Bank of Montreal’s chief executive officer says policymakers should be thinking about the ways they could intervene in the scorching-hot housing market, but that they still need to watch and wait a while longer before taking any action.
Darryl White said Wednesday that Canada’s housing markets are evolving with each passing week, and they are doing so in the midst of a pandemic and public-health measures that can affect real estate activity.
Demand, White said, is being pulled forward and is still relatively pent up, with some buyers worried about missing their chance to own a home. On the supply side, he said, listings may be up over the past six months, but construction of new homes is not keeping pace with demand.
This week-to-week evolution is set to continue for the next several weeks, according to White.
“If I were a policymaker, I’d be spending my time assessing alternatives and knowing what they are, but I would be watching the market for a little bit while longer before I actually step in,” he told the Financial Post in an interview on Wednesday.
White also pointed to a recent report by BMO’s economics unit on the housing market, which said that policymakers should take action and outlined several options they could choose, but did not definitively recommend any. That kind of work, which described options such as a speculation tax, is important, BMO’s CEO said.
“If you have it on the shelf, and you’re ready to go, you can then react when you have a little bit more clarity as to where these housing markets go, let’s say in the July-to-end-of-the-year timeframe,” White told the Post.
One federal banking regulator already appears to be reviving a plan to tweak a housing-related measure that was delayed by the pandemic.
The Office of the Superintendent of Financial Institutions (OSFI) said on Wednesday that it will resume its policy work on the minimum qualifying rate for mortgages not insured against the borrower defaulting, the so-called “stress test.”
OSFI and the Department of Finance said in February 2020 that they would replace the “floor” for the stress tests for both insured and uninsured mortgages with a new benchmark rate, one based on mortgage-insurance applications and an added buffer rather than mortgage rates published by the Big Six banks.
The move was planned for April and was aimed at making the stress tests — which try to determine if borrowers can keep up with their obligations if interest rates rise or their income takes a hit — more responsive to actual market conditions. It may have also made it easier for some borrowers to pass the tests.
However, those plans came screeching to a halt in March 2020 when the pandemic hit and both OSFI and the finance department suspended the proposed change as part of their response to the crisis. As the pandemic dragged on, and the residential real estate market took off, OSFI appeared to be in no rush to start the clock again on the stress-test tweak.
That is apparently no longer the case, a decision that comes as the Canadian housing market is at a fever pitch, with prices shooting up amid relatively low interest rates and bids among buyers for more space.
It remains to be seen, however, if OSFI wants to rejig the floor of the stress test in the same fashion it did in 2020, as it will begin its work Thursday by issuing a consultation letter. In February, though, the regulator said that the proportion of mortgages approved for the most highly indebted borrowers has been rising since the second half of 2019.
“OSFI will continue to monitor the performance of these metrics, along with a number of other measures to assess the effectiveness of Guideline B-20,” which includes the stress test, the regulator noted at the time.
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Canadian Western Bank chief executive Chris Fowler told the Post in a recent interview that he personally didn’t think that surging housing prices required a tighter stress test.
“I think there are enough gates in there, in terms of borrower qualifications,” he said.
Fowler added that all of Canada’s banks want to ensure their underwriting is solid, and ensuring borrowers can handle a rise in interest rates, even as they are being presented with plenty of opportunity to lend.
“I would say you are always mindful (of a housing bust), but I’m not expecting a housing bust,” Fowler said. “The driver of that would be a fast increase in interest rates and I don’t think we’re seeing any talk of that.”
-with additional reporting from Kevin Carmichael
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