The chief executive of the Bank of Nova Scotia says Canada’s housing market needs more supply, not a major change to the mortgage stress test.
Scotiabank president and CEO Brian Porter says while the stress test is “something that you have to look at occasionally, for sure,” the move by the Office of the Superintendent of Financial Institutions, a federal banking regulator, to bring in the measure at the start of 2018 was appropriate.
“I don’t think a lot of tinkering is necessary on the stress test,” Porter told the Financial Post in an interview at the bank’s investor day in Chile last month. “But we have to make sure that these housing markets are in balance. So, rather than look at the demand side of the equation, let’s look at the supply side. Everybody wants to talk about the demand side without looking at the supply side.”
Porter said housing supply needs to be matched with Canada’s growing population and success in attracting immigrants, which he called “the envy of the world.”
“But where are we going to house them?” he said. “There has been a lack of a long-term housing policy in this country.”
Porter and Scotiabank, Canada’s third-largest lender, are forecasting a shortage of housing supply in Canada. During the bank’s investor day, Scotiabank’s chief economist Jean-François Perrault said a fast-growing population, strong employment levels, rising wages and low long-term interest rates have led to a rebound in the Canadian housing market.
“And we think it’s going to keep going,” he added. “And it’s going to keep going for a very simple reason: the housing market in Canada remains undersupplied.”
Builders can’t keep up with the population growth, both because they lack enough workers to build enough homes, but also because of municipal and provincial government regulations that restrict construction, according to Perrault.
There has been a lack of a long-term housing policy in this country
Scotiabank CEO Brian Porter
Porter said the federal, municipal and provincial levels of government need to be more coordinated in their approach.
“You can’t have single-family homes in densely populated cities running right up to the Greenbelt,” Porter said, referring to a protected space in Southern Ontario. “You have to have multi-use facilities, you have to have rental units, you have to have condominiums of some sort. Each of these cities has to rethink their zoning, or application for zoning, policies.”
Porter is not the only big-bank CEO who has recently raised the issue of housing supply. When asked about the stress test last month, Royal Bank of Canada CEO Dave McKay said housing demand will continue to increase whether it is managed by the measure or not, and that what is needed is more supply.
The comments from Porter also came about after Prime Minister Justin Trudeau mandated Finance Minister Bill Morneau review and consider possible changes to the stress test.
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Moreover, the day after Porter’s remarks to the Post, an assistant superintendent at OSFI said in a speech to the C.D. Howe Institute in Toronto that OSFI is reviewing the use of the Bank of Canada’s five-year benchmark mortgage rate as the “floor” for the stress test on loans not insured against default.
B-20, the guideline the stress test is part of, set the minimum qualifying rate for uninsured mortgages at whichever is greater: the Bank of Canada’s five-year rate or the rate on a borrower’s contract plus two percentage points.
There is a similar minimum qualifying rate in Canada for insured loans, which also uses the Bank of Canada’s rate. Default insurance is required for buyers making down payments of less than 20 per cent of their home’s purchase price.
OSFI is of the opinion that its B-20 guideline has had “the desired effect of promoting sound underwriting and thereby reducing risk in the Canadian financial system,” according to a transcript of the speech by Assistant Superintendent Ben Gully.
But the real-estate industry has singled out the stress test on uninsured mortgages for criticism. The measure “continues to sideline potential home buyers where supply is ample,” the president of the Canadian Real Estate Association said in a January press release.
Despite tight supply potentially being a good thing for banks, as it could ensure a busy housing and mortgage market, adding more supply could keep business steady for them as well.
Like Perrault, the Bank of Canada’s latest monetary policy report predicted that housing activity would continue its resurgence in 2020, “then evolve roughly in line with the underlying fundamentals.”
“With resales having rebounded in 2019, new construction is expected to be the main driver of growth in residential investment over the projection horizon,” the report added.
Meanwhile, as long as population growth outpaces the growth of housing supply, “you’re going to have a very robust and active housing market in Canada,” Perrault predicted.
“The downside risks are pretty low,” the economist said.