TORONTO, June 8 (Reuters) - Below are some key quotes from an appearance on Thursday by Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins in Ottawa, after the release of the semi-annual Financial System Review.
“We’re only looking at what I call extreme events. So we’re looking at something that is a little bit more probable than something else, both of them are still what economists call tail risks. Things that we need to be mindful of but no one is predicting that they’re about to occur.”
“Moderate means more than low, and through time, I’m more comfortable observing that that risk that we talk about, the risk of a price correction in specific housing markets appears to be growing through time. It’s not just a static thing, it’s becoming more of a vulnerability, not less. That doesn’t mean it’s become highly probable.”
“It’s important piece of the setting when we talk about these risks, that the economy has shown more signs of strength in recent months, and that we still have questions around sustainability and what risks we face on the macro front.”
“It does appear that the actions that we took in 2015 have done a good job to facilitate the economy’s adjustment to that shock. That’s encouraging.”
WILKINS ON CAUSES OF U.S. CREDIT CRISIS, CONTRAST TO CANADA
“It is important to look at the U.S. experience and see to what extent there are similarities and differences and I think when you see house prices where they are and you see indebtedness it is quite tempting to draw parallels and at the same time when you understand what really led to the severity of the financial stress in the U.S., which was actually quite global in 2008 and 2009, it was related to a number of factors that are not present in Canada.
“And one of them is just the underwriting standards in Canada are high and they are effectively enforced. We are not seeing the kind of ninja loans, if you remember those, just as an example, you look at delinquency rates, they are historically low, they still are.
“I think really importantly is just the difference in laws, lenders in Canada have recourse to other household assets. It is not always the case in the U.S., and that changes the recovery rates for institutions if there is a problem but it also means that households have greater incentives to hang on and not walk away.”
“And then I think finally and probably the most important thing is just how the mortgages were financed in the U.S. which related to very complex securitization products that packaged up risk and spread it around in a way that was completely mispriced and so when it unwound it just amplified the situation.
“So what might have been a macro cycle ended up being a financial crisis. And so when you look at Canada we have much less securitization it’s public, it’s plain Jane.”
“There are lots of folks out there who are self-employed or have recently moved to Canada, other cases where they just don’t have the paperwork it takes to walk in and be approved at a bank for a mortgage in 60 seconds because they don’t fit the template.”
“So this alt-lending sector does an important service, it fills that space. It takes longer to kick the tires and do its credit approvals, but people do get a mortgage and as you can tell from the stats that have been published, they have very, very low default rates, so it’s a business that works.”
“I see that (Home Capital situation) as unconnected to whether or not somebody is analysing the banking system as a whole and upgrading or downgrading ratings on the banks. That has traditionally been a focus on exposure to the housing sector, banks are always higly exposed, that’s their bread and butter business. There are banks in the world that offload that stuff, they keep most of it on their balance sheet. That’s a business model that’s proven itself to be higly successful for a very long time. Whether they’ve been downgraded or not they are still extremely highly rated.”
“I’m reminded particularly by the correspondence flow that I get that there’s an awful people out there who don’t have mortgages, in fact have assets and are quite critical of how low interest rates are. So what happens when interest rates go up to those people is they have more income, they have more spending power. So it’s important to understand that the average consumer out there is not the highly-indebted, 450 percent, consumer that we’re concerned about in the tail distribution.
“The average consumer has actually assets and no debt. So there’s a lot of assets out there, which means then, the macroeconomic response to movements in interest rates has been more complicated by all this. It’s not just people with mortgages affecting how that outcome play out.”
“As time goes on you see more and more evidence that price increases in Vancouver and in Toronto have an element of speculation to them. So that’s a separate, all-by-itself growing vulnerability. As I said before, the longer that goes, the bigger it gets, and the more you start to be concerned that not necessarily a global recession but just about anything could be responsible for causing a correction in housing.
“A trigger or a catalyst that could be literally anything, it could be a change in policy or it could be what we saw in Vancouver a year ago was prices just got high enough that through their own weight, because you actually have to buy the house in the end and when the price gets really high it can be hard to finish that transaction, so people started to back away.”
“At this stage, I’m just comforted by the fact that the economy is showing better dynamics and that does go into this equation of financial risk as a positive. It means that the resilience is rising in the background, even if the vulnerabilities are also rising in the foreground.
“The fundamental demand for housing in both of those markets. This is not by any stretch an entirely speculative situation. There are fundamental drivers that are pushing the demand for housing.
“What we often forget is there’s a supply side to this. The most important we’ve seen in Toronto is a very big rise in supply of houses that people are willing to sell ... There’s an implied supply there, and that higher prices bring out those decisions.”
“For every person that thinks that the vulnerability we’re looking at will be a reason to hesitate to move interest rates higher, there’s someone else who thinks it’s a perfectly good reason to move rates higher.”
“Certainly what we’re cognizant of is that there’s been an increase in debt in the economy, so interest rate senstivity could be higher going forward than it has been historically.”
“Debt is rising because people want to own a home. It’s not really that complicated. And we’ve got solid fundamentals that are pushing the prices of those homes.”
“There are lots of other housing markets in Canada that are behaving completely normally. Fundamentals are solid, prices are rising gently, a little bit more than inflation maybe, but nothing untoward.”
“People borrow to buy a house but when we see the debt-to-income ratio rise, it is usually not because everybody who has got debt borrows some more, it is that some new family who has no debt has entered the housing market for the first time.”
“With the new rules in place we know that those folks have been stress-tested quite well. They are able to withstand as much as a 200 basis point renewal rate increase, because they got the income today to handle that even though that renewal might be five years from now, or it depends on what they have chosen. The point is that they have got time perhaps to have a higher income by then too. So in other words, the sustainability ingredients are all on the rise.”
Reporting by Alastair Sharp, Solarina Ho and Fergal Smith in Toronto; Assembled by Amran Abocar