Finance Committee on Jan. 21st, 2022

[Jake Stewart, Conservative, Miramichi—Grand Lake, NB]

I mean—

[The Chair, Liberal, Peter Fonseca]

You have 15 seconds.

[Jake Stewart, Conservative, Miramichi—Grand Lake, NB]

Okay.

Could you just explain to me about the red tape that I'm hearing about from private developers? What are you doing to alleviate the red tape?

[Romy Bowers]

Throughout the last two or three years we've gone through a number of process improvement initiatives that have actually decreased our turnaround times by over 50%. Is that good enough? No, we need to do more, but when you're thinking about our underwriting process, we're always balancing the need to do the right risk management to protect the balance sheet of the Government of Canada with the need to get the money out the door. There is always a balance between speed and good risk management.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, Mr. Stewart.

Now we're moving to the Liberals.

Mr. MacDonald, go ahead for five minutes.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you, Chair.

I'm going to direct my first question to Mr. Routledge.

I read the speech you presented in Vancouver recently, prior to Christmas. There were a few things that kind of interested me, and I just want you to extend your viewpoint on them.

Our financial system has fared extraordinarily well through several bouts of financial volatility including during the last 18 months. I just want to know what avenues are being taken to lessen that risk going forward.

[Peter Routledge]

Mr. Chair, the aim that the honourable member has referred to is stability or resilience in the face of volatility. The strategy is to build buffers in the system. Buffers could include those at the borrower level, which I spoke about earlier with the minimum qualifying rate. Buffers could include system-wide capital expectations, and buffers could include individual capital and liquidity buffers for individual institutions. It is a multi-faceted array, if you will, of buffers or cushions intended to blunt the impacts of uncertainty and volatility in the market.

[Heath MacDonald, Liberal, Malpeque, PE]

Are any of those buffers depicted basically for any demographic or is it just a blanket type—

[Peter Routledge]

The individual buffers I talked about—for example, the minimal qualifying rate—would just be for homebuyers. That would be the demographic.

On the other buffers, I should have been clearer. They refer to either institutions overall, so federally regulated financial institutions, banks or insurance companies, and there would be systemic and broad expectations about capital or about liquidity. Then at an individual institution level, we'll go in and if we see risk concentrations or stuff we're concerned about, we'll add to those buffers specifically for that institution. That way we tend to minimize the volatility that might come from a financial institution getting into trouble.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you.

Can you explain what you mean when you say that residential mortgage credit risk has risen modestly?

[Peter Routledge]

Yes. When we think about residential mortgage risk, Mr. Chair, we think about a variety of factors. Some of them, like the fast rise in housing prices, give us cause for concern and can foreshadow a deterioration in mortgage credit risk.

Other elements, for example, debt service ratios—the percentage of debt payments mortgagors will have to pay relative to their disposable income—are getting better. To give you another number, there are five million mortgages outstanding according to the Canadian Bankers Association, and in that dataset only 8,720 are in arrears today. That's lower than it's ever been—at least in their dataset—so credit quality is unusually high. That's a sort of countervailing factor that explains how while on a net basis it has risen modestly because of the acceleration in prices, it is offset by other facts that show it is diminishing.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you very much.

I'll go to Mr. Dugan now.

There has been a lot of discussion about the Bank of Canada raising interest rates. I just want to clarify the following. Some economists are saying that even though raising interest rates may drop housing prices, the CPI measurement used by lenders will grow because the rate of interest is significantly weighted.

Can you explain that, Mr. Dugan?

[Bob Dugan]

I guess you're asking about how interest rates and house prices work in the consumer house price index with ownership shelter costs. It gives a very different answer than when you just look at current house prices, because what the CPI is trying to do is measure the impact on the average Canadian homeowner of increases in interest rates and changing house prices, and not everyone is buying a home today at current rates. The mortgage debt reflects an average across Canadian homeowners, and the interest rate reflects an average across Canadian homeowners.

Current conditions don't get fully reflected in the CPI. I think I'm answering your question. It takes into account more of an average. It reflects the burden on an average homeowner's pocketbook of owning a home today. It's not at the margin, but an average across all homeowners.

[The Chair, Liberal, Peter Fonseca]

Thank you. That's your time.

We are moving to our third round of questions, members.

We have the Conservatives up with Mr. Chambers for five minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much, Mr. Chair.

Thank you to our witnesses for being here today.

This is an important study for our committee. There's been 85% inflation in the housing market since 2015. As my colleague mentioned, Bloomberg ranks Canada as having the second most inflated housing bubble in the world. Housing now takes up about two-thirds of a family's gross income.

My first question would be for Mr. Routledge. Have you raised concerns with or warnings to the Department of Finance, in particular to the minister, about vulnerabilities in the financial system from an overheated housing market?

[Peter Routledge]

My advice or consultations to the minister are and should be confidential.

With respect to the risk to the housing finance system and the broader economy from very high house prices, we're very alert. That explains our actions over the last couple of years, and, indeed, going back beyond a decade, to add those safety buffers I talked about to help absorb any volatility that might come after that run-up in house prices.

[Adam Chambers, Conservative, Simcoe North, ON]

Has the minister, or her office or anyone in the government, asked for additional briefings or analysis of vulnerabilities in the financial system from an overheated housing market?

[Peter Routledge]

My consultations with the minister will remain confidential, but I understand she will appear before this committee. That might be a question to ask her.

[Adam Chambers, Conservative, Simcoe North, ON]

That's interesting. If you won't discuss what the analysis might be, has an overheated housing market been discussed at senior advisory committee meetings?

[Peter Routledge]

Those committee meetings are confidential and chaired by the deputy minister of finance. I'm going to keep my counsel with respect to that as well.

[Adam Chambers, Conservative, Simcoe North, ON]

We may look for additional information later at this committee.

Continuing with Mr. Routledge, in an interview with BNN, when referencing speculators, you were quoted as kind of saying “All the power to them. This is a free market.” Isn't part of the problem in the housing market that we have this speculation, and the speculation actually increases risks to the overall financial system?

[Peter Routledge]

Factually, I did say words to that effect. Also, factually, investors as a percentage of homebuyers are higher than they've been traditionally.

We have a free market. We have a free country. We have a housing system wherein Canadians, if they choose to invest in a second or third home, can do so if their banks will underwrite it. That comment specifically related to that reality in the context where OSFI has to make sure—knowing that happens and knowing that this activity is at a greater percentage now—that our housing finance system can absorb the volatility that might follow that activity.

[Adam Chambers, Conservative, Simcoe North, ON]

In that same interview, Mr. Routledge, you mentioned that if we don't build supply, you would be very concerned about increases in financial system vulnerability. We just heard testimony from Ms. Bowers that we are unable to meet our supply goals over the short and the long terms. Are you concerned?

[Peter Routledge]

At a speech in Vancouver, I stated and continue to hold the view that a supply-demand mismatch is a potential issue in that it will tend to produce higher housing prices, and housing prices are already quite high relative to income.

The important thing for a superintendent to do is acknowledge that and begin to redouble efforts to ensure that whatever might come of that, the system can manage and continue to provide vital services to Canadians.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

I'll switch to CMHC.

Ms. Bowers, you mentioned your primary concerns about supply and how that's really affecting price inflation because of the mismatch between supply and demand. We talked about a bunch of supply issues.

Have you raised concerns about the effectiveness or the counterproductiveness of demand-side proposals from the government? I would include the new tax-free FHSA account for homebuyers, doubling the homebuyers' tax credit. These proposals are going to juice up the market on the demand side.

Are you concerned about these?