Risks in the Canadian financial system remain similar to those found six months ago, according to the Bank of Canada’s financial system review released December 15, with two key concerns for Canadian households remaining at the forefront.
Household debt, particularly that relating to mortgages, remains elevated. Eighteen per cent of mortgages had a loan-to-income ratio above 450% in 2016’s third quarter; this is up two percentage points compared with Q3 2015. The problem may ease, however, as new mortgage rules kick in.
“This buildup of vulnerabilities will be mitigated over time by new federal housing finance rules and other housing sector policies, which will dampen activity in the sector and improve the quality of new mortgages,” the Bank said in a press release.
Around 31% of existing high-ratio mortgages across Canada would not qualify under the new rules.
Bank governor Stephen Poloz said, “These macroprudential policies will raise the underlying quality of household indebtedness over time, as well as financial institutions’ capital requirements and pricing criteria, which will make them more resilient to future shocks.
“Accordingly, these policies will help mitigate financial stability risks over time.”
Imbalances in housing markets across the country remain a concern. House prices remain high compared with income in both Vancouver and Toronto. Market imbalances increase the possibility of adverse economic shocks causing significant price drops.
“Vancouver has notably cooled due to the tax on foreign buyers, but the BoC isn’t sounding the all-clear as it noted that Hong Kong prices reaccelerated after a temporary lull [after that city implemented a similar tax in 2012] due to strong demand and tight supply,” BMO senior economist Benjamin Reitzes said in a note to investors.
“Overall, [the report] shouldn’t have much impact on monetary policy. We continue to look for the BoC to stay on hold through 2017.”
@EmmaHampelBIV
Check out BIV’s podcast for the week of December 13, 2016:
