TD chief plays down concerns over Canada's housing market

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Toronto-Dominion Bank's chief executive said a housing market correction is a risk in some parts of Canada, but it would not trigger a messy or protracted downturn.

"Would a correction make sense? Yeah, of course it would," Bharat Masrani said. But "our view is that a correction, if and when it takes place, would be orderly, that markets will react in an appropriate way."

A number of observers, including the International Monetary Fund and the Bank of Canada, have expressed concerns about Canada's housing market, pointing out that lofty prices and perilously high consumer debt loads make the market vulnerable to a downturn in the economy or an increase in borrowing costs.

But Mr. Masrani played down the concerns, rejecting the suggestion that regulators might have to step in to prevent the market from becoming more stretched, even as a number of Canadian banks have slashed their posted mortgage rates in the runup to the busy springtime home-buying season.

He acknowledged that home prices in some major metropolitan areas in Canada have experienced considerable appreciation, prompting some worries within the bank.

"We bankers are paid to worry, so we do," he said.

However, he stressed that some markets, including the Greater Toronto Area, are helped out by imbedded population growth, feeding a steady demand for more homes.

On the supply side, he noted that there is a shortage of single-family homes in some markets, creating a balance that should limit the damage from any dip in home prices or sales activity.

"For TD, we are very happy with our mortgage business. With our underwriting standards and all the stuff we do, we are quite comfortable with how this impacts the bank," he said.

According to a recent report from Statistics Canada, the ratio of total household credit-market debt to disposable income rose to 163.3 per cent in the fourth quarter of last year, a level that drew unfavourable comparisons to American consumers prior to the U.S. housing market bust.

Mr. Masrani said the bank is keeping a close eye on rising consumer debt levels, but cautioned that some countries calculate the ratio differently, making direct comparisons sometimes inaccurate.

In its first fiscal quarter, TD reported residential mortgage loans of $202.8-billion and home equity lines of credit of $73.1-billion, totalling about a quarter of the bank's total assets of $1.08-trillion.

In response to a question about whether regulators would be needed to tame the housing market and the banks' approach to lending, Mr. Masrani said that the best solution would come from a pickup in Canadian economic activity.

"It's amazing what growth will do," he said. "Incomes go up, which is a factor in consumer-debt servicing."

In a speech at TD's annual general meeting with shareholders, though, he said that the Canadian economy is operating below its potential and warned that low oil prices could add to the economic challenges ahead.

As for tighter regulations, he said that previous changes – in 2012, Ottawa reduced the maximum amortization for a government-insured mortgage to 25 years from 30 – made sense.

He also pointed to mandatory insurance for homeowners purchasing a house with a down payment of less than 20 per cent as a reason why Canada's housing market might be more stable than others.

"There are resilient factors built into our mortgage business that perhaps other countries don't have. That provides more resiliency than what people might be thinking," he said.

Asked whether foreign money flowing into the Canadian housing market could be a key source of inflated home prices in some markets – and indebted Canadians swept up in bidding wars – Mr. Masrani said he believed distorted pockets of the housing market would probably right themselves without the need for initiatives that, say, track the number of absentee owners.

"My bias is always market-based," he said. "Markets look after these things."