Weak spot found in Canada’s financial stability

Weak spot found in Canada’s financial stability

The Bank of Canada is expecting new mortgage rules to help ease a continued rise

OTTAWA — The Bank of Canada is expecting new mortgage rules to help ease a continued rise in household indebtedness that it says has left the country increasingly exposed to an economic shock.

The central bank warned Thursday that the still-climbing levels of debt and the growing proportion of highly indebted households in many cities amid low interest rates have opened up a larger weak spot in Canada’s financial stability.

In its latest financial system review, the bank says at a national level the proportion of highly indebted borrowers with mortgage-to-income ratios above 450 per cent reached 18 per cent in the third quarter of 2016, up from 13 per cent two years earlier.

The report said high home prices have helped fuel growth in the proportion of these highly indebted borrowers in cities like Toronto, where in the last two years it increased to 49 per cent from 32 per cent, and in Vancouver, where it rose to 39 per cent from 31 per cent.

But the bank predicted that stricter housing finance rules introduced in recent months by federal, provincial and municipal authorities will help ease household indebtedness and improve the quality of future borrowing.

In October, the federal government announced changes aimed at addressing hot housing markets and rising debt loads. Ottawa’s new rules made it tougher for prospective borrowers to qualify for mortgages and restricted insurance eligibility for high-ratio mortgages.

The central bank also underlined new rules in Vancouver including a 15 per cent tax on foreign buyers and a tax on homes that are left empty.

All of these measures appear to have somewhat eased concerns expressed by Bank of Canada governor Stephen Poloz, who warned in June that surging housing prices in Vancouver and Toronto were outpacing local economic fundamentals in those areas like job creation and income growth.

“Accordingly, these policies will help mitigate financial stability risks over time,” Poloz said in a statement that accompanied the report.

While the bank said the probability of an economic shock materializing remains low, it noted that such an event could have “significant” consequences for the economy and the financial system.

The report said that Canada’s financial system also remains vulnerable to the continued rise in house prices across the country. The bank said real estate prices have hit a level of just under six times the average household income — the highest ever recorded.

At a regional level, it said housing prices remain particularly high in the Toronto and Vancouver areas. The Vancouver market, however, has begun to slow, the bank added.

The report also explored what it described as key risk scenarios — or “trigger events” — to the Canadian financial system. Overall, it said these risks were largely unchanged compared to the June report.

Among the identified risks, it said a large and persistent rise in unemployment across Canada would create financial stress on indebted families, reduce consumer spending and lead to housing price corrections, particularly in markets like Toronto and Vancouver.

While the probability remains low, the likelihood that country-wide financial stress and a housing correction will materialize had “increased modestly” since June, the bank said. The severity of such an event, should it occur, has also increased, it added.

The report also pointed to other risks, including stress out of China and other emerging markets, a sudden increase in long-term interest rates driven by changes in global economic conditions and a prolonged weakness in resource prices.

“Nonetheless, the Canadian financial system remains resilient,” the bank said in a statement.

Follow ↕AndyBlatchford on Twitter

Just Posted

The City of Red Deer sits at 249 active cases of the virus, after hitting a peak of 565 active cases on Feb. 22. (Black Press file image)
Red Deer down to 119 active COVID-19 cases

Province identifies 179 new cases Saturday

Red Deer Emergency Services responded to an explosion at a duplex on Rupert Crescent Saturday morning. (Photo by Sean McIntosh/Advocate staff)
Firefighters respond to explosion in Red Deer early Saturday morning

There was an explosion at a Red Deer duplex early Saturday morning.… Continue reading

Terry Betts, of Kananaskis, looks at the vehicle he was hoping to sell during the Quick Times Red Deer Swap Meet in the Westerner Park parking lot Saturday. (Photo by Sean McIntosh/Advocate staff)
Quick Times Red Deer Swap Meet held outdoors

A big automotive swap meet was held outdoors this year in Red… Continue reading

The Alberta Sports Hall of Fame and Museum is set to re-open on July 2. (File Photo)
Alberta Sports Hall of Fame and Museum to reopen Monday

The Alberta Sports Hall of Fame and Museum will reopen for visitors… Continue reading

Huzaifa (left), Saif (middle) and Zoya (right) were among the 60 or so Red Deerians who participated in a vigil for the victims of a recent terrorist attack that killed four people in London Ont. (Photo by BYRON HACKETT/Advocate Staff)
Red Deer vigil honours victims of London, Ont. terrorist attack

About 60 people gathered at the corner of 49 Ave. and 50… Continue reading

A man wears a face mask as he walks by a sign for a COVID-19 vaccination site in Montreal, Sunday, May 16, 2021, as the COVID-19 pandemic continues in Canada and around the world. THE CANADIAN PRESS/Graham Hughes
Canada paid a premium to get doses from Pfizer earlier than planned

OTTAWA — Canada paid a premium to get more than 250,000 doses… Continue reading

The Kamloops Indian Residential School in Kamloops, B.C., is shown in this 1930 handout photo. HO — Deschatelets-NDC Archives
Calls grow for Ottawa to review settlement decisions for residential school survivors

Lawyer Teri Lynn Bougie still cries when she talks about the final… Continue reading

Syringes are readied at a COVID-19 mobile vaccination clinic for members of First Nations and their partners, Friday, April 30, 2021 in Montreal. Most of the federal contracts for COVID-19 vaccines allow for Canada to donate some of its doses to other countries or international aid organizations and in at least three cases, for the doses to be resold.THE CANADIAN PRESS/Ryan Remiorz
Canada’s vaccine contracts allow for doses to be donated, in some cases resold

OTTAWA — Most of the federal contracts for COVID-19 vaccines allow for… Continue reading

Grand Chief Stewart Phillip, President of the Union of British Columbia Indian Chiefs, responds to the report on the National Inquiry into Missing and Murdered Indigenous Women and Girls, in Vancouver, on Monday June 3, 2019. As stories of the horrors of residential schools circulate after the Tk'emlups te Secwepemc First Nation announced it had located what are believed to be the remains of 215 children, Grand Chief Stewart Phillip of the Union of B.C. Indian Chiefs said he feels a connection with the former students. THE CANADIAN PRESS/Darryl Dyck
Two sides of the same coin: Ex-foster kids identify with residential school survivors

VANCOUVER — As stories of the horrors of residential schools circulate after… Continue reading

A woman sits and weeps at the scene of Sunday's hate-motivated vehicle attack in London, Ont. on Tuesday, June 8, 2021. Four members of a family in London, Ont., are set to be buried today. The public has been invited to help celebrate the lives of Talat Afzaal, 74, her son Salman Afzaal, 46, his wife Madiha Salman, 44, and their 15-year-old daughter Yumna Salman.THE CANADIAN PRESS/ Geoff Robins
Funeral to be held today for London family killed in attack

LONDON, Ont. — Four members of a Muslim family killed in what… Continue reading

Canadian Prime Minister Justin Trudeau and United States President Joe Biden listen to United Kingdom Prime Minister Boris Johnson deliver opening remarks at a plenary session at the G7 Summit in Carbis Bay, United Kingdom Friday June 11, 2021. THE CANADIAN PRESS/Adrian Wyld
Trudeau to discuss foreign policy with G7 leaders at second day of summit meeting

CARBIS BAY, CORNWALL, ENGLAND — Foreign policy is on the agenda for… Continue reading

Multivitamins are shown on the packaging line at the Pfizer plant in Montreal, Thursday, July 12, 2012. THE CANADIAN PRESS/Graham Hughes
Canadian drug companies want new pricing regs delayed again until after pandemic

OTTAWA — Almost three dozen Canadian pharmaceutical companies made a direct appeal… Continue reading

In this file photo, a lotto Max ticket is shown in Toronto on Monday Feb. 26, 2018. (By THE CANADIAN PRESS)
No winning ticket for Friday’s $70 million Lotto Max jackpot

TORONTO — The massive $70 million dollar Lotto Max jackpot remained unclaimed… Continue reading

Most Read