Canadian regulator says housing downturn among biggest financial system risks

By Nichola Saminather

TORONTO (Reuters) -A housing market downturn in Canada is among the many greatest dangers dealing with the monetary system this 12 months, the nation’s monetary regulator stated on Thursday, including it plans to assessment the present house mortgage stress take a look at and broaden its utility to different mortgage merchandise.

The “unprecedented run-up” in house costs has led to more and more leveraged debtors, which in flip will increase monetary establishments’ publicity to a market correction, the Workplace of the Superintendent of Monetary Establishments (OSFI) stated in its first annual threat outlook report for the 12 months ending March 31, 2023.

Whereas lenders are “well-capitalized and look like financially resilient, such a sequence of occasions may result in borrower defaults, a disorderly market response and broader financial uncertainty and volatility,” the regulator stated.

OSFI has recognized points round revenue verification in some “problematic” areas and is contemplating increasing the applying of the stress take a look at to merchandise together with reverse mortgages, mortgages with shared fairness and mixed mortgage plans, which have grow to be extra widespread, it stated.

The stress take a look at units the qualifying fee for mortgages on the increased of 5.25% or 200 foundation factors above the speed the borrower pays.

Different monetary system dangers embody cyber assaults, digitalization of cash, local weather change, a downturn within the industrial property market, riskier company debt funding and third-party preparations, the regulator stated.

OSFI is working a pilot to assist monetary establishments establish know-how weaknesses and plans to seek the advice of on a draft guideline on operational threat administration this fall, it stated.

It’ll additionally difficulty steerage on expectations of establishments’ local weather threat administration and monetary disclosures and, together with the central financial institution, conduct workouts to evaluate the influence on mortgage and securities portfolios and steadiness sheets, it stated.

Pandemic-related adjustments to workplaces and procuring habits have launched uncertainty for workplace and retail properties, and a protracted sharp improve in unemployment and work-from-home insurance policies may pose additional dangers, the regulator stated.

Noting some deficiencies in evaluation and administration of COVID-related dangers, OSFI stated it is going to think about growing supervisory expectations for industrial actual property.

(Reporting By Nichola Saminather; enhancing by Grant McCool and Marguerita Choy)