Canada’s banks, ranked the soundest on the planet by the World Economic Forum, aren’t immune to collapses triggered by falling housing prices, according to the government official implementing new mortgage rules.
Previous failures of Canadian financial institutions were due to bad real estate lending and sharp falls in housing prices, and these can happen again, Vlasios Melessanakis, manager of policy development at the Office of the Superintendent of Financial Institutions, wrote in documents obtained by Bloomberg News under freedom-of-information law. The last failure in Canada was in 1996.
"Canada is not immune," Melessanakis wrote March 21 in internal notes responding to a posting on a mortgage-industry website. "Just because nothing happened in Canada in 2008 (a U.S.-centred crisis), does not mean that Canada is not vulnerable to a housing correction now."
The comments underscore tension between policy makers and mortgage lenders as a booming housing market helps drive profits at banks. Finance Minister Jim Flaherty has tightened mortgage rules three times and put the federal housing agency’s books under regulator oversight, while Bank of Canada Governor Mark Carney has repeatedly warned household debt is the economy’s biggest domestic risk.
Participants at Bloomberg’s Canada Economic Summit in Toronto last week, including the head of the country’s biggest bank, downplayed talk of a housing bubble even after Canadian housing starts rose to the highest since September 2007 last month.
Melessanakis wrote his comments to colleagues in response to a posting on a mortgage-industry website, Canadian Mortgage Trends, that criticized proposed standards published by Canada’s top banking regulator on March 19.
Ottawa-based OSFI suggested requiring lenders to take "reasonable steps" to verify borrower incomes, establish standards for measuring borrowers’ ability to pay their debts, and limit the size of loans secured by the equity in people’s homes. The draft guidelines are based on mortgage-lending principles set by the Financial Stability Board, a Basel-based group that coordinates global financial rules.
Unsound Fundamentals
"The market may break because the fundamentals are not sound (i.e. overvaluation of homes), not because of OSFI guidance," Melessanakis wrote in response.
A spokesman for the regulator said Melessanakis’s remarks don’t reflect the regulator’s official position. While they were shared with the agency’s communications and consultation division, they were not sent to superintendent Julie Dickson, spokesman Brock Kruger said in an e-mail.
Canadian existing home sales rose 0.8% in April from the previous month and 11.5% from a year earlier, the Canadian Real Estate Association said in a statement today. The average home price rose 0.9% from April 2011, the group said in a statement.
