from the National Post:
http://business.financialpost.com/2...f-foreign-investment-could-stress-test-banks/
By Garry Marr and Barbara Shecter
Canada’s top banking regulator is on a fact-finding mission to gauge the scope of foreign investment in residential real estate.
Industry sources say the Office of the Superintendent of Financial Institutions is sizing up the market, most likely as part of its active campaign to “stress-test” the country’s big banks to measure how they would be affected by volatility in various market segments.
OSFI is taking a broad look at bank exposure to household debt and how the financial institutions are monitoring loan portfolios amid growing concerns over the ability of Canadians to handle their debt load.
In the case of the housing market, sources point to global trends that could affect investment in Canada — such as China’s recent policies to curb speculative real estate investment in that country — as evidence that Canada is operating in a fast-changing market that could be adversely affected by decisions made in other countries.
They suggest OSFI wants to know how big a factor foreign investment in Canada’s housing market is, and how big it is likely to become, so the regulator can measure the potential impact on banks if demand were to dry up.
“It’s something they are trying to get information on,” said a source close to the situation. “It’s not something they can find out so easily.”
Rod Giles, a spokesman for OSFI, said the regulator does not comment on specific supervisory actions, but he confirmed that the “housing market including real estate linked lending activities” is among a set of “emerging issues, risks and markets across the Canadian financial system” that is being monitored by the Ottawa-based regulator.
“We do this so that we can better understand the risks and impacts these may pose on federally regulated financial institutions,” Mr. Giles said, adding that the regulator looks at a range of things including specific geographic markets, types of customers, and products.
At the moment, Canada’s real estate market is finding favour among foreign investors because house prices are low compared to international hot spots such as London and New York, industry sources say.
Interest in Canada was evident in this week’s $28-million purchase of a condominium at the top of the Four Seasons hotel in Toronto. It was a record price paid for a condo in the country — one still under construction, no less — and the buyer was identified only as a foreign purchaser.
A recent report from ReMax on the sale of high-end homes said “foreign investment augmented sales activity in several Canadian markets,” and the Canadian Real Estate Association had to revise its forecast for sales and prices in April because of unexpected activity in Vancouver. Real estate industry executives suggested Chinese buyers have been driving the market.
If the trend of international investment were to continue indefinitely, it would not be a troubling issue for the country’s banks. The problems would come if transient foreign interest were to contribute to the formation of a real estate bubble.
“If demand for residential real estate were to dry up in Canada, it would not be good for Canadian banks,” said Peter Nerby, senior vice-president at Moody’s who is responsible for the credit ratings of Canadian financial institutions.
While preliminary research at Moody’s indicates domestic banks are in fairly good shape given the size of home loans in their overall portfolios relative to value of the houses, the banks don’t publicly disclose information on regional concentration or the creditworthiness of individual home owners, Mr. Nerby said.
This makes it difficult to measure the impact on a bank of a housing downturn.
It’s “not something the outside investor can assess,” Mr. Nerby said, noting that declining international demand would simply be one factor that could cause house prices to drop.
He said a downturn in Canada would undoubtedly play out differently from the housing crisis in the United States in 2007 because many Canadian home loans are guaranteed through insurance provided by the Canada Mortgage and Housing Corporation.
As a result, homeowners and the CMHC would be ahead of the banks in feeling the pain, Mr. Nerby said.
Still, with Canadian home buyers able to put as little as 5% down on a house if they are covered by the government-backed mortgage default insurance, there is concern that people might stop making payments if their mortgages exceed what someone is willing to pay for the house.
The global financial crisis shone a harsh light on the domino effect that can be triggered by single a bubble in the global economy, and the harm it can do to financial institutions that don’t have the capital cushion to absorb such blows.
Craig Alexander, chief economist with Toronto-Dominion bank, said it makes sense for the key bank regulator — which routinely tests for shocks and worst-case scenarios — to be making inquiries.
“I wouldn’t be surprised, given what CREA (the Canadian Real Estate Association) has been saying about foreign investment having such a big impact, that it would elicit an investigation,” said Mr. Alexander, adding that he knows of no existing measure of foreign investment in housing.
Financial Post
gmarr@nationalpost.com
bshecter@nationalpost.com
Posted in: FP Street, Real Estate Tags: Banks, Canada Mortgage and Housing Corporation, Canadian Real Estate Association, Foreign Investment, housing market, Moody's, Office of the Superintendent of Financial Institutions (Canada), OSFI, RE/MAX, real estate
