BoC foresees households falling behind on loans
More homeowners expected to take on unsafe level of debt as income shock continues
Some heavily indebted households struggling to manage COVID-19-related income loss will probably fall behind on loan payments despite deferrals and increased borrowing, the Bank of Canada warned Thursday.
The longer the income shock lasts, the greater the risk of a rise in consumer and business defaults and insolvencies, the bank said in its latest Financial System Review.
While central bank and government policies such as flexible income replacements have been effective in easing impacts — and banks remain resilient and able to provide credit — the review said the crisis will probably boost the percentage of households that must dedicate more than 40 per cent of their monthly incomes to payments, particularly for those whose incomes do not fully recover.
The share of households that fell behind on their payments had already been increasing in Alberta and Saskatchewan, resource economies hit hard by the recent collapse in crude prices, the review said, adding that renters unable to make payments could pass financial stress on to landlords, many of whom are households with mortgages.
As well, income uncertainty and physical distancing have led to considerably slower activity in housing markets, with could add more pressure as owners may find it increasingly difficult to sell their homes. The bank said most households now expect house prices to decline over the next six to 12 months.
Noting that the pandemic hit at a time of elevated household and business debt, the review said about 20 per cent of all mortgage borrowers do not have enough liquid assets to cover two months of mortgage payments.
Canada’s banks have allowed more
than 700,000 households to defer mortgage payments and have also provided increased flexibility on payments for credit cards and lines of credit, but the review warns that debtservice payments will resume once deferral periods end.
The review said cash-flow stresses have led some businesses to sell assets, and credit downgrades are intensifying refinancing risks, especially in the resource sector.
Outgoing bank governor Stephen Poloz said while there will be households with more debt due to COVID-19, early statistics suggest there will also be households with less.
He said targeted policies are doing “quite a credible job of offsetting income loss” and are well designed to make more money available as more people are in need. He said debt levels for some households have actually eased during economic lockdowns brought on by the pandemic because people working from home have fewer opportunities to spend and are not using credit cards as much.
The central bank has slashed its target interest rate and embarked on a bond-buying program to ease the flow of credit, measures the review said have helped ease liquidity strains.
It has also bought federal bonds to provide low-cost financing to Ottawa to cover a massive spike in federal government aid.