Finance Committee on June 11th, 2024

[Peter Routledge]

It's hard to predict the future, but I'll try to give some perspective on that.

The issue right now, which the previous member spoke about, is a supply-demand imbalance. It means that, if we have a more than normal level of foreclosures and, therefore, greater supply on the market, demand conditions will be such that they will likely take up much of that supply, and housing price pressure will not be as significant.

I would point folks to the house price indices. Although they've been flat for two to three years, they haven't fallen, despite a very substantial increase in interest rates.

[Don Davies, NDP, Vancouver Kingsway, BC]

I want to shift to other kinds of credit, if I can.

On May 29, a news release from the Canadian Mortgage and Housing Corporation said:

For the first time since the beginning of the pandemic, mortgage delinquency rates are trending up. Vulnerabilities first detected in credit card and auto loan markets are therefore moving into the mortgage market as well.

It goes on to say:

This suggests the financial buffers built up during the pandemic are becoming exhausted for some households.

Do you agree with that assessment? What comments do you have on that?

[Peter Routledge]

Yes, I do. That's what the data indicates.

What we're seeing is that rising mortgage costs and rising interest rates first are impacting households that tend to have a little less income. That's in the lowest quintile of households. Those households typically do not own homes, but they do have credit cards and car loans. We are seeing rising delinquencies in that space, and that is a concern.

What I can tell you is that the financial institutions we regulate are absorbing those higher credit costs without material threat to either their earnings or their capital.

[Don Davies, NDP, Vancouver Kingsway, BC]

OSFI also commented in May and said the following:

Changes to the economic environment, such as weakening labour markets and declining rates, could reduce the payment shocks outlined above.

Could you elaborate on how the combination of weakening labour markets might impact the risk associated with real estate, secured lending and mortgages?

[Peter Routledge]

Weakening labour markets would, if history is a guide, likely be followed by falling interest rates, which would then in turn lower the refinance risk faced by current mortgage holders.

[Don Davies, NDP, Vancouver Kingsway, BC]

If interest rates are reduced, does this not have a risk of restarting the cycle of cheaper money, putting more people in the market and, therefore, putting additional price pressure on housing?

[Peter Routledge]

The answer to that question is, yes, it does. We implemented a policy recently on mortgage underwriting that will check the tendency of banks and homeowners to lever up in that environment. That check is known as the loan-to-income ratio test.

[Don Davies, NDP, Vancouver Kingsway, BC]

Mr. Routledge, you talked about the impact of variable rate mortgages. In your view, have Canadian financial institutions taken sufficient steps to date to mitigate the risk associated with variable rate mortgages, especially those with fixed payments?

[Peter Routledge]

My answer to that would be a qualified yes.

The folks we're particularly worried about are folks who have that product that have negatively amortizing mortgages or interest-only mortgages. The numbers over the last 18 months have fallen from about 270,000 households to about 175,000 households. That is the result of households and financial institutions taking pre-emptive steps to avoid more problems later down the road.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, MP Davies.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

[The Chair, Liberal, Peter Fonseca]

That is the time.

Now, members, I'm just looking at the time. We do have enough time for a full second round.

In this round, we're starting with MP Lawrence for the first five minutes.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you, Mr. Chair.

Thank you for coming today, Mr. Routledge. I really appreciate it. I think Canadians will be glad to hear from you as well.

There are risks and challenges whether the housing prices go up or go down. Keeping it on that narrow path, I believe, is one of your goals there. I want to talk specifically about capital gains, though, and, of course, the increase in the inclusion rate of capital gains and the impact this will have on the housing market.

First of all, I want to talk about the way the Liberals designed the implementation. Of course, that's creating the conditions for a fire sale up until June 25, which is just around the door. In my mind, if you're a cottage owner and you want to get the lower rates of the inclusion, you'll want to sell before June 25.

Do you think this will have any material impact on the prices? Obviously, if the housing prices go down, that puts the risk of mortgages going underwater....

[Peter Routledge]

I think it's a little dangerous for me to comment on tax policy, but I'll address the question about the housing market and the effect of a sudden burst of supply.

If there were a sudden burst of supply in any particular regional market and the demand was the same, there would be downward price pressure. We have not seen that phenomena yet in any of the major markets we cover. I'd have to come back to you on specific or more local markets.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you for that.

Maybe I'll frame this question more towards generalities. It might be a little bit easier for you to respond to. The other question I want to ask is also relative to tax increases. This is on homebuilding. Your testimony earlier was that we need greater housing construction in order to bring housing prices back to reasonable levels of affordability.

If, in fact, a government increases taxes of any sort, that of course will reduce or limit supply, depending on the amount of taxation and various other factors. Is that correct, sir?

[Peter Routledge]

You're asking me an economic tax policy question. I'm just a superintendent. Marginal increases in the cost of housing construction...I have not seen cases in which that has materially impeded supply.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

To just go a bit further on that, if it's not marginal, though, but it's material cost, the increase in the inclusion of the capital gains rate can cost a developer millions, if not tens of millions of dollars, and often these projects are marginal. They might be a million or two either way, whether you go ahead or not. Surely you agree with me, Mr. Routledge, that now is not the time to put in additional barriers for builders to build houses when, as the president, I believe, of the home builders said there's “not a chance” we're going to hit our target.

[Peter Routledge]

I'm going to politely refrain from entering debate around tax policy. I will stand by my earlier statements about the importance of bringing supply into line with demand in terms of housing and household formation.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you for that, and I appreciate you're trying your best there.

I just want to switch subjects a bit to the sensitivity of interest rates with respect to the housing market. Like I said, we can get in trouble if we have houses go too low or too high. Are you concerned that a dramatic decrease—we have 0.25%, which is barely anything—if, in fact, the Bank of Canada were to move too quickly, that might drive the housing prices too high?

Are you comfortable with the four and a half rule, or the 450% rule, that we'll be able to protect ourselves from buyers taking on too much?

[Peter Routledge]

I think the advantage of this LTI requirement that we're putting in.... I should mention that it's just for institutions. It doesn't affect individual borrowers. However, what it will do, if rates do fall very low, is that it will act as a backstop to the mortgage stress test and will tend to limit the amount of excessive risk-taking in the mortgage space.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

What about right now, for the payment shock you talked about in your report? If, in fact, the housing market catches fire again because of the interest rates or whatever, what's your level of discomfort? Is it that if the housing market goes up 10%, 20% or 30% we will start seeing issues with the housing market?

[Peter Routledge]

If we see a significant increase in prices, the problem I spoke to, with respect to variable rate mortgages with fixed payments, will actually lessen because people facing those higher payments will have a more robust market in which to sell their homes and, therefore, cure their debt service issues.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Lawrence.

Now we go to MP Dzerowicz, please.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you, Mr. Chair.

Thank you, Mr. Routledge, for being here today, and thank you for your service to our nation.

At a breakfast that a number of us attended yesterday with Bank of Canada officials, we were talking about housing. I learned that, in a number of different countries, they do very different things with mortgages. Some countries allow you to port mortgages over 80 years and a number of generations. In some countries, like the U.S., you can lock into a 30-year mortgage but you have tons of flexibility in terms of how much to pay off your mortgage at any one time.

My question to you is this. Have you been in touch with other regulators around the world? Is there anything we can learn from them, or are there ideas that we perhaps might want to consider adopting here as we struggle with the affordability and housing crisis we have right now, that you might be able to contribute to this conversation here today?

[Peter Routledge]

Every country's mortgage system is a reflection of its history and regulatory policy. I start by saying that Canada's mortgage system has worked quite well. Many of my peers are envious of the track record or credit quality in our mortgage system. A hallmark of it is that we have relatively shorter amortization periods, so people pay down their mortgages, and the lower your debt goes the less risky your financial situation is. When you have longer mortgages your debt stays around for longer and it is a higher-risk issue.

The Bank of Canada did interesting work on how to improve our marketplace to make longer-term mortgages available so that, if households so choose, they can term out their mortgages for longer than five years at a reasonable price. They can do it right now; it's just the prices are fairly expensive. I refer you to them. They did a lot of good work, and they have a lot of good ideas. In aggregate, if the product set evolves in that way, that will be a net benefit to the system because it will give mortgagors more choices to manage their personal financial risks.