Canada’s housing imbalance poses greatest risk to financial system, says Watchdog

Peter Routledge, head of the Office of the Superintendent of Financial Institutions, said Tuesday that demand for housing remained strong across the country, leading to “very large” price increases.

Recent data from the Canadian Real Estate Association showed benchmark home prices in October were up more than 23% from the same period a year ago. This increase is in part due to a lack of inventory available to buyers.

CREA estimates that in October there was nearly two months of housing stock – or the time it would take, given the current pace of transactions, for every active residential real estate listing in the market to sell. CREA said the historical average for stocks is around five months.

“The greatest prudential risk in the Canadian financial system is the imbalance between supply and demand for housing,” said Routledge during a virtual speech to financial analysts in Vancouver, British Columbia. “The imbalance tends to push price increases to higher and higher levels relative to income; this in turn encourages more Canadians to use more leverage when buying a home.

Mr Routledge cited recent data from the economics team at the Bank of Nova Scotia, which calculated that Canada has the lowest number of housing units per 1,000 population of any Group of Seven countries.

Mr Routledge added that the need to bring the level of housing construction into line with demand “is imperative for long-term financial stability“.

Over the past decade and until recently, Canadian officials have targeted tougher mortgage financing rules to curb housing demand and slow white house price growth in major markets such as Toronto and Vancouver, in British Columbia. Now Canadian officials have signaled a policy shift, considering billions of dollars to build additional housing units in urban areas, suitable for middle-class households, as the best way to tackle housing affordability. lodging.

Earlier Tuesday, a senior Bank of Canada official said high levels of household debt had reappeared as a concern for the central bank, in part due to a sharp rise in house prices.

Bank of Canada Deputy Governor Paul Beaudry said the prevalence of heavily indebted households – which are defined as those with a debt-to-income ratio above 350% – has likely improved over the past decade. the first year of the pandemic, as many Canadians accumulated savings and paid off debt. But that trend appears to be reversing, he said, in part because of the deterioration in the quality of mortgages by Canadians in recent quarters.

Write to Paul Vieira at [email protected]