying the two markets.