Bank of Canada deputy governor raises red flag on rising household debt, but says system is ‘resilient’

OTTAWA – The threat increasing household debt presents to Canada’s economy – and also the country’s economic climate, particularly – is continuing to grow, and also at an ever-worrying pace.

The rising risks to heavily-indebted borrowers, those who have cheated ultra-low rates of interest following a 2008-09 recession, would be an economic collapse and a jump in unemployment, along with a sudden and deep shock towards the housing industry – leaving many Canadians not able to meet their mortgage repayments.

It is really a scenario which has concerned the Bank of Canada since the last global downturn, one which policymakers believe is still threatening – but remains manageable.

According to Lawrence Schembri, central bank deputy governor, monetary officials are working to “connect the dots” between the financial system and the economy to assist better foresee indications of these increased risks to indebted households.

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“The financial vulnerability related to elevated debt has grown over the past decade. It has done this, in part, since the debt has become more concentrated in highly leveraged households, particularly those whose capability to service their debt might be more susceptible to an economic downturn,” Schembri said Wednesday inside a speech in Guelph. Ont.

“However, the Canadian economic climate is extremely resilient and may withstand the triggering of this vulnerability,” he explained.

Speaking towards the Guelph Chamber of Commerce, Schembri said the central bank’s “close collaboration with other agencies has helped Canada acquire a remarkable period of financial stability over the past quarter century.”



“This collective effort to monitor and mitigate financial vulnerabilities, such as elevated household indebtedness, is important to maintaining a reliable and efficient economic climate and promoting economic growth in Canada,” he said, adding that it “permits us to ‘connect the dots’ not only across the economic climate but, equally importantly, between your economic climate and the real economy, including households and non-financial firms.”

Concerns over mounting household debt have resulted in tighter lending rules for financial institutions in Canada, beginning 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 increase in household debt “could force some vulnerable homeowners to market their houses or eventually default on their own mortgages and other personal debt,” Schembri said in his Wednesday speech.

“If defaults rose quickly or if many households were forced to sell their houses, house prices could drop sharply across Canada, specifically in Vancouver and Toronto, which have recently experienced exceptionally strong price growth,” he explained.

Such as broad-based decline internally prices could have a big negative impact on some mortgage lenders 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 per cent of outstanding mortgages, have increased the amount and excellence of their capital in recent years and are well diversified across regions and sectors. Additionally, most of the mortgages they hold are based on government-backed mortgage insurance programs or by high homeowner equity.”

gisfeld@nationalpost.com

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