OTTAWA – The threat increasing household debt presents to Canada’s economy – and the country’s economic climate, particularly – has exploded, and also at an ever-worrying pace.
The rising risks to heavily-indebted borrowers, anyone who has taken advantage of ultra-low rates of interest following a 2008-09 recession, would be a fiscal collapse along with a jump in unemployment, along with a sudden and deep shock towards the housing market – leaving many Canadians unable to meet their mortgage repayments.
It is a scenario that has concerned the Bank of Canada because the last global downturn, one that policymakers believe is still threatening – but remains manageable.
According to Lawrence Schembri, central bank deputy governor, monetary officials will work to “connect the dots” between your economic climate and also the economy to help better foresee signs of these increased risks to indebted households.
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“The financial vulnerability related to elevated debt has grown in the last decade. It has done this, in part, since the debt has become more concentrated in highly leveraged households, especially those whose ability to service their debt might be more susceptible for an downturn in the economy,” Schembri said Wednesday inside a speech in Guelph. Ont.
“However, the Canadian economic climate is very resilient and could withstand the triggering of this vulnerability,” he explained.
Speaking towards the Guelph Chamber of Commerce, Schembri said the central bank’s “close collaboration along with other agencies has helped Canada acquire a remarkable period of financial stability in the last quarter century.”
“This collective effort to monitor and mitigate financial vulnerabilities, such as elevated household indebtedness, is important to maintaining a reliable and efficient financial system and promoting economic growth in Canada,” he said, adding it “allows us to ‘connect the dots’ not only over the economic climate but, equally importantly, between your economic climate and also the real economy, including households and non-financial firms.”
Concerns over mounting household debt have led to tighter lending rules for financial institutions in Canada, starting in 2008. The type of changes, the Finance Department has reduced the amortization periods on government-insured mortgages and increased minimum down payments for amounts between $500,000 and $1 million.
Even so, the rise in household debt “could force some vulnerable homeowners to sell their houses or eventually default on their mortgages along with other consumer debt,” Schembri said in the Wednesday speech.
“If defaults rose quickly or maybe many households were instructed to sell their houses, house prices could drop sharply across Canada, particularly in Vancouver and Toronto, that have recently experienced exceptionally strong price growth,” he said.
Such as broad-based decline in house prices will have a big negative effect on some mortgage brokers and insurers. H0wever, Schembri noted, you will find “sufficient buffers in the financial system to resist such a scenario.”
“For instance, the six largest Canadian banks, which hold roughly 70 percent of outstanding mortgages, have raised the amount and quality of their capital recently and are well diversified across regions and sectors. Additionally, the majority of the mortgages they hold are supported by government-backed mortgage insurance programs or by high homeowner equity.”
gisfeld@nationalpost.com
Twitter.com/gisfeld
