Bank regulator sees growing concerns in real estate even as credit quality holds

TORONTO –

Canada’s bank regulator says it is preparing for strain in the housing market to potentially last throughout the year as it flags the sector as a growing concern.

The Office of the Superintendent of Financial Institutions (OFSI) said Tuesday in its latest annual risk outlook that the housing market is its top source of worry, as high rates mean higher default probabilities.

“OFSI is preparing for the possibility, but not predicting, that the housing market will experience sustained weakness throughout 2023,” said superintendent Peter Routledge on a media conference call.

Credit quality, however, so far looks quite strong and residential real estate remains sound, he said.

“What’s interesting now is how benign conditions have remained. Underlying that is a very strong economy, unemployment is still very low. And because of that, Canadians are servicing the higher cost of debt, quite handily.”

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

To better prepare for future risks, he said the regulator is working through its review of B-20 mortgage underwriting rules, as well as taking a closer look at how banks are handling variable rate fixed-payment mortgages.

The specific mortgage product isn’t an immediate concern, but he said that it could become one in the next two or three years as the terms begin to reset and be repriced and borrowers feel a greater hit from higher rates.

The regulator also noted liquidity concerns as a top risk as banks pull back on lending and higher rates act as a form of liquidity tightening.

“Generally we’re seeing across all lending sectors, including commercial lending, slowdown in credit growth,” said Routledge. “Anecdotally, I would characterize it as so far as a manageable, not extraordinary slowdown.”

The collapse of Silicon Valley Bank and Credit Suisse have also raised concerns that banks will become more cautious on lending, but Routledge said that so far, he’s seen a deceleration in credit growth, not a decline.

Other key areas of concern identified by the regulator include commercial real estate weakness, transmission risk from areas like private credit, digitization of finance that accelerates the movement of money, climate change, cybersecurity and third-party risks from banks relying on systems like cloud computing.

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