The head of Canada’s financial system watchdog is sounding the alarm on the use of home equity lines of credit (HELOCs), which he believes may be “simultaneously fueling and helping Canadians afford rising home valuations.”
“The use of HELOCs and non-traditional housing backed products can lead to greater and more persistent outstanding principal balances, increasing risk of loss to lenders,” said Peter Routledge, who runs the Office of the Superintendent of Financial Institutions (OSFI), in a speech in Vancouver on Tuesday.
“Further, it can be easier for borrowers to manage financial distress by drawing on their lines of credit to make mortgage payments.”
Routledge said such products can be helpful for consolidating debt at low interest rates, but cautions their widespread use can make it difficult for regulators to asses credit risk.
His comments come amid what many describe as a housing affordability crisis, with national home prices rising 24 per cent since the onset of the pandemic in March 2020, according to the latest Teranet-National Bank House Price index. As well, in a speech Tuesday, Bank of Canada Deputy Governor Paul Beaudry warned indebted homeowners of a possible correction sparked by an “influx” of investors.
As a result, Routledge said OSFI must “remain vigilant” as household credit risk is growing “marginally more fragile” and is calling for a more aggressive response to Canada's housing supply-demand imbalance.
However, he doesn’t fault investors for seeing an opportunity.
“Secondary buyers -- the investors -- they're making investments to generate a return. That's a free-market economy, more power to them,” he said in an interview Wednesday.
“They’re recognizing there is that forward price pressure and so they're jumping in to profit from the run up. That's the way markets work.”
Routledge added that he thinks those investors might eventually be dissuaded whenever balance is brought to the market.
“If we correct the supply-demand imbalance, you’ll start to see, in my judgment, that zeal (and) that froth start to dissipate. I think residential mortgage credit will become less of a threat to our system.”