Finance Committee on June 11th, 2024

[Yvan Baker, Liberal, Etobicoke Centre, ON]

What would that mean to Canadians if they were not?

[Peter Routledge]

If we're doing our job right, we see that coming and we oblige boards of directors to take prompt corrective action to forestall that.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

This may be a straightforward thing from your perspective, but just so people understand, what are the consequences of one of the banks, or multiple banks, not being in a sound financial position?

[Peter Routledge]

To answer that question just go back to 2007 and 2008 in the United States. You saw substantial across-the-board weakness and sometimes failure of financial institutions, which contracted the availability of credit, which then contracted the economy and led to unemployment.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Yes, so basically there would be a lot of economic hardship for Canadians if the banks aren't—

[Peter Routledge]

A lot.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

—in a strong financial position. Yes. Okay.

What are some of the steps that you have taken to cool the housing market? Let's start there. What are some of the steps you have taken to cool the housing market because, as you know, my constituents, all our constituents, are struggling with rising housing prices?

[Peter Routledge]

I would reframe that slightly to say that we have taken steps to make the mortgage credit system a little bit safer, which in turn may cool the housing market, but our primary objective is credit quality.

What we have done is that we have put in place mortgage underwriting standards that we oblige all banks to follow, which causes them to make safer mortgages, which then sustains and makes their institutions more resilient.

The key thing that we do, and the most important thing we do, is that we set a common baseline. If all competitors in the system think they are all following OSFI's sound underwriting policies, then they themselves will follow sound underwriting policies. If we don't have those in place, they will think, “My competitor across the street is cheating so I'm going to cheat because I have to to compete,” so there is a game theoretic aspect to what we do. We put a baseline of sound underwriting standards in place to sustain the system through ups and downs.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

That makes sense, but let me challenge that a little bit.

Some of my constituents have said to me, look, if we could make it easier for me to get a mortgage, or allow me to borrow more, then I could afford to buy a house I wouldn't otherwise be able to buy, or I would be able to stay in the house that I'm currently in and now can't afford to stay in because my mortgage rates have gone up.

Wouldn't it help Canadians if we effectively loosened the reins a little bit and made it easier for them to borrow?

[Peter Routledge]

Loosening the reins will typically mean, at least as I interpret it, lessening or lowering underwriting standards. In an individual's case, you're right, someone might be able to get a little bit bigger house or stay in a house that interest rates have made more difficult to afford, but over time we would be building credit risk in the system that would ultimately, in our judgment, metastasize into a broader financial stress event that would be costly to Canada in the long run.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

What I hear you saying—and I don't want to put words in your mouth so tell me if this isn't correct—is that you're focused on making sure that the banks are in a secure financial position because, if they are not, we could face tremendous economic hardship as you described.

You described an example of that as what happened in 2008, but it is in pursuit of that goal that there are some restrictions that you require banks to put in place in terms of how much they could lend to certain individuals, even though that makes it harder for some Canadians. Is that correct?

[Peter Routledge]

I would agree with that. The years 2009 and 2010 taught us that this resilience of Canadian banks produced a less severe recession in Canada than for peers.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

I understand the part about making sure the banks are in a strong financial position. I was working in the United States around that time, 2007 and 2008. I remember the banking crisis there and the economic hardship that Americans and Canadians, but especially Americans, felt around that time. I think what I'm asking is that it sounds like you need to find a balance, because you could be even more restrictive on the banks. Is that right? That would mitigate the risk of the banks having economic hardship even further, but that would make it harder for Canadians to get mortgages.

Am I right that you're trying to strike a balance at all times?

[Peter Routledge]

Yes, and our act obliges us to do so. It instructs OSFI to allow banks to compete and take reasonable risks, and that is a check on what we do.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

I have a last question, then.

There are people out there who have been critical. How do you respond to criticisms that the recent guidelines OSFI put in place will end up hurting Canadian consumers, especially because they make home ownership more difficult to attain?

[Peter Routledge]

My response to that criticism would be that we're making home ownership more safe for Canadians over the long run so that the system, overall, produces long-term outputs that are good for the country: people buying homes, paying down their mortgages and staying in their homes even when there's a recession.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Baker.

We're now going to MP Trudel.

I'll just say that many members who are not permanent members of our finance committee always want to come to the finance committee. They know how hard-working we are here, and they know we have many special witnesses. MP Hoback and MP Kayabaga are with us.

I welcome all of you to the finance committee.

We'll now have MP Trudel for six minutes.

[Denis Trudel, Bloc, Longueuil—Saint-Hubert, QC]

Thank you, Mr. Chair.

Thank you, Mr. Routledge. I was very pleased to hear you speak French earlier. I'm not sure if you will be able to answer all my questions in French, but in any case at least you do speak it.

I would like to talk about the housing crisis. We know that housing is always the biggest household expense. If we help people with housing, we can help them live better and afford other things. For my part, I toured Quebec last year to get a feel for things and met people who help individuals with housing problems. It's really tough. Not a day goes by that we don't see encampments in Toronto, Vancouver or Montreal. The shocking thing is that we are often seeing them now in small municipalities in Quebec, in places where that had never been seen before.

I think it was Scotiabank that said we will need to build 5.8 million housing units by 2031. This is 2024, so that is seven years from now. In Quebec, we need about 1.2 million units, while the most units built in one year is 70,000. By 2031, we need to find some way to create an ecosystem, ideally with government support, to build three times the number of units that we have ever built. So it is a massive challenge.

It was the banks that conducted those studies. The figures are not from organizations advocating for social housing, but from the banks. They are the ones saying we have to build 5.8 million units.

And yet I have not heard a single politician to date say that we have to find a solution. We need a colossal plan, like a Marshall plan. Representatives of all organizations that build housing and of all orders of government need to sit down together to address this tremendous challenge.

Right now, there are people, families and single mothers living on the streets. Last year, a young pregnant woman gave birth in a tent, right downtown. That was very close to us, in Gatineau, Quebec. I don't know how we can accept that in a G7 country. I don't accept it, in any case.

What would the OSFI advise or what policies would it suggest to the government to achieve the target of 5.8 million units within seven years, or at least to get close to that?

[Peter Routledge]

I agree with what you said. We need a strategic plan to build more housing in Canada.

I am still working on my French, so I will switch to English now if you don't mind.

I agree with the notion that we need a national effort to bring our housing construction up to the level of household formation. In my first year as superintendent, I gave a speech where I said that a major potential risk is our household formation well exceeding the amount of household construction in the country. That presents a long-term potential risk to the financial system. I still hold to that.

There has been progress made, and I'm optimistic, but we have to do more to bring housing construction up to household formation. When that happens, the stresses in the housing market that make homes more difficult to afford will lessen.

[Denis Trudel, Bloc, Longueuil—Saint-Hubert, QC]

Let's look at this from a more technical point of view, considering all the types of housing that are built. There is no question that housing is being built. In my riding, for example, condos are being built in Longueuil that go for $2,000, $2,500 or $3,000 per month. Those are for people with a significant income. The housing crisis is really only affecting people in the middle class or below. People who earn $100,000, $150,000 or $200,000 per year do not have any housing problems, in theory, because condos are being built that they can afford.

Do you think that just building housing units, regardless of the type, could reduce housing costs? If we had a strategy to build the 5.8 million units needed, would that help stabilize the market? Would that restore a measure of affordability for people with average or below average income?

[Peter Routledge]

Because of this imbalance between household formation and housing construction, housing has been imbalanced. When demand is greater than supply, prices go up.

If we had a constructive strategy that was useful for the federal government, as well as for the provinces and municipalities, and led to more homes being built in a responsible way, supply-demand pressures would abate, in my view, and price pressures would lessen. That would address the affordability concerns that Canadians face today.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Trudel.

Now we'll go to MP Davies for six minutes.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you, Mr. Chair.

Thank you, Mr. Routledge, for being here.

On May 22, OFSI's annual risk outlook for the fiscal year said:

Of the mortgages outstanding as of February 2024, 76% will be coming up for renewal by the end of 2026. Canadian homeowners who will renew their mortgages during this time period could potentially face a payment shock.

Mr. Routledge, can you quantify the impact you expect this potential payment shock to have on the rates of residential mortgage loans falling either into arrears or into default by the end of 2026? In other words, are we facing a mortgage renewal cliff?

[Peter Routledge]

I wouldn't use that analogy to talk about the refinancing risk that's present.

For mortgagors who have taken out three- to five-year fixed mortgages and face renewal over the next two to three years, the stair-step up in higher mortgage costs will be more manageable—in the 15% to 30% range—just depending on the timing of their last mortgage.

So far, it appears to us that Canadians are managing that increased cost.

There is a small component of the mortgage market of mortgagors who, particularly during the pandemic, took out variable rate mortgages that had fixed payments. Those folks could face mortgage payment increases of around 50%. It varies by mortgage and timing, but 50% is a good ballpark. That is a very significant shock to monthly finances, and it's one we're very concerned about.

We have an early indicator on that risk, and that is people who took variable rate mortgages with variable payments. By and large, they're managing that rising cost of interest, but their delinquency rates are higher than those for people with fixed payments. It is not dramatic; it is incremental.

[Don Davies, NDP, Vancouver Kingsway, BC]

What impact, if any, do you expect an increase in residential mortgage loans falling into arrears or default will have on housing prices in Canada?