Canada's Housing Bubble

Analysis of the real estate bubble in Canada --

Canadian banks not immune to housing bubble: OSFI official Print E-mail

May 17, 2012 Andrew Mayeda

Canada’s banks, ranked the soundest on the planet by the World Economic Forum, aren’t immune to collapses triggered by falling housing prices, according to the government official implementing new mortgage rules.

Previous failures of Canadian financial institutions were due to bad real estate lending and sharp falls in housing prices, and these can happen again, Vlasios Melessanakis, manager of policy development at the Office of the Superintendent of Financial Institutions, wrote in documents obtained by Bloomberg News under freedom-of-information law. The last failure in Canada was in 1996.

“Canada is not immune,” Melessanakis wrote March 21 in internal notes responding to a posting on a mortgage-industry website. “Just because nothing happened in Canada in 2008 (a U.S.-centered crisis), does not mean that Canada is not vulnerable to a housing correction now.”

The comments underscore tension between policy makers and mortgage lenders as a booming housing market helps drive profits at banks. Finance Minister Jim Flaherty has tightened mortgage rules three times and put the federal housing agency’s books under regulator oversight, while Bank of Canada Governor Mark Carney has repeatedly warned household debt is the economy’s biggest domestic risk.

Participants at Bloomberg’s Canada Economic Summit in Toronto last week, including the head of the country’s biggest bank, downplayed talk of a housing bubble even after Canadian housing starts rose to the highest since September 2007 last month.

Pockets of Vulnerability

“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” Gordon Nixon, chief executive officer of Royal Bank of Canada, said May 8. “Frankly, I’d like to see the rhetoric come down a little bit.”

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