Consumer debt gets helping hand from boom
‘More stable upward trajectory’
OTTAWA • There are two things that could impede Bank of Canada Governor Stephen Poloz from raising interest rates further in the coming months: worries about the financial system’s ability to cope with higher borrowing costs and concern that plenty of slack remains in the economy.
By the end of this week, the picture should be at least a little clearer on both fronts.
On Tuesday, the central bank’s semi-annual report on financial stability will reveal its thinking about risks such as how vulnerable are highly indebted households to a major housing correction. That’s followed Friday by Statistics Canada’s gross domestic product numbers for the third quarter and October jobs data that will show the extent to which the economy continues to eat into its spare capacity.
The reports are widely seen reinforcing market expectations for continued interest-rate increases, but only gradually as the Bank of Canada tiptoes its way to more normal levels.
Poloz’s main message at his last Financial System Review in June — which came just before his first rate increase in seven years — was that despite an unsustainable jump in Toronto home prices earlier this year and the consequent rise in debt levels, the financial system’s resilience was actually strengthening on the back of an improving economy.
And since then, Canada’s economy has done even better than Poloz had thought at the time.
While economists expect Statistics Canada to report a slowdown to 1.8 per cent annualized growth in the third quarter, growth in the second quarter turned out to be a much stronger 4.5 per cent and the economy is on pace for three-per-cent growth for all of 2017.
Toronto’s housing market, meanwhile, is cooling after Ontario imposed a foreignbuyer tax and the country’s main financial regulator tightened mortgage- qualification rules.
Stronger growth and cooler housing should mean — in the eyes of policy- makers — the financial system has only become more resilient over the past six months.
Of c ourse, what has changed since June is that Poloz raised the central bank’s key interest rate twice, and the Bank of Canada has said it’s monitoring closely how the higher borrowing costs will impact the economy. It’s one of the reasons the central bank claims it will remain cautious on future hikes.
But the initial signs should be comforting.
A soft landing seems to be playing out in Toronto’s housing market and households are hardly slowing their credit growth.
Year-over-year benchmark home price gains in Toronto averaged 27 per cent in the first six months of 2017, according to the city’s realtor board. Since June, that average has halved to 13.6 per cent. Vancouver’s housing market underwent a similar slowdown after a foreignbuyer tax was imposed in August, 2016, and is now recovering.
Stronger demand and tighter supply mean the Toronto and Vancouver markets are “still on an upward trajectory, but it’s on a more stable upward trajectory,” said Royce Mendes, an economist at CIBC World Markets. New regulations in places like Toronto and Vancouver “will be more like a bump in the road than a car driving into a sinkhole.”
Household credit data — the latest were released Friday — show year- over- year growth still hovering at the 5.5- per- cent range it’s averaged over the past 18 months, with consumer credit gains offsetting slowing residential loan borrowing.
One issue likely to remain an area of concern is the growing share of uninsured mortgages, which is being fuelled by higher Toronto and Vancouver home prices and tighter qualification rules for insured mortgages.
Specifically, the central back said in its June FSR that it worries some home buyers are finding new ways to finance larger deposits — socalled co- lending arrangements — to skirt the tougher qualification rules. Essentially, they are borrowing to finance larger down payments.
The latest data suggest the uninsured market has only gotten larger since the June FSR. As of September the number of uninsured mortgages in Canada was $ 662.7 billion, up 17.5 per cent from a year earlier, the largest year-over-year increase since 2004. Uninsured mortgages now represent 48 per cent of outstanding mortgages, from 36 per cent just five years earlier.
Last month, the Office of the Superintendent of Financial Institutions also stepped in to make it harder for home buyers to qualify for an uninsured mortgage. The issue is likely to be top-of-mind at the central bank, if tighter regulations of the federally regulated sector are only pushing borrowers to private lenders outside of the regulated space.
“You’re kind of back to these non- banks and these provincially- regulated institutions apparently just skating along,” said Eric Lascelles, chief economist at RBC Global Asset Management. “There could be some talk about the composition of the financial sector and just where the risk is accruing. It’s still a fairly serious risk.”
The Bank of Canada sometimes comes under criticism for its role in fuelling all this household debt, with some suggesting the central bank should stop worrying about the impact of raising interest rates and hike more aggressively in order to curb borrowing more quickly. This month, the OECD flagged Canada as leading the advanced and developed world in household borrowing.
MORE LIKE A BUMP IN THE ROAD THAN ... A SINKHOLE.