Finance Committee on March 23rd, 2023

[Michael Gregory]

Sure. Clearly, it was an imbalance between demand and supply. We can go back to hundreds of years of economic research and economic theory that talk about how when demand is greater than supply, you end up with upward pressure on prices. That was the case in broader commodity prices as we recovered from the initial onset of the pandemic, and then afterwards we ended up with Russia's invasion of Ukraine. That part of the world is a major producer of virtually every major commodity, so that further worsened that problem.

We had the situation with the pandemic, and we had limited spending on services. Therefore, there was a lot of spending on goods. People were buying things for their home instead of going on vacations. That further snarled global supply chains. Finally, as we reopened our economy, there was a lot of pent-up demand for going to restaurants, going on vacations and getting haircuts. All of a sudden, we ended up with a tremendous amount of pressure. At the same time, many service providers were having a difficult time filling the jobs. I was out early after the reopening. Restaurants would be closed a couple of days a week because they couldn't get enough staff to open up every day.

All that contributed to this upward pressure on prices. Fortunately, a lot of those pressures are now starting to turn the other way, so the inflation prospects are pretty favourable.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Staff members, before we go to the Bloc and Monsieur Savard-Tremblay, we will try one more time with Mr. Marion. He has turned off his screen, and....

He's not there now. Okay, so we're not going to try with Monsieur Marion. I guess when it rains, it pours.

Monsieur Marion will be able to send in his opening remarks to the members and the analysts for our report. As well, members will have the opportunity to send questions, if they would like, to Monsieur Marion and get his responses back in writing. They can also be submitted to the analysts for the report.

Madame Chatel, is that on this? Go ahead.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you, Mr. Chair.

It would be useful if Mr. Marion could answer all the questions we asked Mr. Gregory and Mr. Jean. I would therefore suggest that Mr. Marion respond in writing to the questions the committee members asked today.

[The Chair, Liberal, Peter Fonseca]

Once we get him, yes, we'll ask him if he would be able to do that for us.

Clerk, could we send him the questions that have been asked?

Okay, so that will happen.

Yes, Mr. Fast.

[Ed Fast, Conservative, Abbotsford, BC]

I have a similar concern. I'm here to ask Mr. Marion questions. I'd like to have our analysts or whoever's responsible for getting Mr. Marion online to keep trying. We have a total of two hours. If we could get him back online, I'd really appreciate it. I have questions specifically for him.

[The Chair, Liberal, Peter Fonseca]

Yes, Mr. Fast. Thanks for that. We have been trying.

We asked Mr. Marion to stop his video feed. We thought maybe that would provide clearer audio, so that the interpreters could do their job. However, we do not have him on screen right now.

I guess we will keep trying, Clerk, and see what can be done.

We stopped the time during this conversation. We will now go to the Bloc and Monsieur Savard-Tremblay, please, for six minutes.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

Thank you, Mr. Chair.

Greetings to everyone. I'm pleased to be here on behalf of my colleague from Joliette.

Mr. Chair, please tell Mr. Marion that there was nothing personal and that I had not intended to have him leave the meeting, far from it. Please pass on my best wishes to him.

Mr. Jean, as you did not have time to finish your address, I'd like to give you the opportunity to do so now.

[Jimmy Jean]

I had almost finished my address.

I'll conclude by saying that the lower rates we are expecting in 2024 will be the foundation for the economic recovery we are anticipating.

It will not necessarily be a very robust recovery, because we are expecting central banks to be cautious and not lower rates very quickly; in particular, they will not lower them to the baseline levels we were seeing in the last cycle. It will be a normalization of interest rates tied to inflation as it returns to its targets, which should lead to a recovery in the economy and the real estate market.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

We are only a few days away from the next federal budget. Most of the political parties have been voicing their expectations.

You've addressed various subjects, but do you have any examples of public policies that Ottawa could include in the budget that would be beneficial in the current difficult circumstances, and that would not necessarily cause a rise in inflation?

[Jimmy Jean]

What makes the situation tricky at the moment is that the inflation rate is still very high. It's headed in right direction now, but it is still much higher than we would like. It will therefore be important to be cautious in making policy decisions to avoid putting the Bank of Canada in a very difficult position.

As for support measures for the most vulnerable households, what was done, particularly in 2022, was the right thing to do. The provinces also followed the federal lead. It was important for people who were having the most trouble putting food on the table and paying the rent. As the situation is beyond their control, it's important for the government to give them back the profits from inflation, which definitely increased nominal GDP, among other things. So the idea of giving that back to give them some breathing space was a good one.

Now there's a reason why these measures were ad hoc: they are expensive and they affect the budgetary balance, which will likely benefit from much less revenue over the next year, in view of the recession we are expecting and lower inflation. A word of caution is in order, however. We are not encouraging the government to make a habit of measures like these. They need to remain ad hoc if there is to be a degree of credibility.

Nevertheless, for all the measures whose goal is to deal with the urgent housing shortage, combined with a high level of immigration and rising immigration targets, our estimate is that there has to be a 50% increase in housing starts, beyond our baseline target, to prevent immigration from having a negative impact on affordability. We are nowhere near that yet. In fact, what our baseline scenario projects is fewer housing starts, which has already been happening for some time. It's therefore urgent to adopt policies that would finally get things moving in terms of housing development, particularly for affordable housing.

It's also important to react to the United States Inflation Reduction Act of 2022. It's going to be extremely important, because it's like a magnet that will attract investment in everything related to the climate transition. We have interests to protect in this regard. We have very promising developments under way whose future might become uncertain because of the Inflation Reduction Act. These are things that need to be factored into the long-term perspective.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

I am the member for Saint‑Hyacinthe—Bagot, and Saint‑Hyacinthe often has the lowest vacancy rate in Quebec. So when you were talking about housing, it caught my attention for two reasons.

I normally sit on the Standing Committee on International Trade, where we studied the Inflation Reduction Act, which does indeed present major dangers. We might well need serious diplomatic efforts to at least extend some of the more protectionist provisions to all of North America.

President Biden has, among other things, been talking about investment tax credits and people are banking on the clean energy transition as a way to combat inflation. Should we be doing the same?

[Jimmy Jean]

I wouldn't say that it's necessary for us to copy every measure. It's important to keep in mind that the United States' and Canada's economies have very little in common, particularly in terms of production capacity. There may be situations in the United States where some clusters reach a critical mass that can generate economies of scale and efficiency. In such a context, it's very difficult to be competitive by copying what's being done in the United States.

I believe instead that we should bank on certain areas in Canada where we have comparative advantages, and there are some. For example, the quality and expertise of our labour force, critical and strategic minerals, and facilities for producing and recycling electric vehicle batteries. Demand for batteries is going to greatly exceed supply…

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Jean.

Thank you, Mr. Savard‑Tremblay.

Members, before I turn to Mr. Blaikie, I will let you know that we are not going to be able to get Monsieur Marion on with us today. We will ask Monsieur Marion for his opening remarks. As well, we will send him your questions so that he can provide some answers.

Mr. Blaikie, you have six minutes, please.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you very much, Mr. Chair.

Mr. Gregory, I want to circle back to a comment you made previously. You said that, for the most part, Canadian mortgage holders aren't stretched beyond their means. I want to test that claim against some of the reporting out that some of the major banks have done recently about their mortgage book.

We know that variable-rate mortgages represent a significant percentage of mortgages held in Canada. About three-quarters of those are on fixed monthly payments. A majority of those now have reached their trigger point, where none of the agreed-upon monthly payment is going to the principal; it is all going to interest. In fact, in some cases now, we're seeing negative amortization by banks, effectively extending the amortization period by adding on the amount of the interest that's not covered by the monthly payment to the principal amount.

It seems to me that this is a significant point of stress within the mortgage system. It hasn't come due yet, because there isn't an obligation to renew the terms of the monthly payment, if it's on a five-year term, until the end of that term, but I do think this is a point of concern. I have a few questions in this regard.

First, I would ask you if you're confident that Canadian banks are acting within their established regulatory authority in engaging in this practice of negative amortization. What is the extent to which this is a creative solution by banks? Even just last year, there were very few of these mortgages that had reached their trigger point. Is this an established practice that's just seeing a lot of activity because of the current economic conditions?

Second, do you think any further policy intervention or actions are required in the private banking sector, or are there public policy actions that you think would help to address this growing concern within the Canadian mortgage market?

Finally, I am curious to know what the analysis is over the next five years or so and what the expectations of banks are. Are these folks that the banks anticipate will likely default when their variable-term mortgage comes up for renewal? What would have to change between now and then in order to ensure that banks aren't simply delaying defaults by engaging in this practice rather than stopping them altogether?

[Michael Gregory]

I have a couple of comments.

First, on my initial reference to households not being stretched, that was a comparison to, say, U.S. households during the global financial crisis in the great recession and that situation.

There's no question that as these mortgages are reset and renewed, it will potentially add to more headwinds on the economy. In fact, that is probably one of the key reasons the Bank of Canada paused its rate hikes, realizing that there will be a period here when many Canadian households will face higher mortgage interest payments as their mortgages are renewed or their rates are reset. They will have to adjust accordingly in terms of their spending patterns.

The key thing to keep in mind as well is that for many years now, the financial systems in originating mortgages.... The government agencies have been insuring them with this notion that there was a stress test, and in some cases a pretty onerous stress test at that. It should be the case that many of these households are now going to face higher mortgage interest payments.

In fact, that scenario has already been played out: Do they have the financial resources to take care of that? Will they have to make adjustments? Will Canadians potentially start eating out a little less, or maybe not go to the theatre as much, or whatever the case may be? The answer is yes. Then again, that is precisely what the mechanism is here: In terms of trying to slow the economy down, to broadly reduce demand, it is to have that happen.

As my colleague Mr. Jean mentioned, the interest rate channel works very effectively in slowing down the Canadian economy for that particular reason.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Just so we have a clear answer on this point, are you confident that banks are acting within their current regulatory authority to engage in the practice of negative amortization that they're using to keep these mortgage holders in their homes?

[Michael Gregory]

That's not really my area of expertise. I can't really comment on that, unfortunately.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Mr. Jean, I have 30 seconds left. Could you tell us what you think about this?

[Jimmy Jean]

Can we really fix what's been done? It will be difficult.

The reason that the United States is less exposed to what we are experiencing at the moment in terms of renewals, is that it's possible there to get long-term mortgages. We don't have that here, and mortgages are generally for a five-year period.

We need to try to generate market conditions that would allow for 10-, 15- or even 30‑year mortgages. This has been discussed in the past, but we are now experiencing the effects of not having a well enough developed market in mortgage maturity.

It could have prevented several of the problems we are now experiencing.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Blaikie.

Members and witnesses, we're moving to our second round of questions.

We will start with the Conservatives.

Welcome to our committee, MP Gray. You have five minutes, please.

[Tracy Gray, Conservative, Kelowna—Lake Country, BC]

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

My first questions are for Mr. Gregory at BMO.

During your opening address, you talked about “record-high household debt burdens”. We know that CIBC has said that one in five of the mortgages they have in their portfolio are in a position where the borrower's monthly payment is not high enough to even cover the interest portion of their loan. Do you happen to know if you're seeing similar numbers at BMO?

[Michael Gregory]

I'm not familiar with those figures at either institution—or my own, quite frankly.

[Tracy Gray, Conservative, Kelowna—Lake Country, BC]

Thank you.

You also talked about increasing interest rates and about how this slows the economy down efficiently and effectively. You made reference to how households might make different buying decisions and what they might do.

You know, at the same time, part of this is that as people are renewing their mortgages, their mortgage payments are higher. With the increase of interest rates, is it not true that in fact the banks themselves are the recipients of increased revenue based on the increase of interest rates?

[Michael Gregory]

Again, how banks generate their revenues is not my area of expertise. Obviously, Canadian households are going to be stressed to some degree as they make these choices, but the thing I will come back to is the fact that we've tested this. This is why we have a stress test. This is why we have one of the safest and soundest financial systems in the world. It's because we take account of these potential problems, and now higher interest rates are going to come home to roost.

I think, for the bulk of mortgages, there will be some adjustments that will have to be made, but those adjustments are all doable. That's the important thing.