Bank of Canada says housing, debt risks have eased

By Leah Schnurr and Andrea Hopkins

OTTAWA (Reuters) – The vulnerabilities created by Canada’s housing market and huge household debt have eased in the last six months amid rising incomes, higher interest rates and tighter mortgage rules, the Bank of Canada said on Thursday.

Continuing the upbeat tone set last week when the central bank signalled more rate hikes were coming, the bank said slowing credit growth among households and higher incomes have lessened vulnerabilities since its November report, but they remain elevated and will persist for some time.

“The two main vulnerabilities we have been watching closely are showing continued signs of easing, which is encouraging,” Governor Stephen Poloz said in a statement. “Combined, the impact of higher interest rates and the changes to the mortgage guidelines have reduced credit growth and improved the quality of new lending.”

Key risks facing Canada’s financial system include a severe nationwide recession, a house price correction in overheated markets and a sharp increase in long-term interest rates driven by higher global risk premiums, the bank said in its Financial System Review.

It said the risk of a recession, possibly triggered by negative growth in China or a spike in protectionism that douses global growth, is elevated but has decreased since the November review, while the risk of a housing crash in Toronto and Vancouver remains moderate, and the risk of a spike in long-term rates is moderate but increasing.

The report said little about the risks of protectionism and U.S. trade policy, except to say a large and persistent drop in foreign demand could spark a Canadian recession.

While it is too early to gauge the full impact of tighter mortgage rules, the bank said the proportion of new high-ratio borrowers who take on mortgage debt in excess of 450 percent of their gross income has been cut in half.

The closely watched report noted “some evidence of speculative activity” in the condominium markets in Toronto and Vancouver, Canada’s two largest housing markets, which have remained strong even as the detached market has swooned.

It said speculation may be supporting condo resales as investors bet that price gains will continue, and noted the risk that speculators may quickly sell their assets if prices fall, “which could lead to large, rapid price declines, with adverse consequences for the rest of the market.”

Still, the bank believes housing prices are fairly well supported by Canada’s strong economy.

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