Poloz Says Household Debt Problems Are Easing in Canada
(Bloomberg) -- Risks to Canada’s financial system from elevated consumer debt and house prices are easing, the central bank said, while the “sheer size” of what families owe means the danger will persist for some time.
Stricter mortgage rules including a broader stress test that began in January appear to be deterring some of the riskiest borrowers, the Bank of Canada said Thursday in Ottawa. Price gains for single-family homes in Vancouver and Toronto have slowed markedly, the central bank said in its semi-annual Financial System Review.
“These vulnerabilities are expected to persist for some time, although we have seen continued signs of easing,” Governor Stephen Poloz told reporters. He also said a “solid” economic expansion “will support Canadians’ ability to manage their debt, even at a time of rising interest rates.”
Canada’s economy has been powered for the last decade by debt-fueled consumer spending, leading to a surge in home prices, particularly in Toronto and Vancouver. Poloz has raised rates three times since last summer and investors predict the 1.25 percent benchmark will climb again at the next meeting in July.
Poloz didn’t comment directly on the future rate path, but said risks to monetary policy from global trade tensions feel like they have risen lately. The central bank will include any drag from new tariffs into the next economic forecast, he said, adding they would likely lead to consumers paying more for many products.
Thursday’s report reiterated the central bank’s view that the housing market is supported by economic growth that is boosting incomes. There are still signs of the overheating that characterized the country’s housing market -- for instance, the central bank pointed to “some evidence of speculative activity” in the Toronto and Vancouver condominium markets -- but the general tone was that risks are in hand.
Consumers will feel the impact of higher rates, but the pain will be spread out over time because only about half of mortgages in any given year are affected by increased borrowing costs, the central bank said.
“Higher levels of debt mean that interest rate increases will have a larger effect on households’ financial positions and consumption spending than they had in the past,” the bank’s report said.
Household debt -- mortgages and consumer debt such as credit cards -- has swollen to C$2.1 trillion ($1.6 trillion), and as a share of income tops the Group of Seven. Two-thirds of that is mortgages.
The report suggests the central bank will raise interest rates again in July, Royce Mendes, an economist at CIBC World Markets, said in a note to investors. “Interest rate hikes will come at a gradual pace and settle at lower levels than in prior cycles” because of the risks, he wrote.
- “Strong income gains, a significant slowing in household credit growth and improvements in credit quality have begun to ease the vulnerability associated with high household indebtedness. But even as conditions slowly improve, the sheer size of the outstanding debt means that the vulnerability will likely persist at an elevated level for some time”
- The most important risk is a severe recession leading to “a rise in financial stress” the FSR said, unchanged from the last report in November. Other key risks include a house price correction and a sharp rise in global interest rates
- Canada is also vulnerable to cyber attacks on the financial system
- The initial effect of tougher regulations and higher interest rates in recent months won’t be seen until perhaps September as data for the second quarter is reported
- “Going forward, solid labor income growth and immigration should support a pickup in housing activity.”
- “Crypto asset markets are evolving quickly and could have financial stability implications in the future if their size and links to the financial system continue to grow. The markets are largely unregulated in many countries and are characterized by high price volatility, fragile liquidity, and frequent fraud and cyber attacks”
- The FSR will now be published each June instead of twice a year, with policy makers giving more fresh analysis in quarterly economic forecasts and a speech each fall devoted to financial system risks. Senior Deputy Governor Carolyn Wilkins said the public didn’t always read reports that could run to 60 pages and the changes would make for more “modern” communications
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