High rates in real estate continues this year: bank regulator

Toronto –

Canada’s banking regulator has signaled growing concerns about the housing market and said it was prepared for tensions in the housing market that could continue throughout the year.

The Office of Financial Institutions Supervision (OFSI) said Tuesday in its latest annual risk outlook that the housing market is the biggest concern as higher interest rates increase the likelihood of default.

“OFSI prepares for, but does not anticipate, the possibility that the housing market will experience a sustained downturn through 2023,” Superintendent Peter Routledge said on a media conference call.

But credit quality has been very strong so far and residential real estate remains healthy, he said.

“What’s interesting now is how well things are holding up. Underlying it is a very strong economy and unemployment is still very low. That’s why Canadians have higher debt costs. has been repaid very expeditiously.”

The risk outlook is meant to remind everyone that although finances look solid, the risks are still there, he said.

To prepare for future risks, regulators are working to review the B-20 mortgage underwriting rules, including stress testing. He concluded on April 14 with the first phase of hearings to consider debt service measures to manage the risks associated with high consumer debt levels.

Regulators are also scrutinizing how banks treat variable-rate, fixed-payment mortgages. This keeps your monthly payments the same as interest rates rise and pays less on your principal. Banks are extending the amortization period because payments to some borrowers do not cover interest costs.

Routledge said while specific mortgage products aren’t an immediate concern, he said they’re likely to continue to grow over the next couple of years as terms begin to reset and prices change, and borrowers feel the hit harder from higher interest rates. He said it could be tiring.

Regulators are actively assessing risks and investigating whether banks have adequate capital in case of potential problems from product borrowers.

Outside of the housing market, OFSI said liquidity concerns were the biggest risk as banks cut back on lending and higher interest rates acted as a form of tightening.

“In general, credit growth is slowing across all lending sectors, including commercial lending,” Routledge said. “Anecdotally, it can be characterized as manageable rather than abnormal deceleration.”

The failures of Silicon Valley Bank and Credit Suisse have also raised concerns that banks will become more cautious about lending, but Routledge said credit growth has slowed, not slowed, so far. .

Commercial real estate is another source of risk, as office values ​​are plummeting due to the shift to remote work. The regulator said it is conducting targeted oversight and considering whether to develop specific guidelines for the sector.

Another key concern is the increase in private credit from providers such as hedge funds and pensions. This is because lending in this area has surged over the past decade, with little or no prudential regulation. The digital transformation of finance through areas such as cryptocurrencies and artificial intelligence. Climate change issues related to both physical and transition risks. Cybersecurity, especially amid heightened geopolitical tensions. Third-party risk from banks that rely on systems such as cloud computing.

This report by The Canadian Press was first published on April 18, 2023.

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