Finance Committee on Jan. 30th, 2017

[Don Coletti, Advisor to the Governor, Bank of Canada]

On the foreign purchases element, these types of measures have been tried in other countries before. Hong Kong is a classic example where they've tried this. What typically tends to happen is that house prices tend to stabilize after these measures are put in, and then they just start picking up and growing again. Usually the reason behind that is there are many factors that are driving up house prices, and maybe foreign purchases are one of them, but it's much more complex. Many other factors are doing it. These measures are definitely not a solution for that.

[Michel Tremblay]

Exactly, and you've raised the spectre of appraisals. We are definitely comfortable with the appraised values. We ensure at CMHC...and I'm sure that our competitors are also doing their due diligence in terms of the appraisal values.

To support my colleagues' response in terms of the house price escalation, the price increases, there are a variety of factors, and foreign investments have been getting a lot of press, but they are not necessarily the biggest driver of house prices in Canada.

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

You feel confident in that, even knowing that we don't collect all the statistics, for example, for cash? If something is an investment property and people can afford it, how do we know that's not a bigger problem than it is if we don't actually have that data? It might not be a bigger issue, but how do we feel comfortable in that?

[Michel Laurence]

Again, we don't track the data for foreign investment with a mortgage, or without a mortgage through cash. We are looking to collect that information. We recognize there is a data gap and we are looking to fill or address that gap. What we do know from our own analysis is that foreign investment is a factor, but not necessarily a large factor. In fact, if you look at it, you could also say that some of the surge in pricing in Vancouver and Toronto can be attributed as much to domestic investment as foreign investment. That's something to look at as well.

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

I think, though, depending on specific areas, the problem will be that foreign investment might be isolated in very specific neighbourhoods, for example. What are the impacts then when you have a high concentration? It might be a very low risk nationally or not a big issue, but when it's highly concentrated in entire neighbourhoods—and I know them offhand, not so much in my community but right next door—are there further risks because it's not evenly spread out in small amounts nationally? That would be my bigger concern when it comes to the foreign investment. I agree, it's probably not the highest risk, but it's that higher concentration and what that means for those communities.

Do I have time for one more? I'll go very quickly.

[The Chair, Liberal, Wayne Easter]

We seem to have lots of time, so go ahead, but quickly.

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

My question is similar to Mr. Grewal's again. I read a study, but I don't know if this is true or if it's credible because it was a self-identified study. It's the idea that young people who want to enter the market for the first time, first-time home buyers, are often asking their parents for their down payments. That's fine if their parents have cash, essentially. But perhaps their parents are taking out loans or lines of credits and saying to their kids, “Here you can use this, but just make the payments”. But that amount is not really being accredited to them in terms of their indebtedness, because they'd be walking into the bank with a certain amount of cash, essentially. How is that being factored into ensuring that this indebtedness level is not just being offset by other means that is further debt, and if interest rates were to rise they would rise on both ends? Where are the checks and balances to the institutions to ensure that where that down payment is actually coming from is not just a further loan by other means?

[The Chair, Liberal, Wayne Easter]

I hope you didn't think that was a quick question.

Who has a quick answer?

[Carolyn Rogers]

I think I can give a short answer. The underwriting requirements that most banks have in place look for the down payment not to be in the form of debt. If it isn't a form of debt, then that debt gets factored into the overall debt service ratio, and these are the measures that were recently tightened, particularly as they relate to ensured mortgages. Lenders are meant to factor in the source of the down payment and whether or not that source is further debt. Now, whether or not the bank of mom and dad would adjust the interest rate in the same way as conventional lenders is something that's always hard to predict.

[The Chair, Liberal, Wayne Easter]

Thank you.

I would say to the parliamentary secretaries that, since we normally have six witnesses and we have three, there may be time if either one of you has a question, to ask one. So just raise your hand.

Mr. Aboultaif, go ahead.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

Thank you very much.

In this situation, we see a blanket policy over the market, over the lending and all that, and we know that what triggered this whole policy is Vancouver and Toronto. The bubbling market, the hot market in both cities, has triggered this whole policy, in addition to the measures we took when we were under Prime Minister Harper's government.

Outside of Toronto and Vancouver, we now hear from small builders in Alberta, 10-15 houses, that they are selling their units without a profit. They're letting the profit go because they can't afford to keep those units there, because there is no buyer to qualify for these units.

Is there flexibility in the policy, and have we regarded markets other than Vancouver and Toronto in this policy? How can we really make sure that the policy itself makes sense? We believe it makes sense in Toronto and Vancouver, but is going to hurt other places, major cities in Canada. There are some unanswered questions out there that we'd like to have some clarification on. Whoever wants to participate to answer, we'll be thankful.

[The Chair, Liberal, Wayne Easter]

I know some of these questions go back to your earlier “what-if” question, Ron.

Some of these questions really amount to questions that are more about government policies. Part of the mandate of the three agencies here is actually to deal with the what-ifs. Some of the general questions are more along the lines of what a minister should have to answer. In any event, you do provide advice.

Who is starting? Mr. Leduc, go ahead.

[Sylvain Leduc]

In terms of tailoring, if we want to have policies that are really tailored to specific markets, they would have to be more along the lines of provincial policies or even municipal policies. We've had some of that. That's the only thing I can really offer here. Again, I would go back to the idea of indebtedness and the fact that indebtedness is due not only to mortgages but also to consumer loans. Some people have high level of debt because of that. That's an important fact to keep in mind.

[The Chair, Liberal, Wayne Easter]

Ms. Rogers, go ahead.

[Carolyn Rogers]

There has been a range of policies, so I guess it's difficult to talk about any one of these policies, but in general the things that OSFI has done and some of the recent things that changed the mortgage insurance market are actually not designed to target housing. They are designed to target debt related to housing. We take an interest in it because that debt, as I said, is 80% on the balance sheets of the institutions that we regulate.

Looking at these policies through the lens of what they are doing to housing is, in my view, and probably my colleagues' view, not the lens that we tend to look at them with. We look at how they affect mortgages, not the houses, and how those mortgages then affect consumer debt, the risk profile of financial institutions, and the broader economy.

We may be talking apples and oranges here, in terms of their effect on the actual housing market relative to their effect on consumer debt or the mortgage market.

[Don Coletti]

Again, in terms of the focus on debt, I think the policies go far beyond the idea of preventing a particular household from getting itself in trouble. The concern here is that if there are enough households that are highly indebted and we should have the misfortune, say, of having a rise in the unemployment rate around the country, the fact that households are highly indebted will make the circumstances in the economy even worse and, in the worst case, increase the stress in the financial system. That just comes back to bite the original people we are all trying to protect in the first place, to make the system safe.

[Carolyn Rogers]

If there's a sudden sharp rise in interest rates, which I think is a genuine risk, whether you live in Kelowna or the greater Toronto or greater Vancouver region, the cost of your mortgage payment will go up because interest rate policies aren't regional. If you have entered that mortgage already stretched to make your payments and the interest rates go up, it will put an enormous amount of pressure on consumers, which in turn will put an enormous amount of pressure on banks and insurers, which in turn will put pressure on the economy. That tends to be the lens through which we look at it. I don't think that's regional. I don't know how you would fix that on a regional basis.

[The Chair, Liberal, Wayne Easter]

We'll give you another one.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

Thank you very much.

The default rate is only 0.28% in Canada, which is very safe. It's very low. It seems as though we have a lack of statistics. I'm not pointing at anyone. I'm saying here that the Minister of Finance and the finance department will have to look at and listen to your opinion, because you are on the market, and you're somehow dominating certain areas of statistics that will be helpful to shape up any policy going forward.

In that fashion, we are saying that the default rate is very low, so why the hurry to have that blanket policy across Canada? That's one question.

As well, do you have any statistics on the effect of these measures on residential construction, on GDP, and on unemployment? That's very important.

These are very legitimate questions for people. The public needs to know and we need to know. Can anyone give us an answer here, please?

[Sylvain Leduc]

On the last question, if I understood correctly, just in terms of the impact on GDP, yes, we subtract about 0.3% to the level of GDP by 2018. That's the impact we have. As I said, there's a lot of uncertainty around that number, and we've noted that, just because these policies are relatively new. We don't have a whole lot of experience on which to base—

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

So that's about $60 million, the 0.3%?

[Sylvain Leduc]

That would be the rough impact.

In terms of the default rate being low, I think this is meant to be preventive. We don't want to implement policies while the default rate is really rising. That probably would be problematic. I think we want to put the policies in place before we have to deal with these problems. I'm sure the U.S. would have liked to have had these policies in place before they dealt with the subprime crisis. I think the idea of prevention, which we've seen since 2008 with different governments introducing different macro-prudential measures, is important.

[Carolyn Rogers]

I would come back to the first question this afternoon from Mr. Sorbara, about what we worry about. I'm a regulator. I get paid to worry. But my biggest worry is that we keep thinking the history is what will happen in the future, and we get complacent. We get asked that question a lot. Banks will often point to their historical default rate as a reason they don't need to hold as much capital or be as careful going forward. Our position is always that your default rate is your rear-view mirror and you need to be looking in the windshield. That's how we approach both our risk management and our capital reserves.

[The Chair, Liberal, Wayne Easter]

Thank you, all.

Mr. Whalen, welcome to committee.

[Nick Whalen, Liberal, St. John's East, NL]

Thank you very much, Mr. Chair.

Thank you each for coming. As Canadians, we rely on your institutions to give us confidence that the markets are functioning effectively, and as parliamentarians and policy-makers we rely on the evidence you provide to help us make sure that our policies are going to help make the economy better, not worse.

When Mr. Sorbara asked what you think the number one risk is, I disagreed with some of the things that were put forward. I hope you can convince me that my concern about the number one risk is wrong.

My concern is about the aging demographic of baby boomers. They have been holding onto their mortgages longer through the use of reverse mortgages and tightening supply in the housing market with those tools, driving home prices up as a result of that tightening of supply. Then, of course, as they all pass on with higher levels of debt associated with their homes, they're going to release all that supply back into the market very quickly over a 20-year span, starting very soon.

The number of people aged zero to 20 is about 7.9 million. The number of people in Canada aged 50 to 70 is 9.64 million. You'll see this extra supply of housing as those people move out and the new generation coming in to take the supply is not enough—and I'll leave immigration aside for a second. This new intergenerational problem we have is that these mortgages or these homes that are being released back into the supply are coming in with large amounts of debt associated with them, which is not the same as in previous generations.

Mr. Leduc, when you say that you've conducted model simulations to analyze the effects of such a shock and found that the buffers in the Canadian financial system would be sufficient to absorb its impact, you're talking about your view that unemployment rates, coupled with increased debt and then a rise in interest rates, is your number one concern.

Can you just give me some comfort that you've actually analyzed the situation that I've laid out, that it's not a bigger risk than the one you've raised, that you've modelled my concern?