September 2011

This article appeared on the MontrealGazette.com and was written on September 27th, 2011 by John Greenwood.

Canada’s financial regulator is hiking its scrutiny of residential mortgages held by banks, a tacit acknowledgement of the heightened dangers around surging consumer debt.

The Office of the Superintendent of Financial Institutions is “stepping in to increase the monitoring” of home loans and lines of credit secured by real estate, said the head of the organization.

While recent moves by the federal government to tighten the rules around home loans have helped reduce the growth of mortgage lending, Julie Dickson told reporters in Toronto on Monday that the issue remains a significant concern.

The comments come a week after the ratings agency Moody’s Investors Service warned in a report that record household loans pose a threat to the Canadian banking system.

Indeed it was only the latest in a series of admonitions delivered by observers going back as far as 2006 when then-Bank of Canada governor David Dodge tore a strip off the Canada Mortgage and Housing Corp. for bringing in what he felt were excessively loose mortgage lending rules.

Dickson said she is delivering an “early warning” to the banks about problems that could emerge down the road, and that she is working on the issue in parallel with current Bank of Canada governor Mark Carney and federal Finance Minister Jim Flaherty.

The Canadian banks have enjoyed surging profits since the financial crisis, partly on the back of their consumer lending operations which have enjoyed consistent revenue growth largely because of the ongoing low-interest rate environment.

The biggest single asset on bank balance sheets are their residential mortgages, about half of which are insured by the Canada Mortgage and Housing Corp.

However, the worry is that the other half is not protected and in the event of a serious housing market correction, lenders could wind up with losses.

Banks “need to keep an eye on” their uninsured mortgages, Dickson said.

In another speech Monday to business leaders, Dickson said the Financial Stability Board, an international body created by the G20 to promote financial stability, is also working at developing principles for safe mortgage lending.

This article appeared in the Toronto Sun on Tuesday, September 27th, 2011.

Canada’s property market is cooling, but still stands out as one of the best performing in the developed world, according to a report by Scotia Economics.

Existing home prices rose 5% in the second quarter, the same pace as gains in the first quarter of the year, the bank’s Global Real Estate Report found. Figures for July and August point to stable sales and a levelling out of prices.

Out of the nine markets studied in the report only Canada, France and Switzerland recorded price gains in the second quarter.

“In the majority of the major markets we track in North America, Europe and Australasia, inflation-adjusted home prices declined on a year-over-year basis in the second quarter of 2011,” said Adrienne Warren, senior economist and real estate specialist at Scotia Economics. “While Canada’s hot housing market also has begun to cool, it remains a notable outperformer.”

Warren said in many markets historically low interest rates coupled with a slump in prices has made homes more affordable. In normal times that would probably be enough to jump-start the market, she said.

However, these aren’t normal times and the ongoing uncertainty created by the financial crisis in Europe and high unemployment have convinced many consumers to save and pay off debt rather than make major purchases.

“Heightened economic uncertainty combined with recent signs of a loss of momentum in Canada’s jobs market could keep some potential buyers on the sidelines for the time being,” she said, adding that the bank is forecasting a slight slowdown in sales and flat prices for the rest of the year.

France so far has managed to buck the trend of slumping property prices in the euro zone, with real estate rising 5% year-over-year in the second quarter. Switzerland’s property prices rose 4%.

Elsewhere the slump showed little signs of slowing in the second quarter, with prices in Spain tumbling 10% after a 9% slide in the first quarter.

Ireland’s property slide also accelerated with a 14% drop in the second quarter following a 12% decline in the first.

In the U.S., second-quarter property prices fell 6%.

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