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Vancouver housing data reveal Chinese connection – ask a Vancouver mortgage broker

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The Globe’s Real Estate Beat offers news and analysis on the Canadian housing market. Read more on The Globe’s housing page.

One of the largest real estate companies in British Columbia says that more than one-third of all the single-family detached homes it sold last year went to people with ties to mainland China.

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MARKET VIEW Video: Market view: Does Toronto face a condo ‘supply deluge’? Macdonald Realty Ltd., which has over 1,000 agents and staff in B.C., said 33.5 per cent of the 531 single family homes sold by its Vancouver offices in 2013 went to people who the company said were a mix of recent immigrants and Canadian citizens.

Those buyers, the company added, tended to spend more money, too, with the average cost of a house sold to these clients topping $2-million, compared to $1.4-million on average overall.

The figures did not include Macdonald’s sales in suburban areas such as Richmond, Burnaby or North Vancouver.

“This is our snapshot of Vancouver,” says Dan Scarrow, vice-president of corporate strategy at Macdonald Realty.

The information is based on reports from the firm’s sales, anecdotes from its agents and Mr. Scarrow’s own experience working with mainland Chinese clients, and it’s a glimpse into the influence of mainland Chinese money on Vancouver’s real estate market, which is considered among the most expensive in North America.

Vancouver has been flooded in recent years by tens of thousands of investor-class immigrants from mainland China, who have seen the west coast city as a stable – and picturesque – place to park their capital in luxury property.

That has helped drive up the average price of a single-family home in Vancouver to around $1.2-million.

Mr. Scarrow, who noted the firm does not query buyers about immigration status, believes that investment flowing from mainland China into Vancouver real estate is a quantifiable phenomenon, but has not personally seen much of the more controversial type of buyer: Those from abroad who buy for investment purposes but never live in the city. “We still see very few pure investors from China who have no connection to Vancouver,” he says.

Getting a handle on foreign buyers is difficult and Macdonald’s survey is far from exact – though one major property developer in Richmond said “that sounds about right.” The federal government does not collect meaningful data on the number of foreign buyers purchasing Canadian real estate, leaving industry participants to debate the impact of foreign capital on the local market. And that debate has gotten heated recently, with some developers accusing others of racism and criticizing those who want to slap curbs on foreign investment. The issue is complicated by the fact that some of Vancouver’s ethnically Chinese-Canadian citizens with ties to Hong Kong view newer immigrants from mainland China with a degree of suspicion, assuming their wealth might have been accumulated in part by proximity to China’s Communist Party, rather than in a free market with the rule of law like Hong Kong.

The lack of hard data has also complicated discussions about the city’s affordability crisis and fuelled a local cottage industry where analysts attempt to decipher the scope of foreign money by looking at things like electricity usage in downtown neighbourhoods where some suspect foreign buyers have bought condos in which they never live.

“People always say there are no stats. Well, here are the stats,” says Mr. Scarrow. “This is actual evidence.”

There have been some reports and statistics about the scale of foreign money in Vancouver real estate before, but few have been conclusive – and none have settled the debate. One Sotheby’s report based on a survey of its agents found that 40 per cent of the luxury properties it sold in Vancouver were to foreign buyers – but not all of them were from China. Many developers trying to downplay fears about Chinese investment cite a statistic showing that only 1 to 3 per cent of Vancouver real estate purchases are “foreign” buyers – but, as is the case with Macdonald’s sales, many more expensive homes are still sold to people based here but who have come, at some point, from mainland China. A 2011 study by Landcor Data showed that 74 per cent of luxury purchases in Richmond and Vancouver’s expensive west side were by buyers with mainland Chinese names.

Mr. Scarrow says his company is “indicative of the overall market,” since his firm has some real estate agents who target overseas Chinese buyers, but is also firmly oriented toward domestic sales, unlike other real estate firms that deliberately target Chinese buyers.

At the same time, Mr. Scarrow and Macdonald are so bullish on the potential for Chinese investment that he is spearheading the company’s efforts to open an office in China. “While there is very little data about foreign investors in Vancouver real estate, our own internal data is enough for us to commit to investing in a representative office in Shanghai,” said Mr. Scarrow, whose mother Lynn Hsu, who came from Taiwan in 1979, is the majority owner and president of Macdonald.

Others remain unconvinced – not about whether there is an influx of Chinese money, but whether the flow of foreign capital will continue unabated.

Richard Kurland, a Vancouver immigration lawyer who works with wealthy Chinese immigrants, believes Vancouver may see a slowdown in foreign investment. He said some wealthy Chinese buyers might get anxious and sell off second properties because of the current crackdown on corruption in China.

In meetings with top real estate agents earlier this year, Mr. Kurland predicted that luxury residential real estate could drop in value by as much as 25 per cent as foreign investment dips. As evidence, he points to July real estate figures that showed 106 homes for sale on the west side in the $3-million to $3.5-million price bracket, and just nine sales, compared to 73 active listings and seven sales during July of 2013.

Follow Iain Marlow on Twitter: @iainmarlow

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Freedom 58? How Canadians are shaving thousands off the cost of their mortgage

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TORONTO — A new survey says Canadians, on average, expect to be mortgage-free by age 58, one year later than in a similar poll a year ago.

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This 29-year-old pension analyst is $130,000 away from paying off his $425,000 home in Toronto, without money from parents or the lotto. Find out how But the survey, conducted for CIBC by Angus Reid, found some big discrepancies across the country.

For example, homeowners in British Columbia thought they wouldn’t be able to pay off their mortgages until they hit 66, while those in Alberta expected to be mortgage-free more than a decade earlier at 55. The survey also found that just over half of those polled were taking advantage of the current low interest rate environment to pay down their mortgages faster.

Fifty-five percent said they were putting in extra effort into repaying their mortgages, although that was down from 68% last year.

Related Canadians’ household debt worries ease as mortgage borrowing slows in May: RBC Savings crippled by kids’ illnesses, parents in their late 50s struggle to find a way to retire and pay off $287,000 mortgage How to pay $67,000 of debt in 3 years and save for a house and retirement CIBC says even small efforts can lead to big savings for homeowners in the long run.

For example, someone paying 4.99% interest on a $250,000 mortgage with 25-year amortization can expect to save nearly $35,000 of interest if they add $147 to their $1,453 monthly payments.

The same homeowner can save as much as $30,000 on interest if they make $726 payments every two weeks, instead of waiting until the end of the month to make a payment.

The bank pointed out that even making a lump sum payment every year — for instance, putting the average $1,600 tax refund towards the mortgage — would shave off $33,103 of interest.

“Employing one or more of these strategies does take some planning and discipline,” said Barry Gollom, vice-president of secured lending and product policy at CIBC.

“If becoming mortgage-free sooner is something you want to achieve, it’s important to look at your mortgage as part of your overall financial picture and to balance your mortgage payment plan against your other goals.”

Of those paying off their mortgages quicker than necessary, 32% said they were making payments more often, 28% were increasing the amount they pay while 18% said they had made either an additional prepayment or a lump sump payment.

Beyond Alberta and British Columbia, the survey found the average age respondents expected to be mortgage-free ranged from 56 years in Quebec to 57 years in Atlantic Canada and Ontario and 58 years in Manitoba and Saskatchewan.

The online poll was conducted by Angus Reid Forum with 1,509 Canadian adults between May 21 and May 22.

The polling industry’s professional body, the Marketing Research and Intelligence Association, says online surveys cannot be assigned a margin of error as they are not a random sample and therefore are not necessarily representative of the whole population.

Canada’s top court declines to hear Toronto realtor case appeal

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Canada’s top court said it won’t hear an appeal of a case on whether Toronto’s main realtor group must give wider access to their historical price data.

The Ottawa-based Supreme Court published the decision on its website Thursday.

The Toronto Real Estate Board blocks its 35,000 members from publishing sale prices on their internal websites, according to a summary of the case from the court’s website, a policy challenged by the federal Competition Commissioner.

The realtor group won its first case at a tribunal before a federal appeals court ordered a second hearing. TREB then asked the Supreme Court to review the case. Bloomberg.com

Sharp rebound in buyer confidence fuels Toronto condo recovery, says Urbanation

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The country’s largest condominium market has fully recovered and is breaking new ground, according to a Toronto research firm.

Urbanation Inc. says during the second quarter Toronto passed a new milestone with more than 100,000 condo dwellings in active development in the census metropolitan area. Of the 105,027 units in the pre-construction, under construction and occupancy phases, 18,744 remain unsold.

The firm notes in a release out Friday that’s “above historical averages but down 3% from a year earlier.”

The new condo market has performed well above expectations in the first half of the year Shaun Hildebrand, Urbanation’s senior vice-president, says there have been plenty of incentives in the marketplace for existing inventory and some new condo openings are proving more attractive to buyers.

“The new condo market has performed well above expectations in the first half of the year, reflecting a sharp rebound in buyer confidence,” said Mr. Hildebrand.

The 5,992 condo apartments sold in the second quarter were the third highest volume for that time of the year with only 2007 and 2011 having a better record for sales for the period. Sales were up 56% from the post-recession low reached in 2013.

Related Housing market skewed by handful of hot cities, Canada Guaranty CEO says Canadian home sales rise 0.8% to highest level in four years Ratings agency Fitch calls for more government action in ‘overvalued’ Canadian housing market The 12-month total for new condo sales was 18,463 and Urbanation says that is in line with the 10-year annual average.

Despite the boost in sales, prices have only moved up 2.8% from a year ago with Urbanation’ index showing an average sale price of $554 per square foot in the second quarter. Prices of unsold inventory climbed 1% to an average of $570 per square foot.

While sales have heated up, prices have remained in check due to competitive supply pressures “While sales have heated up, prices have remained in check due to competitive supply pressures and an absence of short-term speculation on the part of buyers,” said Mr. Hildebrand.

The market for existing condominiums has been hotter with resale sales hitting a record of 5,238 in the second quarter, up 12% from a year ago. New listings also hit a new high with 11,246 offered for sale in the second quarter, down 10% from a year ago.

Fewer new listings than sales led to tighter market conditions with the sales-to-listings ratio rising to 47% — a level Urbanation says is below the 50% characterized as a balanced market.

Prices for existing condo apartments jumped 3.4% in second quarter form a year ago but that was still good enough to set a record high of $427 per square foot for an existing condo.

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Housing market skewed by handful of hot cities, Canada Guaranty CEO says – Consult with a Vancouver Mortgage Broker

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Balanced. That’s the way the head of one of Canada’s two private mortgage default insurers sees the housing market today.

A day doesn’t go buy without some commentator or some media outlet suggesting the housing market is going to crash. But Andy Charles, the chief executive of Canada Guaranty, says much of that view is based on a national average skewed by a handful of hot markets.

“I think we need to keep in mind what is driving house price increases in Canada right now. It’s largely three cities, Toronto, Calgary and Vancouver,” said Mr. Charles. “If you look to eastern Canada, we are seeing price decreases. I hesitate to look at Canada in one national framework when it’s three cities driving the increase.”

Statistics released by the Canadian Real Estate Association bear that out. Nationally, prices rose 6.9% in June from a year ago to $413,215 but if you look at the $21.2-billion in activity for the month, almost half can be attributed to the big three cities he’s talking about. Those cities are driving up the national average.

The steps the Department of Finance has taken over the years have been prudent and resulted in a much stronger marketplace

Mr. Charles agreed to sit down with the Financial Post and discuss the state of the market in the face of ongoing changes at his major rival, Canada Mortgage and Housing Corp. Mortgage default insurance, which protects the bank in the event you can’t pay, is something every Canadian homeowner with less than a 20% down payment must have.

This week, Chicago-based credit agency Fitch Ratings jumped into the fray, saying the Canadian housing market was 20% overvalued and needed even more government regulation despite four previous moves by Ottawa to cool housing off.

Mr. Charles doesn’t believe the federal government needs to do any more at this point. “The steps the Department of Finance has taken over the years have been prudent and resulted in a much stronger marketplace,” he says.

The chief executive says mortgage insurers are keeping a close eye on the market and people they are insuring to make sure they can stay in their homes in a rising interest rate environment, should that play out.

“Our business is driven by the unemployment rate. People are generally going to stay in their homes, if they are working,” says Mr. Charles. “The unemployment rate is what we monitor carefully and is the significant indicator for our business.”

Some analysts suggest Canada Guaranty has secured as much as 13% of the mortgage default insurance market in the country in the four years since the Ontario Teachers’ Pension Plan Board took it over in 2010 and rebranded it. The share could jump with the federal government signalling it plans to scale back the role of CMHC in the marketplace.

“The changes at CMHC to date have been relatively modest, however the direction of CMHC that is evolving around reducing its exposure to the housing market is obviously a net positive for the private sector competitors,” said Mr. Charles. “CMHC has been a very positive contributor to our industry over the the last 60 years. It just doesn’t need to be the dominate player going forward, particularly when you have well-capitalized private players willing to prudently take on the housing market risk.”

Here is an edited transcript of the interview with Mr. Charles:

Q. Can you ever see a mortgage default insurance market that is totally privatized?

A. I would anticipate the government of Canada through CMHC continuing to be a player in mortgage default, just not at the current levels.

Q. At one point there were as many as six mortgage default insurers either in the Canadian market or planning to enter. Your company was originally owned by American International Group, Inc. before the group led by Teachers’ bought the company out. There are now only three players. Could we see more competition in the future?

A. When the financial crisis hit in the U.S., there was a lot of pressure to repatriate the capital from the Canadian marketplace. I’m not aware of any new competitors entering the marketplace.

Q. You are controlled by one of Canada’s largest pension funds. What has that meant to you in terms of market share?

A. We’ve been able to grow being 100% Canadian-owned with the sponsorship of the Ontario Teachers’ Pension Plan and our ownership team, overall we have been well-received by the marketplace. It is a key consideration, having well-known, well regarded ownership.

Q. How much competition is there really in the market? There are some things you insure that CMHC doesn’t, like second homes. But some might point to the fact CMHC increased premiums in May and private competitors were pretty quick to pass on the exact same increase.

A. It’s a fair comment. But you will always see nuances. If you think about it, the government of Canada, through a sandbox, really dictates the type of product offerings in the marketplace. You won’t see a lot of differentiation. You will continue to see some differentiation on some on the peripheral products. The larger question is how does CMHC move from being a dominant player to just a player in the space?

Q. The government backs CMHC insured mortgages 100% but only 90% for the two private companies, how important is that 10 percentage point gap?

A. I believe it’s less of a factor today. There are a number of reasons. One of them is the strength of the ownership team at Canada Guaranty. But the level of capital required [for insured mortgages] continues to increase, so there’s that buffer which is healthy for the housing market. All three mortgage insurers are now regulated by [Office of the Superintendent of Financial Institutions].

Q. Can you ever see a world where the government gets completely out of backing mortgage default insurance for companies like yours?

A. It would be difficult to fathom (as long as the CMHC is still in the marketplace with its government backing). The point I would emphasize is if the private sector competitors take on more of the risk, you are putting private capital in play before the government backstop can be triggered. That’s the important nuance to emphasize, it’s putting private capital at risk instead of public capital.

Q. Can you see mortgage insurance evolving into a more risk-based system where your premium is based more on individual risk factors like your credit score?

A. I don’t anticipate any movement in that direction in the short run. With CMHC being the dominant player, it becomes difficult to have price differentiation in the marketplace.

Illustration by National Post Graphics

Ratings agency Fitch says Canadian houses overpriced even as gains slow down- Consult with a Vancouver Mortgage Broker

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Chicago-based credit agency Fitch Ratings says Canadian housing is still overvalued by 20% and called for additional steps to cool the market.

The company’s statement comes as new data appears to show house price gains are slowing on a national basis despite the fact there are still cities that continue to show price growth.

The Teranet Home Price Index increased 4.4% in June from a year ago, a slower pace than the 4.6% year over year jump in May.

The composite six index which covers Vancouver, Toronto, Calgary, Montreal, Ottawa and Halifax was up 4.9% in June from a year compared to a 5.1% year over year increase in May. Both the overall and the composite index were up 0.9% in June from May.

“With the housing market having now shaken off the winter blues, price are continuing to rise at a solid pace. That said, the continued deceleration in price growth on a year-over-year basis may be an indication that the Canadian housing market is becoming more balanced&,” said Toronto-Dominion Bank economist Randall Bartlett.

Still, Finch points to numbers from Canadian Real Estate Association which show home prices grew 7.1% in May on a year over year basis.

Related Canadian home prices rise in June, but 12-month inflation slows: Teranet Price surge fuels Canadians’ optimism about housing market to highest since before financial crisis “According to Fitch’s sustainable home price model, which measures home prices relative to long-term fundamentals, Canadian home prices remain approximately 20% overvalued in real terms,” the company said in its statement.

It noted building permits have picked up in recent months along with sales, supported by historically low interest rates and those factors are driving up affordability.

Policy makers may be required to take additional steps over the short term to engineer a soft landing Finch also said household debt to disposable income, which reached a record high of 164.1% in the third quarter of 2013 before declining the next two quarters, is making the market “more susceptible” to shocks from higher unemployment or interest rate increases.

The federal government has intervened in the market four times to slow housing down, among the measures being shortening amortization lengths from 40 years to 25 years. It also tightened the rules around government-backed mortgage insurance.

Fitch wants more regulation. “However, the long-term impacts remain unclear, and policy makers may be required to take additional steps over the short term to engineer a soft landing,” the agency said, in reference to the changes made.

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Calgary’s energy boom is fuelling record surge in luxury home sales – ask a Vancouver mortgage broker

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Sotheby’s International RealtyThe estate, once owned by the Ford family of Henry Ford heritage, listed for $37.9-million, with views of the Rocky Mountains, comes with four fireplaces, $1 million in mouldings and two garages for six cars.

Twitter Google+ LinkedIn Email Comments More Larry Lindholm made his fortune in Calgary’s booming energy industry, building and selling an oilfield equipment company. Then he bought a $10.4 million mansion.

“This is the big reward,” Lindholm, 52, said from the new home he shares with wife, Kristi, 35, and their four kids. “Calgary’s a neat city to be part of, the opportunities are here right now. It’s amazing how it’s grown, with all the development taking place in the oil and gas sectors.”

The energy patch in Calgary, nicknamed “Cowtown” for its annual rodeo, and low mortgage rates are transforming Canada’s fourth largest city into a hub of luxury housing. Neighborhoods named Tuxedo Park and Hamptons are expanding as energy industry executives from Canada, the U.S. and Europe fuel record sales of Calgary’s most expensive homes.

Related Canada new home prices pushed higher by western gains Royal LePage says Canada’s big city housing markets continue to boom as small centres left behind Canada’s high-end home sales soar in first half of the year: Sotheby’s International Realty Canada

TIRION PROPERTIES LTD. Neighborhoods named Tuxedo Park and Hamptons are expanding as energy industry executives from Canada, the U.S. and Europe fuel record sales of Calgary’s most expensive homes. Lindholm’s 14,500 square-foot (1,347 square-metre) estate, which features an eight-foot Swarovski crystal chandelier, broke the record for the most expensive home sold in Calgary when he bought it last year. That mark was topped by a $11.1 million sale later that year, which in turn may be shattered by a current listing of a $37.9 million home once owned by Henry Ford’s family.

“Luxury demand is growing,” said Corinne Poffenroth, an agent for New York-based auctioneer Sotheby’s, who represented the Lindholms in their home purchase. “Our energy sector is very strong and it attracts top-ranking executives across the country and the world. There’s a lot of young new money.”

Helicopter Tours

While Vancouver and Toronto, Canada’s financial capital, boast the country’s most expensive housing, sales of luxury homes in Calgary are surging. Realtors in the city, known for sprawling suburbs and the tallest office tower in western Canada, sold 404 homes priced above $1 million in the year to June 13. That’s an all-time high for Calgary and more than 10 times the total for an entire year a decade ago, according to Calgary Real Estate Board data.

The jump in sales has been powered by oil, the most important commodity in the western province. Investment in Alberta’s oil sands may reach a peak this year of more than $30 billion, according to investment bank Peters & Co. That’s generating high-paying jobs in Calgary, Alberta’s biggest city, whose population expanded to 1.2 million last year.

Calgary has the highest concentration of millionaires in any of Canada’s major cities, according to Calgary Economic Development, a nonprofit group. Some of the city’s wealthiest residents and foreign buyers flock to tours of highly priced homes by helicopter. Sotheby’s International Realty Canada added a private helicopter service for its real estate clientele in Calgary in June, a first for the firm in Canada.

Oil Prices

“It’s a boom-bust economy that lives and dies by oil prices, and the housing market is the same,” said Robert Kavcic, Bank of Montreal senior economist in Toronto. “If you were to say what’s going to drive luxury real estate in Calgary, I’d say just oil prices.”

West Texas Intermediate, the U.S. benchmark crude, has averaged more than US$90 a barrel over the past five years, the longest stretch at that price. That stability is unusual for a volatile commodity whose price sank to US$33.87 a barrel in December 2009 from a record of almost US$150 six months earlier.

Low mortgage rates have also helped drive housing sales. Posted rates for a five-year loan have been at a record low of 4.79% since April 9. And some lenders are offering three- year variable-rate mortgages for as low as 1.99%.

Sotheby’s International RealtyThe former estate of Henry Ford’s family is guarded by a security gate and surrounded by 242-acres of pastures and several lakes in Millarville, a 45-minute drive south of Calgary. Millionaire Mortgages

Millionaires are taking home loans because a lot of their assets are tied up in investments they don’t want to liquidate, said Martin Reid, president of Home Capital Group Inc., Canada’s largest alternative mortgage provider. Lenders often offer smaller loans for luxury homes because the prices are susceptible to big fluctuations. Reid said about 5% of the homes for which his company provides mortgages across Canada are priced above $1 million.

“We’re not going to give as much of a loan on a percentage basis as you get into that luxury space,” Reid said. “If it’s a $500,000 dollar house, we loan 75% of the value. If it’s a $2 million house, we’ll likely lend 60% of the value.”

Calgary, which sprang up in 1875 as a fort town for the North-West Mounted Police along the banks of the Bow and Elbow rivers, now has at least four neighborhoods where the average house price is $1 million or higher, according to the city’s real estate board.

Sotheby’s International RealtyOn the 242 acres are two houses with mountain views, one of Alberta’s only covered bridges, horse barn, pasture, paddocks, storage and riding areas, outbuildings and several large lakes. Henry Ford

Those communities include older areas like Mount Royal. It was developed by the Canadian Pacific Railway, which owned most of the land in Calgary in the early 20th century. Bel Aire, one of the established million-dollar areas, has a view over the city’s largest reservoir and is bordered by its oldest private golf course.

The former estate of Henry Ford, the founder of Ford Motor Co., is now listed for $37.9 million, the highest in the province. The 5,000-square-foot home is guarded by a security gate and surrounded by 242-acres (98-hectare) of pastures and several lakes in Millarville, a 45-minute drive south of Calgary. The home, with views of the Rocky Mountains, comes with four fireplaces, $1 million in mouldings and two garages for six cars.

Sotheby’s International RealtyThe home, with views of the Rocky Mountains, comes with four fireplaces and $1 million in mouldings alone. Energy Executives

“Oil and gas is definitely fueling the market,” said Sam Corea, a real estate agent with Re/Max Holdings Inc. in Calgary, who’s busiest during the energy industry’s bonus season in late winter.

Corea’s typical client is a professional in the oil and gas sector between the ages of 35 and 50 who wants expensive amenities including top-tier appliances and granite countertops.

“Calgary is a much more sophisticated market than it was 10 or 15 years ago,” said Corea, who last year sold 128 homes at an average price of $943,000 each.

Corea said the city’s housing could begin to lose its glow as supply catches up to demand.

“The market is starting to feel a bit like the spring of 2007 just before it stalled,” he said. “The market edge is starting to slip away.”

Supply Grows

Homes listed at more than $500,000 jumped 42% to 1,359 units in June over the same time last year, according to the city’s real estate board. Single detached homes will be constructed this year at the highest pace since 2007, according to forecasts by Canada Mortgage and Housing Corp.

“As this market has moved into more balanced conditions, and if inventories continue to rise, price growth should ease throughout the remainder of the year,” said the board’s chief economist Ann-Marie Lurie.

Lindholm, the oil entrepreneur who drives a red Ferrari, said his father gave him a warning after he bought his castle-like home.

“My dad says, ’Nice house. You’re never going to be able to sell that’,” said Lindholm, who moved his family from a home in the city that they sold for $2 million. “I think he’s right. Maybe not now because there’s a small market for this size house — but it’s growing.”

Bloomberg.com

Household debt worries ease as pace of mortgage borrowing slows in May: study – Consult with a Vancouver Mortgage Broker

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Royal Bank says Canadians have been slowing down the amount of debt they are taking on to buy real estate, easing concerns about household vulnerability.

The RBC paper notes that overall household debt accumulation remained flat-lined at 4.2 per cent growth in May, about the same level as the previous three months.

Outstanding mortgage debt stood at $1.23-trillion as the annualized growth slowed slightly to five per cent from 5.1 per cent in April.

But households increased their pace of non-mortgage borrowing, the bank says, to 2.2 per cent from two per cent in April.

RBC says the steady pace of debt accumulation overall should give some comfort to the Bank of Canada, which has called household debt the No. 1 risk to the financial system and economy.

With the housing market expected to moderate further, the vulnerability posed by overly indebted households is easing, RBC says, clearing the way for the Bank of Canada to move toward higher interest rates by mid-2015.

Meanwhile, business borrowing continued to strengthen in May, with short-term debt rising to 10.6 per cent from 9.6 in April.

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Don’t get complacent about risks of housing downturn, OSFI warns lenders and insurers – Consult with a Vancouver Mortgage Broker

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Canada’s top banking regulator is urging mortgage lenders and insurers not to grow complacent despite healthy bank capital levels and predictions of a soft landing in the housing market.

In a speech at a C.D. Howe Institute housing conference on Thursday, Mark Zelmer, deputy superintendent of the Office of the Superintendent of Financial Institutions, highlighted the continuing growth in household debt relative to income.

“I would not presume to claim that borrowers are acting irrationally or do not know what they are doing. But, by same token, it is clear that the ability of the household sector as a whole to absorb major shocks is less now than it was a decade ago,” Mr. Zelmer said in his prepared remarks.

It is clear that the ability of the household sector as a whole to absorb major shocks is less now than it was a decade ago

“Moreover, with interest rates near record low levels, there is not much scope for interest rates in Canada or the United States to fall further – something that helped people weather storms in the past,” he said.

Mr. Zelmer said having well-capitalized lenders might not be enough in times of stress, noting that creditors and investors often lose confidence in financial institutions before they run out of capital.

“Recall that some financial institutions lost access to funding markets in the midst of the global financial crisis even though they were reporting healthy regulatory capital ratios at the time,” he said. “Sitting back and relying on capital is not enough for either financial institutions or prudential supervisors.”

Mr. Zelmer said stress tests, which so far indicate Canadian banks are prepared for a downturn, should not be viewed as overarching “safe harbours” because they are based on models and arbitrary assumptions.

“The results are … comforting. But given the considerable uncertainty associated with stress test results, they are but one input into our decision-making,” Mr. Zelmer said.

“Boards and senior management of financial institutions need to apply judgment in a forward-looking manner and not become too complacent in their capital planning exercises.”

While Canada’s recent housing activity has been far less troubled in recent years than in other markets such as the United States, Mr. Zelmer reminded his audience of the downturn experienced a couple of decades ago.

“Canada has not been immune from significant real estate corrections in the past and the damage they can inflict, as those of you who worked in the early 1980s and 1990s would know,” he said.

“We all have an interest in ensuring housing markets and the financial intermediation supporting them function smoothly.”

Mr. Zelmer noted that consumer debt relative to household income continues to grow at a rate of 4%. And while this is slower than in the past, he noted a small but important group of Canadians who are in a potentially difficult situation “camouflaged” by low interest rates. This group is taking on debt “to make ends meet in the wake of unfortunate life events such as job losses or marriage breakdowns,” he said.

This situation could prove especially tough if house prices don’t remain as strong as expected.

“We believe it makes sense to work with mortgage lenders and insurers to reduce the likelihood of serious problems in the first place by promoting strong governance and risk management controls around mortgage lending and insurance underwriting activities,” Mr. Zelmer said. “This is especially true given residential real estate lending represents more than 60 per cent of bank lending in Canada.”

In his speech, Mr. Zelmer said mortgage underwriting practices have evolved. And while they appear good today, he warned, “past experience suggests that it could become very tempting in the current environment for mortgage lenders and insurers to ease up under the enchanting lull of the siren song of market share.”

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TARA PERKINS – REAL ESTATE REPORTER- The Globe and Mail