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OTTAWA (Reuters) - Canada's housing market still needs to be closely monitored for signs of overheating but the country's banking regulator has no immediate plans to change its rules to help cool the market, its top executive said on Monday.
Housing prices and mortgage debt in Canada have soared in recent years due to record-low borrowing costs, a trend many consider dangerous because of the risk it could end in a U.S-style crash.
But the housing market cooled last year after the federal government tightened mortgage rules. Analysts have said previous measures taken by Canada's banking regulator, the Office of the Superintendent of Financial Institutions, have also had an impact.
"Nevertheless, this is a market that continues to bear very close watching," said Julie Dickson, head of OSFI, in a speech to a conference of mortgage professionals in Toronto.
Dickson cited reports by the International Monetary Fund and the Organization of Economic Co-operation and Development, among others, that warn that house prices in Canada are significantly overvalued and heavily indebted households could be in trouble if the economy took a sudden turn for the worse.
"While not all observers agreed with the extent of the OECD and IMF comments, the continued strength of housing prices across many Canadian cities in the second half of 2013 is undeniable," she said.
OSFI does not reveal its own views on the future of the housing market for fear of influencing banks to either curb or expand lending in a way that might either inflate a bubble or cause an excessive slowdown.
Dickson's main message to an audience of bankers and mortgage brokers was to not rest on their laurels. OSFI's bank stress tests may have produced comforting results, she said, but the regulator keeps a close watch on bank capital levels, she said.
Likewise, low rates of mortgage delinquency and high borrower credit scores can be deceiving and can slide rapidly if there is a shock to the economy.
"So OSFI encourages financial institutions to pay considerable attention to the quality of borrowers, both in the current environment and potential future environments."
So far, the consensus view of economists has been that there will be a 'soft landing' of the housing market. Finance Minister Jim Flaherty and Bank of Canada Governor Stephen Poloz appear to be in that camp as well.
Flaherty has tightened mortgage lending rules four times since 2008. The latest measures in mid-2012 led to a sharp slowdown, but the market has gained new momentum this year.
Flaherty won't rule out further measures but sees no need to act at the moment. Likewise, OSFI said earlier this year it saw no need to make more changes to its mortgage lending guidance but left the door open to that in the future.
OSFI will be releasing guidelines for mortgage insurers by the end of March 2014, Dickson said.
Editing by Jeffrey Hodgson and James Dalgleish