Housing prices may be cooling off in Canada's most frenzied markets, but Toronto-Dominion Bank's chief executive officer is sounding a cautionary note that there's still work to do to stick-handle a soft landing.
As banks gear up for changes to the way they stress-test some mortgages starting in January, Bharat Masrani makes it clear he supports a series of controls on the housing market that governments and regulators put in place to curb steep runups in some cities' house prices. But those measures mostly seek to dampen high demand for homes in the short term, he notes, and that's only tackling half the problem.
With new buyers flocking to the Greater Toronto and Vancouver areas – many of them immigrants buying their first home in Canada – "at some point we'll have to start thinking of the supply side of the equation as well," he said in an interview at one of TD's downtown Toronto office towers.
It's not that there are overt signs of stress in banks' mortgage portfolios – defaults and loan losses remain extremely low and, on average, most borrowers are carrying healthy ratios of equity to debt in their homes. But Mr. Masrani, 61, is a risk manager by training and temperament. And on his way to the top of Canada's second-largest mortgage lender, he ran TD's U.S. retail arm as it emerged from the 2008 financial crisis, which gave him a close look at the destructive power of shaky mortgage underwriting by some U.S. lenders.
So far, Canada's mortgage market has proven resilient and Mr. Masrani is confident its fundamentals are sound. "We don't have a very complex product out there like some other countries have," he said. But that doesn't stop him from looking for cracks in the foundation.
"I'm a banker, so we, by our nature, worry about things, you know, even when things are going swimmingly well," Mr. Masrani said, his voice a gravelly baritone.
By most measures, TD had a very good year in 2017. Profit grew by 18 per cent compared with the prior year – or 14 per cent when adjusting for certain one-time items. And with rising interest rates helping expand tight margins, solid economic growth and low unemployment holding loan losses down, the outlook for Canadian banks in 2018 is relatively rosy. Yet Mr. Masrani also spots "lots of headwinds out there," from trade uncertainty and currency issues to geopolitical instability. "So things could sour quickly."
Many market commentators won't rule out the possibility that the housing market could yet over-correct, either.
A new stress test on uninsured mortgages mandated by Canada's banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), takes effect in January. It will make it harder for some borrowers to qualify by requiring them to prove they could still make payments at a rate as much as two-percentage-points higher than what they negotiate. Coming on the heels of other federal and provincial rule changes aimed at cooling hot urban housing markets, the full impact may not be clear for months.
Royal Bank of Canada and Bank of Nova Scotia each expect to originate about 5-per-cent fewer new mortgages in 2018 with new regulations in force, while Bank of Montreal predicts a 5-per-cent to 10-per-cent drop. And while TD hasn't disclosed specifics, it has signalled similar expectations.
"I think a lot of these policy moves that have occurred have helped in that regard, in making sure that we have a manageable situation rather than an overcorrection in the market," Mr. Masrani said. "And frankly, over the long term, to have some form of stress testing when we are potentially in a rising rate environment is not a bad thing."
But the regulatory measures could push some borrowers to seek riskier home loans from unregulated lenders if they struggle to qualify at conventional financial institutions. Skittish investors have already punished lenders such as Home Capital Group Inc. and Laurentian Bank of Canada over disclosures of problems with the way some loans were adjudicated, casting a sense of unease over the mortgage market.
By comparison with some peers, TD has been conservative about mortgages. The bank's residential-mortgage portfolio grew only 2.2 per cent in 2017, to $222-billion, and most of the increase came from the United States. Compare that with Canadian Imperial Bank of Commerce, where the residential-mortgage book grew by 10.6 per cent in 2017. Instead, TD expanded its outstanding home-equity lines of credit (HELOCs) by 15 per cent to $75-billion.
To the extent that TD's mortgage book grew more slowly, "we're quite happy with that," according to Mr. Masrani, who has been known to describe the bank's risk appetite for underwriting mortgages as consistent and non-negotiable. TD aims to serve its customers "through various cycles," he said, and to that end, he worries about the long-term effects of having a dearth of supply in housing, which drives prices higher and fuels speculation.
"A lot has been done on the demand side," he said, and those changes are working their way through the system. "I think supply-side, you know, we need to do more."
That could include streamlining approvals for new developments, which "can be cumbersome," he said. And it might require more expedient ways to free up land for development, where possible. "It's a complex problem and it's not just [the responsibility of] a particular entity or level of government," Mr. Masrani said. "We need to jointly say, 'Okay, here's what the problem is and let's come up with a co-ordinated strategy to increase supply,' because, ultimately, we're going to need that."
The Canadian Real Estate Association forecasts that home sales will fall by 5.3 per cent in 2018 and predicts national average housing prices could also edge downward by 1.4 per cent. The average Toronto home sold for $761,757 in November, already 2.4-per-cent lower than in October.
And consumer debt continues to climb to record levels, with the ratio of household credit-market debt to disposable income reaching 171.1 per cent in the three months that ended Sept. 30. The total tally of such debt rose 1.4 per cent to $2.11-trillion – also a record.
Jeremy Rudin, who heads OSFI, has said the regulator is "prepared to revisit" the rules of the new stress test if necessary.
Asked whether he thinks governments and regulators are finished tweaking housing rules, or whether further policy changes could be in the works, Mr. Masrani said: "I wouldn't want to say that we are done or not done. But I feel that in Canada, if we do anything, it'll be done in a thoughtful way."
As chief executive of Canada's largest bank by assets, Bharat Masrani has more on his mind than mortgages. Here are his thoughts on key issues facing banks in 2018:
On the federal government's continuing review of the Bank Act
"The pace of technological change has gone through a phenomenal change over the recent past. And it's important that as these technologies emerge, or there are opportunities to modernize our existing platforms, that we have that without any undue burden. It's important that as we go through this Bank Act review, things that might have made a lot of sense when they were first put in, we'll have to modernize it."
On co-operating with other companies and governments to bolster cybersecurity
"I think banks, generally, are very good at it and I'm sure other industries as well. But we need to do more, we absolutely need to do more. … I feel good that there is no debate on that: 'Hey, this is a problem.' We can debate on the pace at which folks need to get together. I think we live in a world where a lot of our laws may not have kept up with the technologies that happened here. And I think that's also being looked at now, saying, 'Do we need to modernize some of our laws?'"
On TD's appetite for acquisitions in 2018
"[The] southeast of the United States is important to us. We love the Florida market, it's a high-growth market for us, it works very well with our already terrific position in the northeast of the United States and, frankly, in Canada. Look at our cross-border offerings. We opened a new store in Naples where 80-plus per cent of our customers in Naples are from Canada. So that market with snowbirds and all that works remarkably well for us. If we can find something that makes sense for us, that's within our risk appetite, that makes financial sense in that part of the world, we will seriously look at it. There are other areas, and we like the credit card space, especially the way we do that: We have partnership deals where we are associated with great partners like Nordstrom and Target, and that provides terrific brand affiliation for us. And from a risk-return perspective, we like those types of deals because the risks are shared in those types of transactions. So we would love to look at that."