Canada steps up housing market oversight - Financial Post

Bloomberg News? Apr 4, 2012 ? 10:45 AM ET | Last Updated: Apr 4, 2012 1:23 PM ET

By Andrew Mayeda and Greg Quinn

Canadian authorities are stepping up oversight of the nation?s housing market even as lenders such as Bank of Nova Scotia warn that tougher rules could threaten the economic recovery.

The country?s banking regulator, the Office of the Superintendent of Financial Institutions, said Tuesdsay it will boost supervision of private mortgage insurers while examining ?emerging? risks to the financial system in several areas, including residential mortgages.

Policy makers, including Finance Minister Jim Flaherty, have said that parts of Canada?s housing market have become overvalued as consumers add to record debt levels, encouraged by some of the lowest mortgage rates in decades. Flaherty said in his budget last week the government will enhance supervision of Canada Mortgage & Housing Corp., a federal agency that insures some mortgages.

Scotiabank chief executive officer Richard Waugh warned about making reforms to CMHC that could have ?unintended consequences? and cause the market to slow too much. ?Canada?s model, which has been so successful, is let the banks manage and let the policy makers set macroeconomic policy, monetary policy, and good strong regulatory supervision,? Waugh said Tuesday in an interview in Saskatoon, Saskatchewan.

Bank of Canada Governor Mark Carney said in an April 2 speech that households relying on debt financing represents ?the biggest domestic risk? to the economy. Some Canadians would be vulnerable to a sharp decline in housing prices, the central bank said in its latest Financial System Review.

Home Prices Rising

Jonathon Rivait/National Post

Home resale prices rose 6.5% in January from a year earlier, according to the Teranet-National Bank Composite House Price Index. The S&P/Case-Shiller index of property values in 20 U.S. cities fell 3.8% in January from a year earlier after dropping 4.1% in December, a March 27 report from the group showed.

The country?s resale housing market is overvalued by 10% to 15% and there is an oversupply of new homes, Toronto-Dominion Bank economist Sonya Gulati said in a March 22 report. ?These excesses should be gradually unwound over 2013 and 2014, with higher interest rates the impetus for the adjustment,? she said.

The Ottawa-based Office of the Superintendent of Financial Institutions said Tuesday it will produce a report for Flaherty on government guarantees on mortgage insurance. An OSFI spokeswoman, Leonie Roux, said the report would apply to private insurance providers such as Genworth MI Canada Inc. and not CMHC.

The federal government guarantees the full value of mortgage insurance offered by CMHC, which had $541 billion in insurance in force at the end of September. The government guarantees 90% of insurance offered by private-sector companies.

Vulnerable Households

?Elevated household debt levels not only make households vulnerable to adverse shocks but continued low interest rates could encourage even higher household indebtedness,? OSFI said in a planning document released on its website yesterday.

Consumers ?could become a source of negative domestic influence if they take action to rein in spending to address their indebtedness,? OSFI added.

Consumer spending has led economic growth since taking the country out of recession in 2009. The Bank of Canada projects households will be responsible for more than half of the country?s 2% economic growth this year.

The government said in the budget it will enhance the governance and oversight of CMHC to ?ensure its commercial activities are managed in a manner that promotes the stability of the financial system.?

Strengthening Oversight

The government is considering whether OSFI can play a role in ?strengthening the oversight of CMHC?s commercial operations,? Chisholm Pothier, Flaherty?s chief spokesman, said Tuesday in an e-mail. OSFI doesn?t currently regulate CMHC, instead, it reports to the country?s parliament through Human Resources and Skills Development Minister Diane Finley.

?Someone is going to have to safeguard CMHC, and I would assume that falls under OSFI,? said Ian Pollick, senior fixed- ncome strategist at RBC Capital Markets in Toronto. ?There is no other real national regulator.?

The budget also said the government will introduce legislation on covered bonds under a system to be administered by CMHC.

Most covered bonds issued in Canada are secured by mortgages insured by CMHC. A government consultation paper in May asked for input on whether the law should encourage banks to secure covered bonds with uninsured mortgages, a move that may lead banks to rely less on CMHC insurance. The budget didn?t specify how the government will proceed on that issue.

Rationing Insurance

The government also didn?t say whether it will raise CMHC?s $600-billion limit for insuring mortgages. CMHC said Jan. 31 it has been rationing bulk insurance offered to lenders as the corporation approaches its legal limit.

Flaherty has tightened rules on mortgage insurance three times since October 2008. He appears to be taking a ?wait-and- see? approach to determine if the market is headed for a soft landing before he acts again, said Finn Poschmann, vice president of research at Toronto-based think tank C.D. Howe Institute. ?If the growth in mortgage credit and home-equity lines of credit doesn?t tame itself, we can expect the finance minister to respond,? he said.

The government should ?hit the pause button? to take stock of the new rules put in place since the financial crisis, and whether such changes may have ?unintended consequences,? Terry Campbell, president of the Canadian Bankers? Association, said yesterday in a speech in Ottawa.

Canada?s banks have been ranked the soundest in the globe by the World Economic Forum in part because they avoided the subprime loans that crippled many U.S. lenders during the financial crisis.

Bloomberg.com

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