The Bank of Canada’s latest assessment of the country’s financial-system risks shows that it remains chiefly concerned about Canadians’ high debts and heavy exposure to the housing market, but it expressed confidence that new national and regional mortgage and housing measures will alleviate those pressures “over time.”
The central bank’s twice-yearly Financial System Review, published Thursday morning, also downplayed the dangers from the recent rise in bond-market interest rates, and signaled that the risks from the slump in commodity prices are fading.
A key focus of the report was an assessment of the measures taken by Ottawa and in British Columbia to address rising home prices, particularly in Vancouver, and the risks stemming from the increasingly large mortgage debts many Canadians have taken on as a result. On Wednesday, Statistics Canada reported that Canadians households’ debt-to-disposable-income ratio, a key measure of consumer debt load, hit a record 166.9 per cent in the third quarter.
The new measures include higher affordability thresholds that borrowers have to meet to qualify for mortgages, and new taxes specifically aimed at cooling speculative and foreign investing in the overheated Vancouver market.
“New housing finance rules will mitigate housing vulnerabilities over time and are expected to slow the housing market,” the report said, adding that the bank expects the collective measures “will dampen activity in the sector and improve the quality of new mortgages.”
Still, the bank noted, the proportion of households carrying excessive mortgage debt “has continued to rise in many cities, notably the Greater Toronto Area.”
The report said the proportion of new high-ratio mortgages (those where the loan exceeds 80 per cent of the property value) with a loan-to-income ratio of more than 450 per cent – the most at-risk group of borrowers – was 18 per cent nationally in the third quarter, up from 16 per cent a year earlier. In Greater Toronto, the proportion rose to 49 per cent, from 41 per cent a year earlier. In Vancouver, where the housing market has recently been cooling, the proportion has risen to 39 per cent from 37 per cent a year earlier.
While the bank noted that these highly indebted households could face severe strains in the case of “a loss of income or other financial shock”, which, by extension, could have “significant” consequences on economic activity and the financial system, it expressed confidence that the new federal measures “will, over time, have a constructive effect on the number of highly indebted households.”
The report made note of the run-up in bond-market interest rates amid rising expectations of interest-rate increases from the U.S. Federal Reserve, which raised its key rate by one-quarter percentage point on Wednesday and signaled a possible faster pace of rate hikes in the year ahead. But while it acknowledged that the resulting upward pressure on global bond-market yields, including those in Canada, are already pushing Canadian mortgage rates higher, it continued to characterize the threat of higher interest rates in Canada’s financial system as only “moderate.”
“The rise has been orderly and mostly reflects market expectations of higher growth, inflation and policy rates in the United States over the next few years,” it said, noting that the increases haven’t been driven by “higher global risk premiums,” which it would consider a more serious threat.
And the bank downgraded its assessment of the risk from prolonged weakness in commodity prices to “low” from “moderate,” signaling that it believes that the worst dangers from the global commodity slump have passed.
“Commodity prices have stabilized, albeit at low levels, and the industries most affected have already undertaken considerable adjustments,” the report said. “In fact, many businesses believe that resource-related activity may have bottomed out.” However, it noted that the adverse financial effects for households from the commodity slump “are still increasing,” as unemployment in the country’s oil-producing regions has increased sharply and households in credit arrears are still on the rise.
DAVID PARKINSON – ECONOMICS REPORTER
The Globe and Mail
Published Thursday, Dec. 15, 2016 10:43AM EST
Last updated Thursday, Dec. 15, 2016 2:32PM EST