RBC's Dave McKay says housing demand will continue to rise; bigger challenge is supply.
The chief executive of Canada’s biggest bank says the federal government need to exercise caution as it considers adjusting the mortgage stress test that has loomed over the housing market and rankled the real-estate industry.
“We have to be a little bit careful,” Royal Bank of Canada chief executive Dave McKay told a banking conference on Tuesday morning, noting that the test has “generally been good policy” in the absence of higher interest rates that could slow demand for housing.
Canada has mortgage stress tests in place for both loans that are insured against the borrower defaulting and those that are not, with both measures aimed at ensuring homeowners can meet their obligations to federally regulated lenders such as banks if circumstances change.
However, Prime Minister Justin Trudeau recently tasked Finance Minister Bill Morneau with reviewing and considering recommendations from financial agencies “related to making the borrower stress test more dynamic,” according to the minister’s mandate letter.
“The stress test certainly delayed purchases, caused consumers in Canada to look at less expensive homes, and to adjust their desire for the cost of the home they’re purchasing, or delay,” McKay told a conference in Toronto. “And I think we have to be a little bit careful how we adjust it. But if done in the right way, and with the right objectives, (it) can be achieved.”
While the stress test has been defended by regulators as necessary and prudent, it has been targeted by the real-estate industry as a weight on the housing market that has made it harder for Canadians to buy homes.
Federally regulated financial institutions, such as RBC, saw mortgage originations slow when the uninsured stress test came into effect at the start of 2018.
More recently, though, the Canadian housing market has been having a renaissance. On Tuesday, the Toronto Real Estate Board reported that home sales in December were up 17.4 per cent over the same month of last year.
McKay said the “bigger challenges” facing the housing market have less to do with demand and more to do with managing supply. Demand will continue to rise, stress test or not, as, among other things, Canada continues to attract an increased number of immigrants, McKay said.
What’s needed is more supply, which falls more on the municipal and provincial levels of government.
“We’ve moved into a strong seller’s market again, from a balanced marketplace,” McKay said. “And we haven’t been in a buyer’s market for quite some time because of those supply-demand dynamics.”
This article has been edited for clarity and length.
Author: Financial Post
Insurance & Estate Planning
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