Threat from high debt, hot housing market growing, central bank says
OTTAWA — The country's financial system has become
increasingly exposed to economic shocks amid the continued rise of
household debt and still-scorching housing prices in major markets, the
Bank of Canada said Thursday.
But even as the central bank warned the country's most significant weak spots have widened, governor Stephen Poloz offered words aimed at reassuring Canadians.
He said the financial system remains sturdy in the context of brightening economic conditions.
"At this stage, I'm just comforted by the fact that the economy is showing better dynamics and that does go into this equation of financial risk as a positive," Poloz told reporters.
"It means that the resilience is rising in the background, even if the vulnerabilities are also rising in the foreground."
The bank's assessment was rolled into its bi-annual review, which explored and identified the key vulnerabilities and risks surrounding the stability of the financial system.
Poloz often uses a tree as a metaphor for the economy with vulnerabilities represented by cracks in the tree and risks akin to gusts of wind that could knock it down.
The two most-concerning fissures highlighted by the bank Thursday are also intertwined.
The report said the growth in mortgage lending in Toronto and Vancouver has largely fuelled an increase in Canada's overall household indebtedness since the bank's last review six months ago.
"Highly indebted households have less flexibility to deal with sudden changes in their income," the bank's report said.
But even as the central bank warned the country's most significant weak spots have widened, governor Stephen Poloz offered words aimed at reassuring Canadians.
He said the financial system remains sturdy in the context of brightening economic conditions.
"At this stage, I'm just comforted by the fact that the economy is showing better dynamics and that does go into this equation of financial risk as a positive," Poloz told reporters.
"It means that the resilience is rising in the background, even if the vulnerabilities are also rising in the foreground."
The bank's assessment was rolled into its bi-annual review, which explored and identified the key vulnerabilities and risks surrounding the stability of the financial system.
Poloz often uses a tree as a metaphor for the economy with vulnerabilities represented by cracks in the tree and risks akin to gusts of wind that could knock it down.
The two most-concerning fissures highlighted by the bank Thursday are also intertwined.
The report said the growth in mortgage lending in Toronto and Vancouver has largely fuelled an increase in Canada's overall household indebtedness since the bank's last review six months ago.
"Highly indebted households have less flexibility to deal with sudden changes in their income," the bank's report said.
The bank has been issuing warnings about the steady climb of household debt in Canada for years.
Poloz, however, said Thursday that the numbers are mostly creeping up as some people with little or no debt enter the housing market for the first time.
"Debt is rising because people want to own a home — it's not really that complicated," Poloz said.
"Those are signs of a solid economy, a good economy and Mother Nature does this."
The bank's report was released with recent indicators showing that Canada's economy has been building momentum for months.
It also comes, however, as concerns about the Canadian real estate market — domestically and from abroad — continue to pile up.
This week, the Paris-based OECD became the latest international organization to urge Canada to do more to address risks associated with its high-priced housing markets.
The central bank report also noted Moody's recent credit downgrading of Canada's six largest banks due to growth in private sector debt and higher housing prices.
Over the past year, various governments in Canada have introduced housing policy changes that the bank predicted will help ease the regional vulnerabilities over time.
Poloz said "it's simply too early to say" whether governments should consider doing more at this point to address the hotter housing markets.
The measures have included foreign buyer taxes in the Vancouver and the Greater Toronto Area as well as federal restrictions that tightened mortgage qualification rules.
However, while recent federal measures have improved the credit quality of insured mortgages, the bank said the share of uninsured mortgages has increased and their characteristics are showing more signs of risk.
The report warned that another financial stability concern could emerge if more and more borrowers accumulate debt elsewhere to enable them to put down bigger down payments because of recent changes to mortgage rules.
Carolyn Wilkins, the bank's senior deputy governor, said some people may be drawing more cash through secondary loans like lines of credit that could make a "significant" change to the borrower's profile.
The Canadian Press
Poloz, however, said Thursday that the numbers are mostly creeping up as some people with little or no debt enter the housing market for the first time.
"Debt is rising because people want to own a home — it's not really that complicated," Poloz said.
"Those are signs of a solid economy, a good economy and Mother Nature does this."
The bank's report was released with recent indicators showing that Canada's economy has been building momentum for months.
It also comes, however, as concerns about the Canadian real estate market — domestically and from abroad — continue to pile up.
This week, the Paris-based OECD became the latest international organization to urge Canada to do more to address risks associated with its high-priced housing markets.
The central bank report also noted Moody's recent credit downgrading of Canada's six largest banks due to growth in private sector debt and higher housing prices.
Over the past year, various governments in Canada have introduced housing policy changes that the bank predicted will help ease the regional vulnerabilities over time.
Poloz said "it's simply too early to say" whether governments should consider doing more at this point to address the hotter housing markets.
The measures have included foreign buyer taxes in the Vancouver and the Greater Toronto Area as well as federal restrictions that tightened mortgage qualification rules.
However, while recent federal measures have improved the credit quality of insured mortgages, the bank said the share of uninsured mortgages has increased and their characteristics are showing more signs of risk.
The report warned that another financial stability concern could emerge if more and more borrowers accumulate debt elsewhere to enable them to put down bigger down payments because of recent changes to mortgage rules.
Carolyn Wilkins, the bank's senior deputy governor, said some people may be drawing more cash through secondary loans like lines of credit that could make a "significant" change to the borrower's profile.
The Canadian Press
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