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OTTAWA, May 20 (Reuters) – The Bank of Canada said on Thursday that high household indebtedness and imbalances in the housing market have intensified in the last year, leaving the economy more vulnerable to economic shocks.
The remarks were the most expansive commentary the central bank has made about the risks posed by a hot housing market since the start of the COVID-19 pandemic early last year.
Canada’s housing market boom and the corresponding rise in mortgage debt support economic growth in the short-term but also increase the risk to the economy and financial system over the medium-term, the central bank said in its annual review of financial systems.
Although consumer debt has fallen since early 2020, an increase in mortgage debt has more than offset that decline, with total household debt rising sharply since mid-2020.
“The vulnerability associated with elevated household indebtedness is significant and has increased over the past year,” the bank said, adding the quality of new mortgage borrowing had deteriorated during the pandemic.
The share of newly issued mortgages with a loan-to-income ratio above 450% rose substantially in the second half of 2020 and account for 22% of all new mortgages. That is above the range seen in 2016-17, before Canada’s financial regulator introduced mortgage stress tests intended to cut out risky lending.
“If house prices and household incomes were to fall in the future because of a shock to the economy, some households could need to cut back on spending. This would slow the economy and possibly put stress on the financial system,” the bank said.
Canada’s financial system had proven to be resilient thanks to a well-capitalized banking sector and strong support from governments and the bank, it noted.
Other vulnerabilities are the mispricing of assets exposed to climate-related risks, cyber threats and fragile corporate debt funding from certain markets. (Reporting by Julie Gordon and David Ljunggren; Editing by Andrea Ricci)
