When the mortgage price wars broke out in Canada recently, with lenders competing fiercely over deeply discounted rates, National Bank of Canada stuck to the sidelines.
The bank's chief executive officer Louis Vachon says the strategy was intentional.
"We've been a very slow and very reluctant follower in terms of the price wars," Mr. Vachon said during an interview Wednesday, following National Bank's annual meeting in Montreal.
At a time when household debt is soaring in Canada, prompting the federal government to raise concerns over potential problems in the economy if interest rates rise, banks have to be careful not to go overboard with aggressive lending, Mr. Vachon said.
Canada's sixth-largest bank, which has most of its branches in Quebec, Ontario and New Brunswick, has spent the past few years increasing its mortgage sales force, so Mr. Vachon decided he could keep signing up quality borrowers without letting margins fall too far.
The price battle, which saw banks offer 2.99 per cent on four-year and five-year fixed-rate mortgages, appears to have subsided in the past week or two. The banks were using the historic low rates to add as many new customers as possible, but they offered thinner margins than they normally obtain.
Mr. Vachon said banks need to watch their lending, given Ottawa's concerns about the housing market, to ensure standards aren't being lowered.
"The banks have a fundamental and core responsibility," Mr. Vachon said. "What we all want to avoid in this country is a repeat of what went on in the U.S. and in other places. … When you look at what occurred in the U.S., it was the underwriting policies of the banks and of the mortgage insurance units that impacted things."
However, Mr. Vachon said he believes Canada is tackling the debt and lending issue better than the United States. At a time when interest rates are being kept low to encourage economic growth for the business sector, the banks are in close contact with regulators on the mortgage market.
"There was no dialogue [in the U.S.]between the industry and the regulators prior to the crisis. I think in Canada there is a good dialogue," he said. "Based on the dialogue, we'll adjust our policies accordingly. But most of it has to come from [the banks] Are we comfortable with our underwriting policies?"
Mr. Vachon's sentiments are similar to those expressed by Bank of Nova Scotia a day earlier. Scotiabank CEO Rick Waugh told his annual meeting on Tuesday that he believes it's up to the banks to manage their mortgage lending properly, rather than expecting Ottawa to step in to cool the market.
As concerns persist about soaring housing prices in some cities – particularly Toronto and Vancouver – fuelled by historic low interest rates that have encouraged borrowing, the federal Department of Finance says it is monitoring the situation.
Finance Minister Jim Flaherty said in Vancouver on Wednesday that he prefers not to tighten mortgage rules. "It's better that the markets fix it than that government has to fix it," he told reporters after a speech. "I've tightened up the mortgage insurance market three times. … I really don't want to do it again."
Ottawa stepped in a year ago to tighten mortgage rules, reducing the maximum duration of government-backed mortgages to 30 years from 35 to rein in riskier lending and cool the market. While there has been debate about whether the government should further reduce the maximum amortization on insured mortgages to 25 years, Ottawa has so far not shown an appetite to intervene again.
"The current concerns about Canada's housing market are reason for caution but not pessimism. … We can and will manage through any potential problems," Mr. Waugh said.
Mr. Waugh noted Scotiabank has not seen a significant increase in Canadians falling behind on their payments, even in an economic slowdown. "Canadian household balance sheets remain solid, and our housing market is supported by strong fundamentals," he said. "Our customer delinquency rates are well within parameters."
Grant Robertson