MNI: Canada Bank Czar Says Housing And Liquidity Are Big Risks

Canada's bank regulator OSFI said Tuesday that the jump in interest rates underpin the biggest risks to the financial system around weakness in domestic housing markets and a potential liquidity squeeze.

"Given the rapidity at which interest rates globally have increased, the risk has grown that such an adjustment may not be completely smooth," OSFI said in the second edition of its Annual Risk Outlook.

"Following record increases during the pandemic, house prices declined significantly in 2022. OSFI is preparing for the possibility that the housing market will experience continued weakness throughout 2023," said the report led by Superintendent Peter Routledge. "The steep increase in interest rates has eroded debt affordability. This is a growing concern from a prudential perspective."

The worries echo warnings from the central bank that its 425bps of tightening over about the last year puts some heavily indebted borrowers at risk of falling behind on payments. OSFI's warning on liquidity also points to global risks seen in the collapse of Silicon Valley Bank and Credit Suisse, though OSFI pointed out banks are safer than they were in 2008 and Canadian banks have a long history of prudence.

Canada will continue with a review of the crucial B-20 mortgage guidelines this year, OSFI said. Emphasis on domestic housing risks over global funding troubles is consistent with Canada's place as one of the most strained housing markets among advanced economies following a decade of outsized price gains.