MNI INTERVIEW2: Canadian Banks Resilient To Rate Jump, Omicron

Canada's financial system has solid buffers against surging interest rates and Omicron because of past actions such as the tougher mortgage qualifying test, the top bank regulator told MNI, though he cautioned that the housing market may remain imbalanced for a while as supply catches up with demand.

There have been at least 30 actions to rein in housing demand since 2010, OSFI Superintendent Peter Routledge said in an interview Wednesday from Toronto. Mortgage applicants with a 20% down-payment are being stress tested against a 5.25% rate, well above market rates around 2.5%.

“So there's a fair amount of a buffer to absorb higher interest rates,” he said, adding he's not making any predictions on borrowing costs. “I'm not complacent, but I am a little comforted.”

Investors are betting the Bank of Canada will raise its record low overnight rate as soon as April and perhaps several times more next year to curb the fastest inflation in decades. That could shock a generation of borrowers who bought million-dollar homes in Vancouver and Toronto and have never refinanced at higher interest rates. BOC Deputy Paul Beaudry in a recent speech said the share of heavily indebted households is rising to a record and home prices are now being fueled more by speculative investors.

ABSORBING THE HITS

Routledge, the BOC and Finance Minister Chrystia Freeland have all recently said that after years of trying to clamp down on hot housing demand, the issue now appears to be lagging supply. “The supply-demand mismatch took a long time to build and it'll take a while to address,” Routledge said.

“We just have to keep that focus and keep you know, leaning into the wind to ensure that the system can withstand and absorb the volatility that could come, whether it's higher interest rates, or maybe we have problems with employment in certain parts of the country for a time,” he said.

“Right now on the credit demand side, the credit risk side, I am comforted by the buffers we have but not so comforted that I'm not obsessing about it," he said.

The volatility created by the pandemic and new variant of Covid also seems to be manageable in terms of financial stability, Routledge said.

"We came through the first storm quite well I think, as a country and as a financial system. And this is the emergence of Omicron. I think we've got the readiness, the resilience to absorb it," he said. "I am concerned about the impact on the economy. I'm concerned about the impact on my colleagues’ health and their safety as well as my own family’s, but I think we can absorb the hits, quite handily.”