BoC sees progress but overall risks to economy ‘elevated’
Elevated housing prices and household debts remain the single biggest vulnerability in the Canadian economy, according to the latest Bank of Canada report, despite signs that financial risks are beginning to ease.
“Our financial system continues to be resilient, and is being bolstered by stronger growth and job creation, but we need to continue to watch financial vulnerabilities closely,” Bank of Canada governor Stephen Poloz said in a written statement as part of the bank’s November Financial System Review.
“Overall risks to the Canadian financial system remain elevated. Some preliminary signs of improvement, however, are emerging,” the bank said in its latest financial system review, which explores key vulnerabilities and risks surrounding the stability of the financial system. “Better economic conditions and several new policy measures support prospects for additional progress,” it said.
The statements mirrored another report Tuesday from the Organisation for Economic Cooperation and Development, which warned that the country’s still-overheated housing market and rising household debt levels remain a key risk to the economy, overshadowing record-level GDP growth in the first half of the year.
“High house prices and associated debt levels remain a substantial financial vulnerability,” the OECD said in its November outlook.
Canada’s economy grew four per cent in the first half of 2017, easily making it the fastest-growing economy among G7 countries. The growth was driven in part by higher business investment, improved exports and consumption spending, and was partly due to some fiscal stimulus measures introduced by the federal government.
But growth rates are expected to taper at the end of 2017 and through to 2019, which could intensify pressure on highly indebted households, particularly as the Bank of Canada is expected to continue raising interest rates in 2018, after raising them twice this year. Meanwhile, borrowing has risen around five per cent compared to a year ago, outpacing wage growth by several percentage points.
Higher household debts come as the real estate prices in some regions, particularly in Vancouver and Toronto, have ballooned.
The Bank of Canada report said indebtedness, especially the number of highly indebted households, remains high. Household debt relative to income has hit historically lofty levels and continues to grow.
But it noted there’s already some green shoots that suggest stricter lending rules have started to reduce the country’s exposure to hefty debtloads, pointing to mortgage insurance policy changes such as a stress test.
Further easing is likely on the way due to higher interest rates and another new stress test to be introduced in the new year, this time aimed at low-ratio mortgages that don’t require insurance, the bank predicted.
The bank said tighter stress tests on mortgage loans introduced by the Superintendent of Financial Institutions (OSFI) will restrict as much as 10 per cent of prospective Canadian homebuyers, or roughly $15 billion in loans every year.
The OECD echoed that sentiment, noting that while various government programs have helped overheated real estate prices, the impact of a new tax on foreign buyers has diminished in Vancouver, suggesting that Toronto’s introduction of a similar tax could have a limited effect on prices.