BoC says ris­ing home debt still ‘man­age­able’

National Post (Latest Edition) - - FINANCIAL POST - Gor­don Isfeld

OTTAWA• The threat in­creas­ing house­hold debt presents to Canada’ s econ­omy — and the coun­try’s fi­nan­cial sys­tem, in par­tic­u­lar — is con­tin­u­ing to grow, and at an ever-wor­ry­ing pace.

The risks to heav­ily- in­debted bor­row­ers, those who have taken ad­van­tage of ul­tralow in­ter­est rates fol­low­ing the 2008- 09 re­ces­sion, would be an eco­nomic col­lapse and a jump in un­em­ploy­ment, ac­com­pa­nied by a sud­den and deep shock to the hous­ing mar­ket — leav­ing many Cana­di­ans un­able to meet mort­gage pay­ments.

It is a sce­nario that has con­cerned the Bank of Canada since the last global down­turn, one that pol­i­cy­mak­ers be­lieve is still threat­en­ing — but re­mains man­age­able.

Ac­cord­ing to Lawrence Schem­bri, cen­tral bank deputy gov­er­nor, of­fi­cials are work­ing to “con­nect the dots” be­tween the fi­nan­cial sys­tem and the econ­omy to help bet­ter fore­see signs of th­ese in­creased risks.

“The fi­nan­cial vul­ner­a­bil­ity as­so­ci­ated with el­e­vated debt has in­creased over the past decade. It has done so, in part, be­cause the debt has be­come more con­cen­trated in highly lever­aged house­holds, es­pe­cially those whose abil­ity to ser­vice their debt may be more vul­ner­a­ble to an eco­nomic down­turn,” Schem­bri said. “How­ever, the Cana­dian fi­nan­cial sys­tem is very re­silient and could with- stand the trig­ger­ing of this vul­ner­a­bil­ity,” he said.

Schem­bri said the cen­tral bank’s “close col­lab­o­ra­tion with other agen­cies has helped Canada achieve a re­mark­able pe­riod of fi­nan­cial sta­bil­ity over the past quar­ter-cen­tury.”

“This col­lec­tive ef­fort to mon­i­tor and mit­i­gate fi­nan­cial vul­ner­a­bil­i­ties, such as el­e­vated house­hold in- debt­ed­ness, is es­sen­tial to main­tain­ing a sta­ble and ef­fi­cient fi­nan­cial sys­tem and pro­mot­ing eco­nomic growth in Canada,” he said, adding that it “al­lows us to ‘ con­nect the dots’ not only across the fi­nan­cial sys­tem but, equally im­por­tantly, be­tween the fi­nan­cial sys­tem and the real econ­omy.”

Con­cerns over mount­ing house­hold debt have led to tighter lend­ing rules for fi­nan­cial in­sti­tu­tions in Canada, be­gin­ning in 2008. Among those changes, the Fi­nance Depart­ment has re­duced the amor­ti­za­tion pe­ri­ods on govern­ment-in­sured mort­gages and in­creased min­i­mum down pay­ments for amounts be­tween $500,000 and $1 mil­lion.

Even so, the in­crease in house­hold debt “could force some vul­ner­a­ble home­own­ers to sell their homes or even­tu­ally de­fault on their mort­gages and other con­sumer debt,” Schem­bri said.

“If de­faults rose quickly or if many house­holds were forced to sell their homes, house prices could drop sharply across Canada, par­tic­u­larly in Van­cou­ver and Toronto, which have re­cently ex­pe­ri­enced ex­cep­tion­ally strong price growth,” he said.

How­ever, Schem­bri noted, there are “suf­fi­cient buf­fers in the fi­nan­cial sys­tem to with­stand such a sce­nario.”

“For ex­am­ple, the six largest Cana­dian banks, which hold roughly 70 per cent of out­stand­ing mort­gages, have in­creased the quan­tity and qual­ity of their cap­i­tal in re­cent years and are well di­ver­si­fied across re­gions and sec­tors. In ad­di­tion, most of the mort­gages they hold are sup­ported by govern­ment-backed mort­gage in­sur­ance pro­grams or by high home­owner equity.”



Of­fi­cials are work­ing to “con­nect the dots” be­tween the fi­nan­cial sys­tem and the econ­omy to help bet­ter fore­see signs of in­creased risks to heav­ily-in­debted bor­row­ers, says the Bank of Canada’s deputy gov­er­nor Lawrence Schem­bri.

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