BoC says rising home debt still ‘manageable’
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.”
THE CANADIAN FINANCIAL SYSTEM IS VERY RESILIENT.