Royal Bank of Canada's chief executive voiced support for new rules to help cool hot housing markets a day before Canada's banking regulator is expected to unveil new stress tests for uninsured mortgages.
Dave McKay believes further dampening of the explosive growth in housing prices across the Toronto and Vancouver markets "is in all our interests," and will be key to Canada's long-term growth and competitiveness. However, RBC's CEO acknowledged that more work may be needed to minimize the impact on some buyers.
The Office of the Superintendent of Financial Institutions (OSFI) has proposed regulations that would require buyers making down payments of more than 20 per cent of a home's value – who do not need mortgage insurance – to prove they could still afford their mortgage payments if interest rates were 200 basis points (two percentage points) higher than the rate they negotiate.
The regulator is expected to announce a final version of its new rules on Tuesday morning, to take effect two or three months from now, which may include tweaks to a draft released in July.
The proposed new rules have caused considerable hand-wringing among stakeholders in the mortgage industry, some of whom have described the measures as punitive and unnecessary, and urged OSFI to soften its proposed stress test. Groups representing home builders, real estate agents and credit unions have all spoken out, with some warning that less-wealthy home buyers could be shut out of the market or forced to accept less-favourable loan terms.
In an interview on Monday, Mr. McKay told The Globe and Mail he is "thinking about the long-term" effects of soaring housing prices in supporting OSFI's proposals. Earlier Monday, he kicked off the Sibos banking conference in Toronto with a speech in which he told an international audience that they "flew over one of the hottest real estate markets in North America" when they arrived.
Mr. McKay, who is in charge of a $251-billion portfolio of Canadian residential mortgages at RBC, points out that interest rates are still low by historical standards, despite two recent increases in the Bank of Canada's benchmark rate. At the same time, high demand far exceeds supply in big cities, foreign money continues to flow into the country despite new provincial taxes in Ontario and British Columbia and speculators are still active.
"We've got to pull some of that back, because the big concern is when we start to move rates up, that cash flow [devoted to housing] gets sucked out of the Canadian economy, and it's going to drag on growth," he said.
But he agreed that some spin-off effects from OSFI's new rules need to be minimized, including the prospect that some borrowers will turn to alternative lenders, which may struggle to meet the demands for funding over time.
"That's a concern, for sure," Mr. McKay said. "I mean, if you push people to the [federally] unregulated credit union sector or [alternative-mortgage] sector, then you haven't solved the problem, have you? So that's the back door to this whole strategy that they have to be careful of."
In his own speech earlier this month, OSFI superintendent Jeremy Rudin said such concerns are "certainly valid," though he insisted that is "not an intended consequence, nor a positive consequence." At the time, Mr. Rudin said OSFI's focus remains on the institutions it supervises, which account for about 80 per cent of Canadian mortgages.
Mr. McKay called for more co-ordination with provincial regulators that oversee credit unions and alternative lenders to head off possible unintended consequences.
"What's the co-ordination with the provincially regulated entities, so there isn't too large a back door to fund this growth and the risk taking moves into other sectors? That has to be managed and co-ordinated," he said. "I fully believe that."
He also sounded an alarm about the effect of high housing prices on the war for talent that Canadian banks and companies are waging as they explore emerging fields, such as artificial intelligence. He pointed to Amazon.com Inc.'s plan to build a massive hub creating up to 50,000 jobs, which is expected to draw bids from several Canadian cities hoping to be its home, as a prime example. "Look at everybody running around bidding on the home for Amazon," Mr. McKay said. "One of the big risks in our bids [in Canada] is the cost of housing."
Even if Amazon doesn't choose Canada for its new hub, the same principle applies to homegrown firms such as RBC, he said.
"Attracting talent to this market is critical to our long-term success," he said. "And if housing keeps going up by 10 or 15 per cent per year, I'm not going to get the talent to come."