Household debt still a concern
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 on Tuesday from the Organisation for Economic Co-operation 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 economic 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 Ottawa.
But growth rates are expected to taper at the end of 2017 and through to 2019, which could intensify pressure on highly indebted Canadian 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 increased 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 reached 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 introduced by the federal government last year.
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.
“Provincial government measures have also temporarily slowed house price growth, but some, notably Ontario’s expanded rent controls , risk discouraging the supply of new housing. Macroprudential policies will need to be tightened further if rapid increases in house prices and debt resume.”
In its report, the Bank of Canada once again listed cyber threats as another key vulnerability for Canada.
Poloz has said a cyberattack against the financial system is a scenario that likely troubles him the most. In a recent interview, he said he was unsure how severe the fallout from such an event could be and he struggled to picture what it might look like.
“Cyberattacks do not respect borders: They can originate from outside Canada and be transmitted across the global network that financial institutions rely on to operate their businesses,” the report said.
The bank said it has been working with industry, international organizations and federal and provincial authorities to improve collaboration and policy-making to ensure rapid response and recovery from a cyber event. An example could include a loss of connectivity or corruption of data within the payments system.