Finance Committee on June 15th, 2023

[Julie Turcotte]

Maybe I can give a broader context here. I'm not sure I would qualify it as a structural trap. Like you said, we have interest rates that have risen rapidly and mortgage costs that are up. Of course, it's going to squeeze household budgets and slow consumption, and we have seen some of that.

If you look at consumption adjusted for population growth, what we call “consumption per capita basis”, it has really plateaued and has not increased much. Households are coping with these higher interest rates, as Matt said before, in a relatively good manner, because labour markets remain strong and household balance sheets are also quite healthy.

Obviously over time this will help to slow inflation and will also allow for some normalization in interest rates. That's part of the process.

With regard to extending the maximum allowable amortization, it seems like a release valve, because you maybe have some temporary increases in payments and some difficulties in coping. This is a really temporary valve and not a structural one.

[The Chair, Liberal, Peter Fonseca]

Thank you very much to our witnesses and to MP Blaikie. That concludes our first round.

We're into our second round now. I have MP Lawrence up next for five minutes.

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

Thank you very much.

I appreciate your being here today.

I think this is a very serious subject. Of course, Canada is the most indebted nation in the G7. Consumer debt is, both in popular media and in academic writings, a very serious issue, and I give you all my best in trying to manage this situation as we go forward.

I have just a couple of questions for you. I want to take this to a fairly high level. If you were to look at the mortgage market right now in Canada, and you were looking at a green with everything being fine and good, a yellow for the most part being pretty good but with some concerns, or a red being that we have some serious concerns, where would you put the Canadian mortgage market right now?

[Robert Sample]

I'm not sure that I would colour-code it myself at this point. An entity that does is the Bank of Canada, so I point you to their “Financial System Review”.

Yes, Canadian household debt and house price matters have been an important vulnerability to financial instability in Canada for a decade or more. There have been a number of measures taken by successive governments to try to manage this issue.

I spoke to the mortgage insurance regulations. There have been a number of gradual steps to tighten in that area over the last decade. There have been steps taken, and I can go into more detail if you'd like, but I won't at this time.

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

That's fine.

[Robert Sample]

Also, in terms of the prudential underwriting standards that the Office of the Superintendent of Financial Institutions has put into place, I think that's another element, which is that the quality of the mortgages and the credit level of the borrower coming into the mortgage market today is a lot higher standard than it was a decade ago.

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

Thank you.

Would your level of concern increase if interest rates went up by, say, 2%?

[Julie Turcotte]

OSFI's guideline already stressed a mortgage at a 2% rate differential. The idea is to ensure that households can cope and be resilient—

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

I'm sorry, Ms. Turcotte. Some of those mortgages might have been tested with a 2% increase when interest rates were 3% lower. If they went 2% higher, and their existing mortgages, which might have been stressed at 3% or 4% are now at 5%, 6%, 7% or 8%.... I mean, let's call a spade a spade. I would think you'd be concerned.

[Robert Sample]

Yes, from a financial system perspective, it could raise difficult issues if interest rates were to move to higher levels, certainly for those borrowers who currently have mortgages. I think you made a good point, which is that.... What Julie was trying to emphasize is that, for new borrowers coming in, there is this stress test or this minimum qualifying rate, which provides some protection.

Definitely this is a large interest rate increase for a number of borrowers. At current levels, as I mentioned before, what we're seeing is that there are borrowers who are managing the payment, the payment increases—

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

Thank you. I very much appreciate your testimony.

Is there a tipping point where you would be—whichever adjective you wish—very significantly or otherwise concerned? What interest rate would it be—at 6%, 8%, 10%?

I assume that these numbers exist. If you would be kind enough to table them with the committee, we'd be greatly appreciative. Will you table those documents?

[Robert Sample]

We can take that back. We're happy to table anything we have that would be of use to the committee.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Lawrence and officials.

Now we are moving to the Liberals and MP Dzerowicz, please.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Chair.

I want to thank our presenters today. This is an important topic. The information you're providing is excellent.

In February 2020 our then minister of finance introduced a more difficult stress test. Do you believe that the measure we introduced then has actually contributed to the low delinquency rate that we are seeing right now?

[Robert Sample]

Thank you for the question.

Yes, prudent underwriting standards mean that borrowers who become homeowners can withstand shocks—income shocks, interest rate shocks and personal issues that might arise in their family circumstances. The minimum qualifying rate, or the “stress test”, as you referred to it, is one measure that was put in place with a floor of 5.25% at the time, and a 2% buffer above the contract rate. That has been helpful in mitigating issues, but it doesn't work alone.

There are other standards in place that also help the financial system's ability and borrowers' stability, such as minimum down payment requirements, maximum amortization limits—I'm speaking about the insured mortgage rules at this point—debt service ratio limits and minimum credit score requirements. There are a number of rules in place for insured mortgages that are helping.

Similarly, with uninsured mortgages, the focus of the superintendent of financial institutions and his office on this matter over the last number of years certainly will be helping and has helped mitigate potential issues in this area. I can't quantify that.

[Julie Dzerowicz, Liberal, Davenport, ON]

That's okay. I just want to make sure that the public is reminded that a number of measures were put in place to actually build some resiliency into mortgages, so it became more difficult for mortgages to default. Those measures have actually helped.

I just want a couple of basic facts. What percentage of residential mortgages are at a variable rate versus a fixed rate? Do you know, just quickly?

[Matthew Emde]

I have those statistics.

The Bank of Canada, in its “Financial System Review”, has them publicly. As of February, 2023, the share of the stock and mortgages that had variable payments was 9%. The share that had variable rate fixed payments was 17%, and the rest were fixed rates.

[Julie Dzerowicz, Liberal, Davenport, ON]

About 80% are sort of fixed, and then 20% are variable. Do you have that number?

[Matthew Emde]

If we add up the two variable shares I gave you, 17% plus 9% is 26%, so 26% is variable rate.

[Julie Dzerowicz, Liberal, Davenport, ON]

What percentage of mortgages have increased their amortization period beyond 25 years since 2021?

[Matthew Emde]

Those data we don't have. Different financial institutions have released some of this data in their regulatory filings. It's just kind of publicly reported in the press.

[Julie Dzerowicz, Liberal, Davenport, ON]

That will be a question I will ask the financial institutions, if they come here. Thank you.

We have been hearing that Canada probably has the largest debt levels of all G7 or OECD countries. I don't what the data is, but I know we have been told that we have large debt levels.

You have told us today that household finances are relatively healthy and that we have strong balance sheets. I would love to know if someone could respond. If we have high debt levels, what percentage of that is equity, housing equity, and does that make it less of a worry in terms of high debt levels? Can someone maybe respond to that?

There is a two-part question. Of the high debt levels that apparently we have in this country, is a lot of it what we own and does that make it a healthier type of high debt level? Could you respond to that?

[Matthew Emde]

Thank you for your question.

[Julie Dzerowicz, Liberal, Davenport, ON]

Could you speak up, please? I can barely hear you.

Monsieur Ste-Marie, I could barely hear. Could you just stop talking? Thank you.

[Matthew Emde]

I believe that about 80% of household debt is mortgages. To the extent that you think of that debt as different from other debt because it's linked to an asset that appreciates, yes, what you're suggesting is reasonable. That doesn't mean that it's all—